By elmads

The almighty Pyramid Scheme, it made people who came in early rich and the top levels richer, while they left the bottom pawns into their own financial demise.

Pyramid just like what I have discussed in my previous blog titled “The Popular Scams”, are structured literally as a pyramid. It means that there is a top person or persons, and a lot of individuals in the bottom of the pyramid.

I’ve focused in this scam because this is one of the most popular scams worldwide, plus there is a stigma and confusion with any business model that has recruitment with it, almost everyone automatically thinks that anything that is related directly to recruitment is a pyramid scam. I’ll help to shed light into this misunderstanding in this blog.

How does it work?

Pyramiding is also a business model, but an unsustainable one. Just like any other businesses in the world, they will need profits in order to continue with their operations. Legitimate businesses sell various products and services that give value to the people, but with pyramiding organizations they sell goods and services that hold less to no value at all. Instead, they use their so called products and services as a disguise to bring in their main way of attaining revenue, which is through recruitment. They can only recruit so much that when their recruitment revenue dries up, the company eventually collapses.

Recruitment is the main source of income for pyramid organizations. How? it is via their so called “buy-in”. Every person who wants to join the pyramid organization needs to pay a certain amount of money first. Let’s just say that instead of having an interview and examination to work in a company, you’ll just need to pay a certain amount of money to get hired. In exchange, the organization promises that the new entrant will in turn have an income or commission for every person they are able to recruit in their organization.

When you think of it, where does the scam actually start? because if we look at it, it seems that as long as the organization and its people are able to recruit more individuals, then all of their employees will still have commissions and return on their investments. Which, is true in that simple sense.

Nonetheless, the answer is already in the phrase “as long as the organization and its people are able to recruit”. Remember, our world has finite number of people, if you’re main source of income is only based on recruitment then eventually they will only be able to recruit the maximum number of people they can recruit in the future. The money will stop to come in the pyramid organization, which in turn will cause for the organization to collapse and close, leaving the top people of the pyramid to take home majority of the money that the company has amassed, while the bottom individuals, most especially the last people who came in, will lose all of the money they placed in the pyramid organization. That is where the scam takes place.

Their Sales Pitch

Pyramid scheme’s marketing and advertising are same as almost all other companies.

1.) They show how good their products are

2.) Statements and testimonials from other people how their products helped them with their own personal problem

3.) You can travel around the world when you join their organization

4.) Make a lot of money

5.) Meeting new people

The only way to reduce the risk of being fooled, is through looking into the company’s license to operate, knowing if their products have approvals from the specific government agency which the product is categorized by, and most of all to do your own due diligence to research about the company and their products.

Popular types of Pyramid Schemes

• The Eight Ball Model – This is the most popular pyramid scheme model in which it requires for every recruited individual to recruit 2 more people below them. It will be like a structure of (1, 2, 4, 8, 16, 32 and onwards.) This makes recruitment not too stressful for the people who are involved in the scheme already.

• The Airplane Game – As the name implies, it comes from the idea of working in an airplane needing employees and passengers. In here there are 4 tiers of the pyramid, namely “1 Pilot”, “2 Co-Pilots”, “4 Crew Members” and “8 Passengers”.
  
  The idea here is that the total 15 slots must be completed, and there is a specified “buy-in” amount for everyone to get in the plane. Once all slots are completed, the total amount of money collected will go the pilot and that’s when he/she will retire afterwards.
  
  Additionally, The remaining members of the plane will be broken down into two groups, which they will start their own airplane model again. There’s a plus from it, the previous co-pilots, crew members and passengers will be promoted now to pilots, co-pilots and crew members, respectively. Their next job is to find another 8 passengers to fill up the plane again.

• The Blessing Loom Model – This is the same as the eight ball model, the difference is that this model is presented online and with a great promise of making your $100 to $800, if you just recruit people. This blessing loom model is shown as an octagonal diagram so that it wouldn’t look like as a pyramiding chart.

