The pyramid scheme or MLM (multi-level marketing) seems like a good idea at first glance, but these schemes can be far from beneficial and may take up more time and money than they initially promise. These schemes entice potential sign-ups with images of good fortune, luxury holidays and the chance to start a very profitable business and live the self-employed lifestyle that many people dream of. But what is the truth behind these schemes? Are they scams or are they genuine?
In some cases there are genuine MLM schemes operated by trusted companies, and whilst they are highly unlikely to be profitable to those at the bottom, they are perfectly legal and above board. However, there are many pyramid schemes out there designed purely for the benefit of the founder, who is willing to make a profit for themselves by any means necessary. These scheme are often illegally run and give no gain to those at the bottom.
In this article, we are going to take a look at the pyramid schemes in a lot more depth to uncover the truth behind them. This may be especially useful information for those who are tempted to join up to one of these schemes.
Types of Pyramid Schemes
There are various forms of the pyramid scheme. In order to fully understand and be able to successfully detect such a scheme, you should be familiar with the different forms they can take.
MLM (Multi-level marketing)
MLM is the most common and easy to understand form of the pyramid scheme. Simply put, MLM is a type of business model used by big companies to boost sales and therefore profit without the need to hire paid sales representatives. Those who sign up to take part in one of these schemes, let’s call them reps, are not directly employed by the company but do receive a commission from any sales they make. MLM schemes can be a perfectly normal and honest business model, however in our case we are going to look only at how a dishonest MLM scheme would look like. To understand how such MLM schemes operate, we are going to break down the steps.
- The founder of the scheme will sign up a group of participants and in this example we will presume that the founder recruited six members.
- Members are then encouraged to recruit further people into the scheme, often times in order to see a return on their own investments.
- This process repeats with member recruiting new groups.
- Money is then funnelled through the pyramid, with each group ‘earning’ from their recruits.
It is an effective sales method, however it is usually those at the top of the pyramid who gain the most profit. Those at the bottom gain little to no return. Companies are also likely to offer sales reps an initiative to sell more products or recruit more members, these initiatives could be anything from a cash prize to a new car, and are offered to those who recruit the most members or sell the most products within a set time frame.
The next form of pyramid scheme on which we will focus is the chain email. These can be exceptionally attractive to those who would like to make a bit of quick cash, but as with many pyramid schemes, they may come with a “price” to pay. Let’s take a look at the steps involved in a scheme like this.
- Potential recruits will receive an email detailing the scheme, which will often be disguised as an investment club or some such other name.
- Once the participant has been convinced, they are then asked to forward an amount of money to each person named within the letter.
- Members are then asked to remove the top name from the list and replace it with their own name.
- They can then forward the email, believing that they too will receive an influx of cash from the following group of recruits.
This can seem like a very lucrative deal, but for most of the time, if something seems to good to be true, then it probably is and you can read a more in-depth guide on how chain letters operate here!
The final type of common pyramid scheme is the Ponzi scheme, so called because of the man who originally came up with the idea in the 1920’s. Evidently, this is a scam which has been going on for a long time and with the modern day assistance of the internet, has been made even more simple. The Ponzi scheme looks a little like this;
- Members sign up to the scheme and need to pay a fee with a promise of a huge return on their investment.
- New recruit fees are then used to pay existing members and percentages funneled up the pyramid chain.
- Recruits are encouraged to sign-up more members in order to gain a profit from them.
- When there is no more new recruits who will join the scheme, the pyramid collapses as the entire “business model” was funded by new participants coming in.
In reality, as you can guess, profit is rarely or never seen. The only ones who profit are those higher up in the chain and those who joined the game early or recruited a lot of new members. And all of those people who actually profited, did so at the expense of new recruits who paid for their profits. Recruits are often left with less money than they started out with, after losing their investment fee or failing to bring in new members. The scheme is not sustainable indefinitely and will always collapse at some point.
What Are the Dangers of a Pyramid Scheme?
One of the most concerning elements of these pyramid schemes is that those at the top are willing to use any technique possible to gain more sign-ups. Psychological manipulation? Why not? In some cases, intense mind games will be played with prospective new starts with the sole purpose of making money for the company, promising vulnerable people hoards of cash and a chance at creating an entirely new social circle, when in truth, none of this will come to fruition.
