A pyramid scheme is an exploitative and illegal business model. In a pyramid scheme, participants are encouraged to recruit and sign-up new members in order to make money. Most people who join the scheme lose their money. Pyramid schemes aren't very different from multi-level marketing (MLM) companies like Avon or Mary Kay Cosmetics. In both models, there are multiple levels of participants: some make money off the sale of products to consumers, while others earn commissions based on how much product they sell and how many people they sign up as distributors. The difference is that in MLMs, participants can earn money by selling products directly to customers without having any downline members of their own—something that's impossible for participants in an unlawful pyramid scheme because there is no product being sold other than the opportunity itself.
In an unlawful pyramid scheme, most of the revenue generated comes from recruiting new members rather than selling actual goods or services. This means that it's not really a sustainable business model—there will eventually be too many people at the bottom of the pyramid who have paid into it but haven't gotten anything back out in return. The ones at the top, however, continue making huge sums of money as more people keep signing up on each end of the line of distributors under them. The vast majority of participants will not make any money because the revenue from new participants does not cover the costs from refunds, chargebacks, and fraud related to products that do not exist. In addition to making a loss, another common outcome is that many people will be left with unwanted products which they cannot sell at a profit.
Types of Pyramid Schemes
A. Product-based pyramid schemes:
This type of pyramid scheme is the most common, with a focus on recruiting members who sell a product to make money. The products being sold have little or no real value, but you are incentivized to buy more and more to increase your commission. These are sometimes referred to as multi-level marketing (MLM) schemes.
B. Investment-based pyramid schemes:
With an investment scheme, you pay money either into the scheme itself or directly to the person who recruited you in order to make money from the scheme. In some cases, the scammers themselves receive your investment directly; other times they will create a fake company to take your money and then use it for their own purposes instead of investing in anything worthwhile. Either way, these so-called “investments” are not legitimate.
C. Pyramid/Ponzi hybrid schemes:
Not all Ponzi schemes are pyramids; however, some of these two types cross over with each other in certain aspects and can be considered a combination of both Ponzi and pyramid schemes.
How to Identify a Pyramid Scheme?
There are some points which can help a person identify a Pyramid Scheme: -
It offers extravagant earnings claims that sound too good to be true - such as promises of high returns in a short time period for doing very little work, or guarantees that you'll earn a certain amount of income in your first month or year of business
Avoid Getting Involved in a Pyramid Scheme
If you are ever unsure about a business opportunity, it is always best to take the time to research it or get advice from someone you trust. While many legitimate businesses offer an attractive compensation plan that rewards their members for selling products and recruiting new members, if the primary focus is on recruiting others to join your team, you should proceed with caution. If you are trying to decide whether a business opportunity or compensation plan is a pyramid scheme or not, following these steps can help:
Pyramid schemes cases
Let us know about some identified pyramid scheme frauds: -
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