• The Franchise Fraud – This is usually done by the intermediaries of the brand owner and the potential franchisor. Sometimes the intermediaries just copies other popular brands in the market or disguise themselves as part of a popular brand organization with the power to franchise their products to people who are interested in it. It becomes a pyramid because what they sell is only the franchise and the rights to distribution, not the actual product. They gain money from people recruiting individuals to continuously sell the franchise and distribution rights. In the long run, they will eventually hit a ceiling for them to recruit people into their network, or potential franchise investor to buy the rights of the franchise. Hence, the collapse of the fraudulent organization due to drying up of capital coming in the pyramid.

• The Matrix Scheme – This is type of pyramid involves winning a product to incentives other people to come in their network. You’ll be buying a certain item like a flash drive, mouse, and an earphone that is worth just a couple of dollars. Additionally, you have a chance to win a better equipment like game console, or laptop or a phone if you join their queue. For you to be able to join the queue you need to recruit another 10 people to purchase the product you previously purchased as well. Once you have joined the queue, the people below you and yourself will need to continue to recruit another 10. Once every 10 people enters the queue you will be moving forward up the queue until you receive the free equipment.
  
  Basically, you will have the chance to receive a reward worth more than the money you paid for in the expense of recruiting more people to join the queue.

Pyramid Scheme vs Multi-Level Marketing (MLM)

MLM is one of the popular business models that has been practiced by most companies worldwide. It is a model to increase sales volume, and the number of employees selling the company’s products with the incentive of commissions from every sold product.

Nonetheless, MLM business model, even though is a legitimate framework, will always have a stain in their name because of pyramiding scams. Why? because both have almost the same process. The only differentiator is the ACTION and what is being COMMUNICATED to the people.

Here is what I mean. Remember in pyramiding, their main source of income is recruitment through people’s “buy-in” as a means to join their organizations, while there is no specific product being sold, even if they have one they don’t actually make money from selling it. On the other hand, MLM gets revenues from selling actual products and services.

They ACT in a way to sell product to acquire money from it, and they COMMUNICATE that the product is made to help people. Unlike with Pyramiding, they ACT as if they sell the product but what they COMMUNICATE is different, it is something between the lines of, when you buy their product and get other people to buy the product, you’ll get a specific amount of money from it.

Can you see the difference? Pyramiding is structured to entice people to join the organization or purchase a product, and ask them to ask other persons to also join the organization or purchase the product with the promise of getting a specified amount of money in return. Whereas, MLM works to sell the product that gives value to other people, and gets commissions from the product sold. They act as a group of salesman which is to sell the products they genuinely believe will give significant help to the people.

MLM gets customers, service their customers, gets results and feedback from customers, teach people who want to make money how to get money through sales, build and make their team better. I know it still sounds complex and shady, you know why? because MLM and Pyramid Scheme have a very thin line that differentiates them.

The easiest way to spot it is through their main source of income. A pyramid scheme will mostly focus on recruitment, and selling their products is not a priority at all. MLM on the other hand is sales oriented with their products and services, and can sustain their business operations even without recruitment.

Pyramiding is a scam because majority of their business model is built to collapse in the long run, built only for the middle to the top brass, while leaving the bottom succumbing to their financial demise.

To sum it up

Pyramiding scams will never go away, as long as there are people who are willing to take advantage of other people, and individuals who want to get rich quick. If we cannot eradicate this unlawful behaviour then we must be vigilant and be wary of such financial scams.

The only way we can protect ourselves from this scam is through financial education, knowing the business model of these scams (how it operates) and most of all, a better understanding and control of our emotions.

In the end of the day, understanding and learning the unknown is the protection from the unknown.

-ELMads

Knowledge is my Sword and Patience is my Shield,

elmads

This blog is for informational purposes only and not a Financial Recommendation. Not all information will be accurate. Consult an independent financial professional before making any major financial decisions.