Founders of pyramid schemes are likely to target groups which are trusting or vulnerable, these groups could include religious groups, the lower working classes or minority communities. These groups of people are more likely to trust the scheme if one or more of their own members becomes involved and shares their success story, making it much more easy for them to bring in new recruits.
The problem with many pyramid schemes is that over time the scheme loses momentum due to the fact that the pyramid will exhaust itself, and without continuing participants it ends up collapsing. This leaves any prior investors with nothing to show for their work or money.
It is important that these schemes remain wide on the lower levels in order to properly thrive, and reputable companies will ensure that this happens, those who are out to scam and make quick money will not concern themselves too much with this issue. However, there comes a point in a pyramid schemes where it is impossible to progress any further, if the business model does not generate revenue from other means than by recruiting new members.
This theory is proven by doing some simple math. If the founder signs up six members who each sign up a further six members, this would result in thirty-six members in the second round of recruits. As this pattern continues, assuming that each recruit brings in six more, by the 12th round of recruiting there will be 2 billion members! If profit is to be made purely by recruiting new members, the bottom level would be required to recruit a further 13 billion people-which is impossible since there are not even that many people on this planet. For this reason, most of those signing up to a pyramid scheme will never make any profit at all.
Once a pyramid begins to collapse, it is the lowest levels who will suffer first, however eventually even those right at the top stand to lose, proving that the pyramid scheme is not a sustainable business model.
Do People Really Make a Profit From MLM Schemes?
For those who are interested in a genuine and legal MLM scheme, there are many available online for immediate sign-up. Regardless of whether or not they are a scam, they still may prove to not be as fruitful as they appear.
Often times, you will see advertisements on social media sites for people looking to ‘expand their thriving team’ or promising ‘a lucrative new venture with unending prospects.’ If you see anything with the words ‘join my team today’ it will likely be a form of MLM.
Many of these companies offer the top reps chances to win an all-inclusive two-week break on a tropical island, or a shot at winning a cash prize. And there are those who have claimed such prizes, however, these are extremely few and far between. In order to qualify for this type of winning, reps must have put through an immense amount of sales, which for the regular Joe (or Jill) is usually unattainable.
Most people who enter into a pyramid scheme will be marketing the products on their personal social media pages, and in reality, never sell much. Let’s take a home fragrance company for example, which sells things such as candles, room sprays and car air fresheners. Whilst these are products that a lot of people buy, MLM schemes usually come from companies whose names are not recognized and so encouraging people to buy products (which are often highly-priced) can be difficult in itself. And even if one manages to get some customers, it is often the case that they will purchase once and not return again.
The people who are likely to be seen shouting about these schemes from the rooftops are the lucky handful who have made some money, because it can be done. As with anything, there are a small number of people who thrive in an MLM scheme and are able to make a decent income. Some people have even quit their jobs and moved into the MLM scheme full time. Great, for them. But what about your average Joe?
It is easy for a certain type of person to be pulled in by the lure of a pyramid scheme, ‘work your own hours,’ ‘never have to face a commute again,’ or ‘make quick money’. Such are the promises thrown about by those who are attempting to gather a team together. Stay at home parents are one group which are targeted by these people with the wonderful idea of being able to make some extra cash by simply chatting on Facebook. Those with limited mobility who cannot go out and get a ‘regular job’ might find the idea interesting. However, these are also people who may not be financially secure in the first place and with the often large upfront sum that MLMs require, these people tend to find themselves in the red more often than in the black.
People often fail at the MLM scheme purely because they do not have the correct knowledge of sales and marketing that is required to be successful in the field. You might even be tempted to purchase an online course, something along the lines of:
‘How I made millions doing MLM, and how you can do the same’
You would be surprised at how many people will pay for such information, pouring more money that they probably do not have into something that they will probably never make a profit from.
Answering the question of whether you can make money from a MLM pyramid scheme can be challenging. The reality is that you can make money, although you’d be in a very small percentage of people.
How to Recognize a Pyramid Scheme
You may remember from earlier on in this article, the mention of promises made to potential new reps. This is the first sign that what you are being sold is some sort of pyramid scheme. As we discussed earlier, reps are encouraged to build up a team of their own in order to boost sales and profits for themselves, and it is not uncommon for people to become desperate for new sign ups simply to keep their own businesses afloat.
