Pyramid schemes have been around for years, but scammers are still growing rich off them. Let’s look at what constitutes a pyramid scheme and how to avoid falling for one.
What is a Pyramid Scheme?
In a pyramid scheme, participating members earn money by recruiting an ever-expanding number of “investors.” The initial promoters stand on top of the pyramid; they will recruit more investors, who will each recruit even more. At each level, the number of investors multiplies. Investors earn a profit for each new recruit and pass on some of the profit to their recruiters. The further up on a pyramid an investor is, the more money they get.
Sometimes, pyramid schemes involve the sale of a product, but that is usually just an attempt to appear authentic. The product will typically be faulty, and will obviously not be the focus of the business.
It may be difficult to spot the crime here, but don’t be fooled: There are underhanded tactics at play.
First, new investors must pay a fee for the right to sell a product or service and recruit others for monetary reward. This fee is usually pretty steep.
Also, if a product is sold, it is likely faulty or damaged and will not sell well. Recruiters might be required to purchase the product themselves, and the company refuses to take back products deemed unsalable.
Finally, every pyramid scheme will eventually collapse, because they are dependent on the ability to recruit more investors…and there is inevitably a limited number of people in any community.
What is Multi-level Marketing?
Multi-level marketing (MLM) companies and pyramid schemes are similar, but there are major differences between the two.
First, in an MLM company, distributors sell the company product and also train and recruit distributors. Each distributor earns a commission on each sale, as well as commission on the sales of the distributors they’ve recruited.
The primary difference between MLM companies and pyramid schemes is the reliable line of products or services offered by MLM companies. The bulk of the company profits come from sales, not from recruiting new investors.
Also, authentic MLM businesses will typically buy back unsold merchandise.
How Can I Spot a Pyramid Scheme?
Watch out for these red flags:
- High-pressure tactics are used to recruit new investors.
- Income is purely recruitment-based.
- You’re promised enormous earning potential in a short time.
- The company makes outrageous claims about their products.
- You need to buy the product to sell it.
If you think you’ve been targeted by a pyramid scheme, report it if a law has been broken. Also, warn your friends about the circulating scheme, so they know to be on guard.