A pyramid scheme comprises of a business model that isn’t sustainable long term, and serves to mainly to recruit new paying members. Most Multi-level-Marketing (MLM) businesses are glorified legal pyramid schemes, find out why here. First let’s look at what a pyramid scheme is.
What’s comprised of a successful Pyramid Scheme?
1. The business must appear credible to potential investors.
- The business needs to conceal their true intent, so the product or service is often convincing to even the skeptical. These products are often ‘health’ related but can appear in any niche.
2. The method needs to be simple enough so the common person will understand.
- The business strategy will be straightforward so they will be able to recruit more members. There’s no point in making a complicated method when their system is driven by recruiting new members.
3. In order for the new member to make money he must recruit other members
- The products or services simply can’t compete with the competition from legitimate companies. The products are overpriced, generic, and will never sell in stores. This means the main source of the income has to come from recruiting members. This is why MLM companies are pyramid schemes, their products are mainly sold through new members to friends and family.
4. The person has to buy the tangible product or commodity upfront.
- Commonly a sample kit has to be bought to showcase the products to friends and family. In others members must continually buy the product in order to be eligible for payment.
5. The pitch or sales letter is social engineered to prey on the unknowing victim.
6. Compensation is given to members who are able to recruit a new salesperson.
7. When people ultimately fail they believe it’s their fault not the flawed system.
Why are some Pyramid Schemes legal?
1. Not enough fraud cases have been reported to the FTC
2. Teams of lawyers keep the scheme legal for as long as possible
Why are Pyramid Schemes Illegal?
1. Pyramid schemes are flawed from the start, only the people at the top of the pyramid will make money.
2. The main source of income comes from recruiting new members.
3. They operate to make money without providing a product or a true service to the customer.