Pyramid schemes are business models that promise a big monetary reward but seldom deliver. Most people involved in pyramid schemes lose money and never see a profit or compensation.
In this blog, we’ll discuss how to spot a pyramid scheme and what they look like today:
How Does A Pyramid Scheme Work?
A pyramid scheme is an illegal profit and business model where members at the top-level recruit other members to the team. The goal is to have the new members sell the company’s “products.” When they do, the people at the top also get a cut.
As the company grows, each member will try to recruit new sales team members, and when they do, the new members will pay costs upfront to join. Most pyramid schemes make money by recruiting new members, and most do not actually deal with the selling of real products.
Why Are They Illegal?
Pyramid schemes are not legal in any state due to how they are structured. Pyramid schemes are built in a way so they can only make money by taking on and recruiting new members who will pay upfront to join. The way they are built is not sustainable, and they will eventually have to stop and thus fall apart as they’ll lack people to onboard.
How is Multi-Level Marketing Different?
Even though pyramid schemes are illegal in all fifty states, a similar structure still exists in Multi-Level Marketing (MLMs). An MLM is different because an actual product is being sold, from skincare to kitchen equipment to educational courses; any product can be involved in an MLM.
Most MLMs don’t make their sales members pay a fee to join the company; instead, they make them buy the products they are required to sell. In most cases, the products aren’t worth much, and the sales team members buy them at a high mark-up price. In order to make money, they have to sell the newly expensive products or recruit more people to join their sales teams.
How to Spot a Pyramid Scheme?
Pyramid schemes may be difficult to identify as they’re often structured similarly to actual, legitimate MLMs. While it can be difficult, keep an eye out for:
Pressure to recruit: If you’re primarily encouraged to bring on more members to get rewards or higher commissions, you should be cautious.
Confusing commission structure: If you cannot simply understand how your commission structure works, it may be a scam.
Hidden sales revenue: If you cannot see sales records or you find that revenue is primarily generated due to bringing on more members, be wary.
If you think you may have fallen victim to a pyramid scheme, contact the team here at Nick Lotito & Seth Kirschenbaum to discuss your case.