What is a Pyramid Scheme?
A pyramid scheme is a business model that recruits members via a promise of payments or services for enrolling others into the scheme, rather than supplying investments or sale of products or services. As recruiting multiplies, recruiting becomes quickly impossible, and most members are unable to profit; as such, pyramid schemes are unsustainable and often illegal.
Pyramid schemes have existed for at least a century in different guises. Some multilevel marketing plans have been classified as pyramid schemes
Is multi level marketing a pyramid scheme?
If the money you make is based on your sales to the public, it may be a legitimate legal multilevel marketing plan (MLM). BUT, if the money you make is based on the number of people you recruit and your sales to them, it’s a pyramid scheme. Pyramid schemes are illegal, and the vast majority of participants lose money.
Are pyramid schemes Legal?
A pyramid scheme is an unsustainable and often illegal business model that involves promising participants payment or services, primarily for enrolling other people into the scheme, rather than supplying any real investment or sale of products or services to the public.
Why do pyramid schemes collapse?
Pyramid schemes are doomed to fail because their success depends on the ability to recruit more and more investors. Since there are only a limited number of people in a given community, all pyramid schemes will ultimately collapse. The only people who make money are those few who are on the top of the pyramid.
Pyramid Scheme Concept and basic models
In a pyramid scheme an organization compels individuals to join and make a payment. In exchange, the organization promises its new members a share of the money taken from every additional member that they recruit. The directors of the organization (those at the top of the pyramid) also receive a share of these payments. For the directors, the scheme is potentially lucrative—whether or not they do any work, the organization’s membership has a strong incentive to continue recruiting and funneling money to the top of the pyramid.
The two common models of pyramid schemes are the “eightball” model and the “matrix” model.
The “Eightball” model
Prior instances of this scheme have been called the “Airplane Game” and the four tiers labelled as “captain”, “co-pilot”, “crew”, and “passenger” to denote a person’s level. Whichever euphemism is used, there are 15 total people in four tiers (1 + 2 + 4 + 8) in the scheme— with the Airplane Game as the example, the person at the top of this tree is the “captain”, the two below are “co-pilots”, the four below are “crew,” and the bottom eight joiners are the “passengers”.Many pyramids are more sophisticated than the simple model. These recognize that recruiting a large number of others into a scheme can be difficult so a seemingly simpler model is used. In this model each person must recruit two others, but the ease of achieving this is offset because the depth required to recoup any money also increases. The scheme requires a person to recruit two others, who must each recruit two others, who must each recruit two others.
|The “eight-ball” model contains a total of fifteen members. Note that in an arithmetic progression 1 + 2 + 3 + 4 + 5 = 15. The pyramid scheme in the picture in contrast is a geometric progression 1 + 2 + 4 + 8 = 15.|
The eight passengers must each pay (or “gift”) a sum (e.g., $5,000) to join the scheme. This sum (e.g., $40,000) goes to the captain who leaves, with everyone remaining moving up one tier. There are now two new captains so the group splits in two with each group requiring eight new passengers. A person who joins the scheme as a passenger will not see a return until they advance through the crew and co-pilot tiers and exit the scheme as a captain. Therefore, the participants in the bottom three tiers of the pyramid lose their money if the scheme collapses.
If a person is using this model as a scam, the confidence trickster would take the majority of the money. They would do this by filling in the first three tiers (with one, two, and four people) with phony names, ensuring they get the first seven payouts, at eight times the buy-in sum, without paying a single penny themselves. So if the buy-in were $5,000, they would receive $40,000, paid for by the first eight investors. They would continue to buy in underneath the real investors, and promote and prolong the scheme for as long as possible to allow them to skim even more from it before it collapses.
Although the “captain” is the person at the top of the tree, having received the payment from the eight paying passengers, once they leave the scheme they are able to re-enter the pyramid as a “passenger” and hopefully recruit enough to reach captain again, thereby earning a second payout.
The Matrix Model
Matrix schemes use the same fraudulent non-sustainable system as a pyramid; here, the participants pay to join a waiting list for a desirable product, which only a fraction of them can ever receive. Since matrix schemes follow the same laws of geometric progression as pyramids, they are subsequently as doomed to collapse. Such schemes operate as a queue, where the person at head of the queue receives an item such as a television, games console, digital camcorder, etc. when a certain number of new people join the end of the queue. For example, ten joiners may be required for the person at the front to receive their item and leave the queue. Each joiner is required to buy an expensive but potentially worthless item, such as an e-book, for their position in the queue. The scheme organizer profits because the income from joiners far exceeds the cost of sending out the item to the person at the front. Organizers can further profit by starting a scheme with a queue with shill names that must be cleared out before genuine people get to the front. The scheme collapses when no more people are willing to join the queue. Schemes may not reveal, or may attempt to exaggerate, a prospective joiner’s queue position, a condition that essentially means the scheme is a lottery. Some countries have ruled that matrix schemes are illegal on that basis.
Pyramid Schemes Try To Disguise Themselves As Legitimate Multi-Level-Marketing Organizations
Pyramid schemes seldom involve sales of products or services with value. Without creating any goods or services, the only ways for a pyramid scheme to generate revenue are to recruit more members or solicit more money from current members. Eventually, recruiting is no longer possible and most members are unable to profit from the scheme.
Some multi-level marketing (MLM) companies operate as pyramid schemes, and consumers often confuse legitimate multi-level marketing (www.findajob.co.zw) with pyramid schemes.
According to the U.S. Federal Trade Commission legitimate MLM, unlike pyramid schemes,
have a real product to sell. More importantly, MLM’s actually sell their product to members of the general public, without requiring these consumers to pay anything extra or to join the MLM system. MLM’s may pay commissions to a long string of distributors, but these commissions are paid for real retail sales, not for new recruits.
It’s best not to get involved in plans where the money you make is based primarily on the number of distributors you recruit and your sales to them, rather than on your sales to people/organizations outside the plan who intend to use the products/services.
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