Pyramid schemes are commonly described as a once-in-a-lifetime opportunity to earn a higher return on investment with minimal effort. However, the depicted image differs significantly from reality. Most of the time, it turns out to be a scam in which an individual or group entices people to invest in their apparent thriving business.
It is essential to understand how this system works in order to avoid falling into these traps, and we are here to tell you all about it.
What Is A Pyramid Scheme?
A pyramid scheme is a business model that recruits members through the promise of payments or services in exchange for enlisting others in the program rather than through the sales of products or services. Members are rewarded for their ability to hire new members and are under pressure to recruit new members. As a result, businesses do not have to invest any more money in production.
How Pyramid Scheme Works?
The structure of this scam is similar to that of a pyramid, flowing from top to bottom.
The founder is at the top of the pyramid, while lower-level management members are at the bottom. While recruiting members for lower-level management employees, the top-level management charges an entrance fee to make them a part of their team. Furthermore, lower-level employees must recruit new members on an individual basis in addition to selling the company’s products or services. The newly recruited members would also have to pay the fee to join the company, so the pyramid would continue to increase from the bottom.
This cycle keeps on repeating. Each member reaches out to their circle and paints the same old picture: “The company’s product is a hot seller and requires little effort to sell.” Highly astonished by the incredible incentives they may receive, not all but a few of them join the organization and are willing to pay the small price for such high gains.
Where Does The Money Go?
You may be wondering where the collected money goes. Simply put, all money collected from lower-level members is directed to the highest level member, namely the CEO. In some cases, if a member brings in a new participant, they will be paid a commission.
However, such businesses do not last long. The system will eventually collapse because their primary revenue source depends on their ability to attract an increasing number of investors. Also, there are only a limited number of people who join, and the turnover rate is quite high. The only people who make money are the ones at the top of the pyramid. The remaining 70 percent fails to even recover their invested amount.
Types of Pyramid Schemes:
⦁ Multi-Level Marketing Plans (MLMs)
Multi-Level marketing programs use networks to sell their products and recruit new members. They get on top of sales commissions which is a partial commission from the entrance fee of the newly hired member. However, not every MLM plan falls on the pyramid scheme, and some of them are genuine as well.
⦁ Ponzi Schemes
The business model is designed in such a way that the earlier members are paid by the entrance fee of the new members. It is a deceiving investment scheme that promises high rates of return with little risk to investors.
⦁ Chain Email
Chain emails are used to gain donations and are considered to be the most ethically incorrect. Each person who receives an email is required to donate money for a good cause to the people named in the list of recipients. Then, the receiver is encouraged to forward the email by putting his name on the list of the recipients.
⦁ Gifting Clubs
This type of pyramid scheme involves enticing new participants by promising them gifts in exchange for recruiting new members. The newcomers present gifts to the top-level members. Typically, the gifts are in the form of cash.
The Bottom Line
Nowadays, pyramid schemes are gaining popularity and are adopted by individuals to gain an easy source of income. However, pyramid schemes are an unsustainable and deceiving form of business practice. You never know when the business might collapse, and you will not only end up losing your money but also your precious time and energy. So, don’t get trapped in these fraudulent schemes, and stay vigilant.