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Beware! Pyramid schemes are raising serious concerns. Are they legitimate wealth opportunities or simply scams?
A pyramid scheme is a marketing strategy structured like a pyramid, where participants profit by recruiting others to join beneath them. The aim is to expand the network and generate significant returns through continuous new member recruitment.
In a pyramid scheme, salespeople both sell products and recruit new team members. Recruits earn commissions or bonuses from their sales and further recruitments. This hierarchical system, repeated across levels, ultimately positions the company at the pyramid’s apex.
Pyramid scheme companies typically focus on recruiting new members rather than selling products or services. Participants are rewarded for bringing in new investors, with a large share of earnings funnelled to those at the top.
According to Jonathan Perlman, an attorney at the American law firm Genovese Joblove & Battista, the founders at the top of a pyramid scheme earn commissions from every new recruit beneath them, leading to substantial profits at the upper levels, particularly for the company. Some schemes also mandate that participants purchase a set amount of products monthly to maintain their membership.
Let us assume there is a company selling a specific product, such as perfumes, operating on a pyramid scheme. To become a marketer, individuals must first purchase the product and sign up as members. They then promote the product by recruiting friends and acquaintances, who must also buy the product.
Marketers earn a commission on each sale made through their recruits. Moreover, they receive a percentage of sales generated by recruits recruited by their recruits, and so forth. This system ensures that every marketer at each level earns a commission based on the sales made within their network.
Despite numerous attempts to promote pyramid schemes, they remain fundamentally deceptive and fraudulent. Furthermore, they are illegal in most countries around the world.
The title “Don't Get Caught in a Pyramid Scheme” published by the Office of the New York State Attorney General, highlights that pyramid schemes are fraudulent money-making schemes. It also underscores that participants in such schemes will face legal consequences.
Why is a pyramid scheme deemed a scam? Because it depends primarily on recruiting new members rather than offering any actual product or service. Participants earn profits based on their ability to recruit others, and as the number of recruits expands, the flow of new participants will inevitably dwindle. This leads to a shortage of recruits at the lower levels, causing the scheme to collapse and leaving many participants with financial losses instead of the expected gains.
In this regard, a report by the financial platform "Unbiased" reveals that Britons lost around £35 million over the year from October 2019 to October 2020 due to involvement in pyramid schemes.
Once you recognize a pyramid scheme as a scam, you should be able to spot it easily. Robert FitzPatrick, president of the "Pyramid Scheme Alert" organisation, underlines the core characteristic of such schemes by stating:"Your income will depend entirely on your success in bringing in other people behind you.”
Pyramid schemes exhibit several defining characteristics. Typically, participants must pay fees to gain the right to sell the company's products, with the payment directed either to the company or to the recruiter. Another major red flag is the focus on recruiting new members rather than selling the product itself. Additionally, these schemes frequently promise exaggerated financial returns and substantial profits in a short time to lure new recruits.
[1] investor.gov, Pyramid Schemes
[2] businessinsider.com, Understanding how pyramid schemes work and 3 ways to detect them
[3] constantinecannon.com, Ponzi & Pyramid Schemes
[4] investopedia.com, What Is a Pyramid Scheme? How Does It Work?
[5] forbes.com, Understanding Pyramid Schemes
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