A pyramid scheme involves, one way or another, giving money to people above you within the chain, before recruiting more individuals beneath you who will, hopefully, pass a larger amount of money on to you.
If you consider the shape of a pyramid then you will realise how this works as each new level is wider than the one above.
At least that’s the theory.
In reality, pyramid schemes only tend to make money for those at the top, the people who have created them.
In order to be viable, a pyramid scheme always needs new members at the bottom level in order to sustain itself.
Due to the finite number of people likely to join, a pyramid will always reach a point where no new members are available.
This, of course, causes the pyramid to crash.
In practice, most people who invest in a pyramid scheme will lose their money.
For this reason, pyramid schemes are illegal in most countries of the world. In simple terms, they are a complete and utter fraud.
MULTI LEVEL MARKETING
A legal variation of the pyramid scheme is MLM – multi level marketing.
The main difference between the two is that MLM resolves around selling a product or service.
Whilst I don’t doubt that there are many companies operating successfully and ethically with multi level marketing, there are a good few that are no more than scams, using the product or service as a smokescreen to cover the fact that they really are a pyramid scheme, or ponzi.
If you are thinking of taking advantage of some money making opportunity and wish to know whether it could be a pyramid scheme then the following points generally indicate that it is something you should avoid –
1. You have to pay a fee to join and then recruit new members to be able to earn any income.
2. Member’s identities are kept secret, even from other members.
3. The scheme is marketed as being ‘approved’ by a group of importance and such claims cannot be verified.
4. There are a large number of testimonials about the product or service, all left by people who are impossible to contact.