What is a Pyramid Scheme?

 

Pyramid schemes are a non-sustainable business model where the original investors earn income by recruiting others rather than selling actual goods or products. The scheme is based on asking new investors to pay an initial payment in order that they can be a part of the scheme. The money collected from new investors is used to pay early investors. New members are given a guaranteed income if they can bring more participants to join the scheme.

Although the principle of pyramid schemes may sound straightforward, they are typically presented to investors disguisedly. Therefore, it is crucial to understand the way it operates and the various ways it could be presented.

How Pyramid Schemes Work

The name implies it follows the form of a pyramid. It begins with one person, the recruiter, who is at the highest point of the pyramid. The person recruits one individual and they are required to put in a certain quantity of funds. The initial amount is given to the person who recruited you. In order for this new member to recoup their investment has to find more members and each one of them will also pay an investment upfront.

If the candidate is able to persuade more than 10 people to sign up the organization, he'd have made a significant amount of profits from a tiny investment.

Every one of the newly-adopted members will need to recruit more to join. For every 10 new members one invites to join they earn an impressive profit, less the initial payment made to the person who recruited him.

The process continues to the point where the program is no longer able to sustain itself. In this case the people at the top in the ladder have made enormous profits and those at the bottom are left with a loss of their money.

The issue is that this kind of scheme can't last for a long period of time. There are only a few members who are eligible to join. Participants are misled into believing that by investing they will earn a large amount of money. But, in fact, the program is not typically a catalyst for any kind of wealth creation and neither have the participants purchased any assets.

Forms of Pyramid Schemes

1. Multi-level Marketing (MLM)

As opposed to other scams, the multi-level market (MLM) is actually a legal business practice. MLM involves recruiting people to assist in selling the product or service that is valuable. The person who recruits them earns a profit by selling the productor service, and is not required to recruit additional members.

The main distinction between different pyramid schemes and multi-level sales is that it offers an authentic solution or product, and the former does not.

However there is an alternative version of MLM that is in an MLM pyramid scheme. This means that the variation involves selling products or services that offer minimal or any worth. For instance, it could include selling printed materials like courses on investing. A scheme like this is capable of sustaining itself by enticering people to buy items that are not valuable at expensive cost.

1. Promotions for gifts

Certain schemes are disguised as gifts promotions. They are usually found in investment companies. The way they operate is that the person who recruits is presented with the opportunity to receive a gift. If the person who is recruited succeeds in getting more members to join, they also receive a gift from those whom he has recruited. These schemes are usually included in clubs and are deemed illegal.

Attributes of a Pyramid Scheme

Pyramid schemes share some typical characteristics that one must be aware of. They include:

1. Focus is on recruitment

If you're a part of a program emphasizing recruiting others to join, instead of selling an item or service the chances are it's illegal.

1. No actual sale of product or service.

Be very careful regarding schemes that do not involve selling any real goods or service. Fraudsters often come up with fancy-sounding products in order in order to trick customers.

1. High-yielding promises of returns in the shortest amount of period of

If someone is presented with a method to earn fast cash in a short period of time one should be wary about these programs. The only way in which a plan could generate quick cash is when the payments made by new customers are being utilized to pay back early investors.

1. There is no proof of the revenue generated from sales of retail

Before signing up to any scheme, you should inquire about proof of revenue. For instance, they could request the financials of the company which must be examined by a qualified CPA. These records will indicate what actions the company is involved in. In general it is recommended that a plan earn its money primarily through the sale of its products or services instead of the recruitment of individuals.

Summary

Pyramid schemes are fraud which is based on an unsustainable model of business. It is a method of obtaining people to join an investment scheme by paying the cost of a fee. They then have to convince more people to sign up so they can recoup their investment as well as earn a profit.

The process of recruitment continues until the cycle becomes no longer able to keep itself going. At the point that the system is broken, the first members (those at the highest levels in the hierarchy) will have made significant profit, while recent members will be losing on their investments.