Perhaps you have an old school friend who has suddenly made an appearance in your Facebook Messenger inbox, you haven’t heard from them for years but all of a sudden they want to meet up for coffee to tell you about the ‘amazing opportunity that they need to share with you.’ Whilst this might sound interesting, and perhaps even flattering that this person has thought of you, they have likely sent the same message to everyone on their contact list.
There are many things that you can look out for to determine whether you are being lured into an pyramid scheme, let’s now take a look at some other cues to look out for.
- Income and profit from is made up mostly from recruits.
- Income is completely commission-based.
- Sign-ups are highly encouraged to recruit more and more people because the main focus is to get more reps on board.
- You are told that you will be ‘starting up your own business’ and made to feel like you are independently going to thrive.
- There is a high startup price or a required fee.
- Being fed stories of people who have started with nothing and have made millions and are now living a life of luxury.
- Celebrity endorsements may be also appearing in MLM schemes, however, these celebrities have most likely been paid to advertise a product that they know little or nothing about.
If any of these flags show up, it is worth looking deeper into the background of a company in order to determine whether the scheme is legitimate or not.
It may be confusing since there are so many pyramid schemes out there and whilst some are completely legal and above board, others can be extremely dangerous with owners running them simply to make a quick buck out of naive people before making off into the depths of the woods.
It is important to differentiate a pyramid scheme and MLM scheme from a referral scheme. The later is a legitimate and very common business oppurtunity. The main difference is that in a referal system the profits are not being funneled up the pyramid chain, but are only divided between the company and the individual promoter. Here we also notice a difference between this system, which is usually a ONE level system as opposed to an MLM (multi level). The affiliate in a referral system is usually being paid a comission either for a new referal or for a sale.
Genuine MLM and Referral Systems
Even an MLM can be a legitimate scheme run by a reputable company. They may be referred to as a pyramid scheme, which is the term more commonly used for a scam form of MLM, thus we can see the importance of differentiating between these schemes. There are signs that can separate a genuine MLM opportunity from a scam:
- MLM opportunities will usually have a genuine product or a service to offer to customers, pyramid schemes do not have these or they have them only as a masquerade.
- Pyramid schemes will likely put time pressure on potential sign-ups. A genuine MLM will be open for new recruits at any time and will not encourage potential members to act quickly.
- Many scam pyramid schemes will disguise themselves as a genuine MLM opportunity or give themselves an alternative name such as a gifting group (this might be more in relation to a chain email).
- Those attempting to recruit for a pyramid scheme may become aggressive or pushy to potential sign-ups due to the fact that they themselves, are under pressure. True MLM schemes will encourage recruits but will do so with a friendly, caring undertone.
- A genuine MLM opportunity will sometimes require a startup fee, but this will usually be a low fee and will often come with things attached to it such as sample products or a beginners kit. In many cases there is no startup fee at all and an option kit can be purchased with no pressure. A scam scheme on the other hand will require a large startup fee and will offer no or low value in return for this.
A genuine MLM opportunity will sometimes require a startup fee, but this will be relatively low (usually under £100) and will often come with things attached to it such as sample products or a beginners kit. In some cases there is no startup fee and an option kit can be purchased with no pressure. A scam scheme will require a large startup fee and will offer nothing in return for this.
If you are in any doubt about a scheme, the most important thing to do is to research the company. Use a search engine to find reviews and stories from those who have had previous experience.
There are many legal and legitimate schemes out there but the pyramid scheme is something which is not legal in a lot of countries due to the high-risk nature of the model and the fact that many are started by people looking to make profit only for themselves at a cost to those below them. People who invest can become entangled in a web of attempting to sign up family and friends which results in not only the loss of money but also the potential loss of personal relationships.
People who become involved in a pyramid scheme may not only lose huge amounts of money, but also suffer mental health problems. These types of schemes can make recruits feel like they are the ones who have failed after hearing so many success stories and not making any profit themselves. They become obsessed with the idea that they WILL make money at some point if they just keep at it. They can become ashamed and embarrassed that they have not succeeded and perhaps recruited and shared this fate with their friends and family in the process.