Pyramid schemes

As far as scams are concerned, of which there are many, we refer to them regularly. Lately we gave the Nigerian scams a lot of exposure to retain your awareness which, like a battery, needs regular charging. Today we must recharge our awareness about pyramid schemes, which are illegal money-making ventures for individuals, businesses and small groups of people.

A typical pyramid scheme involves a few individuals at the top who recruit participants who, in turn, recruit other participants to offer something of value (usually money, but in some cases, time) to the organisation. Recruits are offered the promise of large sums of money if they successfully bring in others to pay money to join the pyramid. Pyramid schemes focus on the exchange of money and recruitment. Usually, there is no legitimate product being sold. They may be disguised as games, chain letters, buying clubs, motivational companies, mail order operations, or investment organisations.

Although some pyramid schemes call themselves multi-level marketing operations, not all multi-level marketing companies are pyramids. The sale of legitimate products is what distinguishes multi-level operations from pyramids. When the emphasis is on recruiting new members rather than selling something of value, it is an illegal pyramid.

How do pyramid schemes work?

Basically, a pyramid scheme is formed when a single promoter (or small group) collects money from a certain number of "friends" and instructs them to collect more money from more of their "friends". The cycle goes on from there. As the pyramid grows, the number of people involved becomes too large to sustain the pyramid.

Some people will fail to send in their money, or recruit the required number of "friends", and the pyramid crumbles. The majority of people end up on the "bottom" of the pyramid and inevitably will lose their initial "investment". They won't get their money back or earn their promised fortune because no one is beneath them in the pyramid adding new money to the pot.

Multi-level marketing companies

Multi-level marketing companies differ from pyramid schemes because they are usually legitimate business opportunities. The sale of legitimate products is what distinguishes multi-level marketing operations from pyramids.

If the emphasis in a multi-level marketing company is to build a sales force rather than sell the company's products, it may be an illegal pyramid.

Many pyramid promoters attempt to make their schemes look like a multi-level marketing company by using a line of near-worthless products or newsletters and claiming to be in the business of selling them. In pyramid schemes, little or no effort is made to actually market the products.

Often there is not even an established market for the products. Rather the "sale" of such merchandise is used as a front for the transactions which occur only among and between the operation's distributors.

In pyramid schemes, the emphasis in the sales pitch is on recruiting - building up the organisation and the number of participants and on collecting the "start up" fee - not on selling the products.

Pyramid schemes want to make money from you, not the product sales.