What are pyramid scheme businesses? How do they work? Are they honest-to-goodness businesses or are they illegal? Those questions and more will be answered in this article.
How Do Pyramid Scheme Businesses Work?
I often hear about horror stories of people getting conned when joining quick-rich schemes that promise bigger and faster returns (even overnight). But how do we avoid these things from happening to us?
Will we be able to recognize them from afar or let them smack us in the face before avoiding the scams altogether?
Before jumping into any business groups and ventures, let us first discuss what pyramid scheme businesses are.
What Is a Pyramid Scheme Business?
A pyramid scheme business is a business model wherein the top-level person or people enlist new members to join their company. Those new members directly pay those who recruited them. In return, said members invite their own set of underlings who also pay for fees which will be passed up to the top-level members in the pyramid.
Why pyramid? This business scheme mirrors that of a pyramid starting with a single point-person on the top of the structure that becomes increasingly larger at the bottom.
For instance, Person “A” is at the topmost part of the structure. “A” recruits 2 people for his second -tier, both of whom pay “A” substantial amount of cash for joining the business. The money goes directly into A’s account or pocket.
Additionally, the 2 new recruits must enlist two three-tier members of their own who also pay fees upfront. A percentage of those fees are sent back up to “A”.
Those pyramids are often referred to as pyramid scams which are operations that are illegal in many countries. These scams do not have actual products or services so they rely on cash brought by new members.
Recruitment events typically promise a significant amount of money (from fees from their recruits) to those who are bold enough to take this so-called once-in-a-lifetime opportunity.
However, number of prospect members dwindle until the recruitment stops altogether. When this happens, the pyramid scheme closes while the top members walk away with a huge sum of money. Those at the lower end of the pyramid are left penniless.
How Does It End?
Pyramid schemes continue as long as the lower level is wider than the top ones. But when the lower part lessens and recruitment stops, the entire structure falls apart.
Even by just looking at the pyramid, you will know that it will not sustain forever. It is bound to collapse as people lose money and interest. Even those at the top-level will want to give up when the recruitment pool dries up and the payments get delayed.
Pyramid Scheme Businesses Versus Ponzi Scheme
These two are both fraudulent activities that are often exchanged for their similarities. Both feed on the people’s hunger to earn more fast, but they are still different.
In a pyramid scheme, recruiters directly benefit from the fees of new recruits. No new members mean no additional income for them. On the other hand, the recruiter in Ponzi schemes directly interacts with all of the new members.
Secondly, Ponzi schemers attract wealthy investors that have a specialized knowledge or interest in investments. Whereas, pyramid scams rely on income from anyone and everyone who wants to join.
Lastly, pyramid scheme businesses require a lot of participants for it to thrive. In fact, it banks on an aggressive increase of recruits for it to sustain. Ponzi schemes last longer, as they encourage some their members to reinvest.
Multi-Level Marketing vs Pyramid Scheme Businesses
Oftentimes, multi-level marketing (MLM) is confused with illegal pyramid scheme businesses. So let us talk about each one and take note of their differences.
MLM is often called as network marketing. This business model involves members to sell goods or services to acquaintances, friends, and family members. The members earn money from commissions made from sales or recruitment of newbies into the company. Some well-known examples of MLM companies are Avon and Amway.
Unfortunately, other businesses call themselves MLM when they are, in fact, operating as pyramid scams. For this reason, it is understandable why people can’t tell the two apart.
MLM becomes a pyramid scam when the practices involved are deceptive and unfair. They claim to sell products to disguise themselves as an MLM company. But in the end, there is really no effort in marketing their “product”.
There are even times when new recruits are swayed into paying for overpriced goods or services upon signing up. Sometimes, newbies are required to pay for training, inventory, and/or computer services that are non-existent.
Simply put, the majority of the income is derived from fees from the recruitment instead of goods or services.
Be that as it may, not all MLM companies are pyramid scheme businesses. There are still a lot of legitimate MLM companies today where you can still join and make money from.
Red Flags
Recruiters and promoters are good in what they do – invite people to join. They often hold mass recruitment and meetings to create a frenzied atmosphere.
This works well because of group pressure. Additionally, participants in the meetings are being fed stories, and false promises so they give in to fear (of missing out) and greed.
They often tell people that they will miss out on a life-changing opportunity if they do not join. They are also lured in, in the hope of being able to retire in five years and just rely on their residual income.
Another thing to look out for is their confusing plan. Is it clearly explained? Do they encourage people to ask questions about it?
Tips to Avoid Being Scammed
Pyramid Scheme Businesses often masquerade themselves as MLM companies so scams are difficult to detect. Take note of our tips below prior to investing your money:
Research. Find out if the company you are eyeing concentrates on member recruitment than in making sales. If they pressure the participants to sponsor new recruits than focus on product marketing, avoid them at all cost. There is a huge probability that they are a scam and that the money primarily comes from their downline.
Ask questions. Ask around to learn more about the company’s track record. Do they have tangible products? If so, how do they market them? Are there any restrictions or clear rules? Talk to the distributors and listen to their stories. Do not be afraid to ask as much as you can.
Take your time. Take the company’s statements with a grain of salt and really think things through. Are the top income earners really earning that much? Or maybe they are just creating stories to encourage people to recruit? Do the success stories of the distributors reflect the truth? Find out about these things no matter how much time it takes just to ensure that you are not losing your hard-earned money.
Read the paperwork. Do not sign anything unless you are sure about what you are getting into. Read the contract over and over. Consult your spouse, or maybe a friend, or an acquaintance who is knowledgeable about this. If possible, ask a lawyer. If the recruiters are pressuring you to sign right away, that is not a good sign. Trust what your gut tells you.
Be cautious. Some companies ask you to buy overly expensive products that no one wants to buy. Those products might be cover up for their recruitment. Also, legit companies do not recruit as many employees as they can.
Conclusion
In a nutshell, pyramid scheme businesses are illegal. They temporarily prosper by recruiting members to pay fees that are passed up to the top-level members. When there is no one else to recruit, the system collapses, leaving the bottom-level members with nothing.
Some MLM businesses are actually pyramid schemes that have successfully disguised themselves as legit businesses with products that are purely for gimmick purposes only. However, this does not apply to all of the MLM businesses. There are still legal MLM companies out there.
Your responsibility now is to exercise caution when it comes to investing your time, money, and effort in any of those companies. Remember that you are legally accountable for all the claims that you make about the company, the products, and services if you do decide on joining pyramid scheme businesses.
Even if you are simply reiterating what was written in their brochures and ads, you will be held responsible if your claims don’t turn out to be true.
More importantly, your decision to join pyramid scheme businesses masquerading as MLM companies will affect you and all the lives of your recruits. Remember that if the offer is too good to be true, it most likely is.
If you want to make money online, then it’s better to start your own online business and make money as an affiliate instead of risking losing money with MLM.
Click Here to Learn About Affiliate Marketing
Hello Chris, I must say that this article is very helpful and informative. I had so many experiences with pyramid schemes (negative of course) and I can say that people definitely should avoid it at all costs, I am glad you talk about this topic as there are still many people who believe in this and that they can make a living from it.
Hello Danijel,
Thank you for the comment.
The make money online niche is so much filled with these pyramid schemes. Some even go to the extent where they tell you all you have to do is refer some people and get paid even if they don’t pay anything and I found these to be totally fake every time.because there is no money being generated at all.
is pyramid schemes the same as ponzi schemes. I have come across some schemes where they tell you to invest and you get back your money after a few days or even hours at a profit. Looks too good to be true, is there any truth to it?
Ponzi and pyramid schemes are a little different, but both are scam. Thank you for the comment.