The fascinating life story of Saint Francis of Assisi
Ever heard somebody talking about a "pyramid scheme" and wondered what that really entails? Well, at a high level, a pyramid scheme is a business model that recruits new members to a company and promises them commission in return for more recruits. Pyramid schemes are illegal in most countries around the world, but that doesn't stop fraudsters from running them.
While some pyramid schemes are obvious, others are more difficult to detect. This is part of the reason why they are so dangerous and destructive to the lives of those who fall for them.
Pyramid schemes have existed in various different guises for at least a century. They are fraudulent and destructive, and are therefore illegal in many countries.
At a very basic level, a pyramid scheme is a business model that recruits members and promises them compensation for recruiting more members.
Normally the founder of a pyramid scheme recruits an initial group of members to invest in and promote the scheme. They are then encouraged to recruit more members.
Members are incentivized to recruit additional members by the promise of a share of the money that the new member invests, while the founder also takes a cut.
With each new level of recruits, the pattern repeats; that is to say, the money invested by the new recruits is funneled to the members who recruited them.
Pyramid schemes are different from Ponzi schemes, although the two are often cofounded. In a Ponzi scheme, the founder recruits new members.
The founder then secretly uses the money from the new members to pay the existing members, who think that their compensation is coming from an actual investment.
The larger a pyramid scheme grows, the more difficult it becomes for new recruits to make money from their buy-in. This is because the pyramid grows exponentially.
Imagine a pyramid scheme in which the founder recruits an initial group of six individuals. Each of those individuals then has to recruit another six people to turn a profit.
The twelfth group of recruits will consist of 2,176,782,336 individuals, who between them have to recruit 13,060,694,016. That’s more than the entire world population.
In that scenario, the majority of the latest recruits will lose all of the money they initially invested. People higher up the pyramid are likely to lose out as well.
An example of a high-profile pyramid scheme was Vemma, a nutrition company incorporated back in 2004 that sold dietary supplements.
The scheme drew people in by offering a life-changing opportunity to earn full-time income for part-time work. It already sounds too good to be true...
The opportunity was open to everyone, regardless of background and experience. To get started, a new member simply had to purchase a US$500 kit and recruit two more members.
Vemma was a hit and it grew quickly. At its peak, the company was bringing in 30,000 new members each month, and by 2013 Vemma was turning over US$200 million annually.
There was just one problem: the majority of new recruits were earning less than their initial investment. Vemma was shut down by the FTC in 2015 for operating a pyramid scheme.
While it may be easy with hindsight to identify a pyramid scheme, they are often difficult for the average, untrained eye to spot. This is part of the reason they’re so dangerous.
Pyramid schemes may be presented to their victims in any number of ways, including as gifting groups, investment clubs, or multi-level marketing businesses.
Legitimate multi-level marketing (MLM) businesses do exist, and sometimes it is difficult to tell the difference between one of those and a pyramid scheme.
In theory, the difference between the two lies in the compensation model. The members of a multi-level marketing company earn commission for selling a product or service.
The members of a pyramid scheme, by contrast, primarily earn commission for the recruitment of new members. That is the difference, in theory at least.
In reality, however, many multi-level marketing businesses make it all but impossible for their members to turn a profit from sales alone.
It is the similarity between the two models that allows people who run pyramid schemes to disguise their venture as a legitimate multi-level marketing company.
Pyramid schemes can be very tricky to spot and can be equally destructive to the lives of their victims. Luckily, there are a few things to look out for.
An offer with a very short deadline should immediately set the alarm bells ringing. Be wary of any instruction to “act now or miss a once in a lifetime opportunity.”
Promises of earning a life-changing amount of money are also suspicious, particularly if it seems you will have to do very little in order to earn the cash.
Last but not least, watch out for any multi-level marketing company that requires its members to pay for the opportunity to sell its product or service.
If a multi-level marketing business is legitimate, this will never happen, so you can take a payment requirement as a sure sign that something is off.
Sources: (TED-Ed)
See also: The biggest missed business opportunities in history
How to spot a pyramid scheme
Important things to look out for
LIFESTYLE Fraud
Ever heard somebody talking about a "pyramid scheme" and wondered what that really entails? Well, at a high level, a pyramid scheme is a business model that recruits new members to a company and promises them commission in return for more recruits. Pyramid schemes are illegal in most countries around the world, but that doesn't stop fraudsters from running them.
While some pyramid schemes are obvious, others are more difficult to detect. This is part of the reason why they are so dangerous and destructive to the lives of those who fall for them.
Luckily, there are some key things to look for if you suspect you may be dealing with a pyramid scheme. Check out this gallery to find out what they are.