In broad terms, a pyramid scheme is presented as a type of investment, or business opportunity, in which profits or large returns are based primarily on recruiting others to join the venture. There’s typically no product or service being sold nor any investment being made. Joining the scheme also requires an upfront investment. This is where the “pyramid” comes into play.
With that, here are a few things to remember about pyramid schemes.
No product sales or services. No investments. The scheme doesn’t sell anything nor invest in anything. The “returns” are the “investment” fees of new recruits as they’re brought in. Those who join first are at the “top” of the pyramid but number very few as other investors quit once realizing they’ve been taken advantage of.
Upfront Inventory Requirements. While the scheme itself doesn’t sell anything, it often requires investors to purchase large, upfront inventories of products. These products are typically overpriced and very hard to unload once purchased.
Recruiting. This is the lifeblood of the scheme. New recruits are needed to pay investment fees and to purchase products. What may look like a promising business opportunity turns into a large recruiting exercise of family, friends, and other acquaintances. It’s usually at this point when an investor realizes the business needs investor after investor after investor to stay afloat.
Pyramid schemes come in all shapes and sizes. They don’t necessarily have to be related to direct sales or network marketing. I’ve seen eBay merchants selling the same “hot business website” over and over again. I’ve seen schemers on legitimate Websites selling domain names they don’t even own.
The only way to avoid getting involved in a pyramid scheme is to do your homework. Does it sound too good to be true? Is someone promising big gains for little to no work? Do you have to purchase large inventories month after month? These are tell tale signs that should raise red flags in your mind. Sometimes recruiters will approach you in the middle of the store taking an interest in whatever you’re looking at. Other times you might get an innocent email looking to hook your interest.
Sadly, individuals can and will take advantage of others if they think they can get away with it. The problem is that most of us are gullible when it comes to our future selves. We want to be debt free, buy things without worrying about the cost and do it all while assuming more money will make us happy.
By knowing what a pyramid scheme looks and acts like, you can protect yourself while making wise and prudent investments.