Introduction :

The primary aim of every human being should be to make their life easy by earning money. Many of them find the work of their choice and earn a good amount of money. However, some fail to do so and find an easier way to make some money. There are various reasons why one may not get a job or do not have the money to live the lifestyle they yearn for. Some become scammers and lead a life of easy money by promoting their illegitimate workings. A pyramid scheme is one of the many ways scammers dupe people. In this blog, we will understand everything about pyramid schemes.

Topics we are covering in this blog are as follows:

• What is a pyramid scheme and how does it work?
• Why are pyramid schemes used?
• What could be the key points of the pyramid scheme?
• What are the types of pyramid schemes?
• How to spot the pyramid scheme

In this article, we will dwell on the basics of a pyramid scheme: what they are, how they operate, and what are the obvious red flags that might help you avoid falling victim to them.

What is a pyramid scheme?

Pyramid schemes are one of the oldest scams in history; however, in this new digital age, this scam has been adapted. Pyramid schemes work on fraudulent business models. In this scheme, scammers devise ways for their victims to fall for their ruse. They play off the lack of financial awareness of their victims.

Pyramid schemes involve the participation of several victims. They are drawn towards the scheme on the pretext of "earning substantial money with minimum risk involved."
encourage their victims to recruit more to earn money. There are different ways scammers promote their pyramid schemes. They either encourage their victims to buy some products or services and then sell them to other "prospective victims" or simply invest in a bogus financial scheme.

They also encourage their victims to earn a bonus for referring someone else to the "supposed business scheme" and recruiting them. In other words, scammers are interested in increasing their database.
How does the pyramid scheme work?
Scammers just have to recruit a few victims, who in turn are requested to join more members to earn a significant amount of money. They aim to recruit first-level investors. The structure of the business model looks like a pyramid, with scammers at the top and victims forming many layers of the base of the pyramid, thus the name pyramid scheme.

The scheme works by paying off old investors with the money collected from recruits. The scheme is successful as long as there is a steady flow of recruits.

Although pyramid schemes in various countries have been banned under the pressure of law enforcement, However, in several countries, it is still running, and many still fall victim to such schemes. As per the experts, this business model is unsustainable in the long run since these "prospective victims" can recruit more members. These victims will contact their friends and family members since they are the closest. In the end, the only ones who make a substantial amount of money are these scammers.

What are real-world examples of a pyramid scheme?

There are some popular real-world examples of the pyramid scheme. They are as follows:

1. Bernie Madoff’s Ponzi scheme
2. TelexFree
3. MMM
4. Herbalife
5. OneCoin

What could be the key points of the pyramid scheme?

The key points of the pyramid scheme are as follows:

Promises of high returns: The main motive of a pyramid scheme is to keep the community growing by recruiting new members who have a good amount of money to invest in the scheme. Many fall victim to bogus promises of high returns on investment, which in reality make no sense.

Recruitment: Those who do fall victim are encouraged to recruit new members rather than sell their products and services.
Multi-level structure: If you can imagine a pyramid, it is differentiated into various levels, and the scheme runs on the same calculation. People at the top are ensured substantial profits by recruiting more people to join at the bottom level.

Unsustainable and illegal: It has been observed that the pyramid scheme eventually becomes unsustainable as it fails to recruit more people. However, it is not the best business practice, and many countries deem this marketing practice illegal.

Illegitimate: It is an illegal business model that troubles those who have invested in the scheme. These victims not only lose a substantial amount of money but also lose their friends and family members who were recruited by them.

Lack of transparency: The lack of transparency in a pyramid scheme makes it challenging for the victims to assess the total amount of money lost to scammers. At an individual level, the amount of money lost to a pyramid scheme can be counted. But many victims refrain from reporting their losses due to the pyramid scheme.

Rigid strategy: Making false promises and promising high returns are always counted as high-pressure tactics. A few members of the pyramid scheme look for potential members who can invest and keep the scheme going.

What are the types of pyramid schemes?

There are several types of pyramid schemes. We are presenting a brief introduction to it.

 

Classic Pyramid Scheme:
A pyramid scheme runs on one strategy: a group of people hire potential investors and promise them high returns on the amount invested.

Multi-level marketing (MLM):
Multi-level marketing runs on the principles of a pyramid scheme, but it is a little bit focused on the sale of products and services. The best example of MLM to understand is Amway.

Ponzi Scheme:
The Ponzi scheme is the most popular type of pyramid scheme. This scheme is named after Charles Ponzi, who proudly used it in the 20th century.
In this scheme, the older investors are paid by the subsequent recruitment of new investors. There is profit for everyone as long as there is no dearth of fresh investment in the scheme. Once the pool of fresh investment stops, the scheme also collapses.

Gifting Scheme:
A gifting scheme is nothing but a form of a pyramid scheme where instead of investing in the recruits, they simply give a gift to the existing community in the hope that they will get the return gift soon.

High-Yield Investment Programs (HYIPs):
It is not a new concept but just emphasised high-pressure tactics. Although it is unsustainable and fraudulent.

How to spot the pyramid scheme :

Now that we have explained how these schemes work, we will educate you on a few obvious red flags that you need to be aware of.

Promises of high returns: genuine business models never promise the outcome; at most, they will predict it. However, it is not a foolproof plan where profits are guaranteed in a short span. Every business takes some time to mature and churn out heavy profits in the future. The pyramid scheme runs on a low-reward relationship, which is not people-friendly

In a pyramid scheme, the focus is on recruiting people and not on selling products and services.

Within the community, there is no concept of transparency. Genuine organizations run on transparency. Hence, the scheme is a failure.

This scheme is neither registered nor licensed. Thus, the risk of losing your money is high. If you ever come across any business model, do not jump immediately. It is better to get hold of the business prospects in writing and consult your local certified public accountant, or CPA.

Scammers will always use pressure tactics to get you to open up your wallets and make investments quickly. When you come across anyone who is selling get-rich-quick tactics, it is better not to entertain them any further.

When you come across any investment scheme that sounds too good to be true, then it probably is. Refrain from digging any further into the scheme since scammers will try to use heavy jargon to commit you to invest in their scheme.

Conclusion :

A pyramid scheme is a failure and an unsustainable business model. When you come across any such scheme, it is better to discuss it with your near and dear ones whom you trust. The business model will initially give you confidence with the money you make, but in the long run, it is not financially healthy. Such business models are banned in most countries since they use unethical means and only end up victimizing innocent people.