Pyramid Scheme

 

A pyramid scheme promises a large financial return for a relatively small cost. They are very risky and usually illegal depending on where you live in the world.

They are promoted as a get-rich-quick scheme.

Sometimes they are confused with multilevel-marketing [MLM] programs, however in legitimate MLM, money is made by selling genuine products to consumers, with an accessory income being the recruitment of new members.

There are some schemes that have overpriced products, or products that are hard to sell, and the primary purpose is to gain income from recruitment.

The products are added to try to prevent it being classified as a pyramid scam which is illegal in some countries.

How Does it Work?

A typical scheme operates by attracting investors and charging them large membership or joining fees in order to take part in money-making schemes.

There is little chance of you getting your money back unless you convince other people to join. This is where people often convince family members and friends to part with their money and join.

The schemes make their money by recruiting people, and not by selling a service or a product. Because of this, pyramid schemes always collapse and lots of people are left out of pocket when it does.

Normally they recruit members at seminars, over the phone, home meetings and by mail. An increasingly popular method is using spam to recruit members.

For them to work so everyone makes a profit, there would have to be an endless supply of new members. However the number of people willing to join the scheme [and therefore inject new money into the scheme] dries up quickly.

When the scheme collapses as they all do, relationships, friendships and sometimes even marriages can be destroyed over money lost in the scam.

Warning Signs

  • You are offered a chance to join a group or scheme where you need to recruit members to make money 
  • The scheme offers goods or services with little or no value that serves only to promote the scheme
  • There is a large up-front cost to purchase large quantities of goods
  • There are no goods or services being offered for sale
  • The promoter of the scheme makes claims like 'this is not a pyramid scheme' or 'this is totally legal'

How to Tell if it is a Pyramid Scam

Ask these questions:

  •  Are the rewards you have been promised based on product sales?
  •  Are the products genuine products of real value, at a reasonable price, and something people will want to buy again and again?

If the answer is no, or you are unsure, it is probably a pyramid scheme.

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