Pyramid Schemes in 10 Questions
Legitimate direct selling and pyramid schemes have often been confused. While there are clear distinctions between the two, pyramid scheme promoters do everything possible to disguise what they really do and to represent themselves as legitimate network marketing activities.
We will go over some of the most frequently asked questions on this topic:
1. What Is a Pyramid Scheme?
It is a fraudulent scheme where participants’ source of income depends solely or heavily on persuading other people to join.
2. How Can We Identify a Pyramid?
There are several characteristics common to all pyramids:
* Promises of high income with a little effort.
* Sales of products having little or no impact on earnings.
* Requirements of high fees and/or purchases to join.
* Pressure rather than convincing others to participate.
* So few people benefiting from the losses of many.
3. Are All Pyramids Alike?
All have common features as mentioned above. However, while some of these scams are easy to detect, some others disguise themselves to avoid authorities’ attention.
Generally, what the second group does is to offer products that have little or no value at unreasonably high prices and to claim that participants’ earnings are based on sales of those products.
4. What Is the Difference Between a Legitimate Network Marketing Business and a Pyramid Scheme?
Features that exist in legitimate network marketing businesses:
* Participation is either free or against a small amount of payment.
* Participants’ incomes rely on sales of goods or services.
* Goods or services that are sold have values and are demanded by end users.
* Inventory loading is not encouraged and a clearly defined buyback policy exists.
5. Are Pyramid Schemes Illegal?
Yes! That being said, not all countries have specific provisions against pyramid schemes in their legislation. Even in those countries though, pyramid organizations are prosecuted and shut down under various related laws and regulations.
In many cases, not only the “founders”, but also the participants face criminal charges for promoting the scam.
6. What Is a Ponzi Scheme?
It is basically an investors’ pyramid scheme. In those organizations, investors’ incomes are based on newcomers’ investments, but not on proceeds from their own funds. These are named as such after Charles Ponzi’s infamous fraudulent scheme in the U.S. You can read more about it here: The 3 Most Notorious Ponzi Scheme Cases in History .
7. Are Pyramid Schemes Sustainable?
No, all such schemes are bound to collapse. The “business” here does not rely on the exchange of goods or services, but on the acquisition of new people. So, any hiccup in the inflow of new participants results in a collapse. This occurs without any exceptions and those who initiate a pyramid scheme know this will happen from the very beginning.
8. Who Benefits From a Pyramid?
Only a few people! They are those who establish the scam and also a few others who join at the start
9. How to Avoid One?
Looking for the existence of such scams’ typical features as listed above would help a lot. If start-up costs are reasonable, unsold products can be returned, and earnings are based on the sale of products, most probably this is a legitimate business.
10. While a Few Earn Large Amounts, Many People Make Much Smaller Amounts at Network Marketing Organizations. Isn’t This a Sign of a Pyramid?
Not at all! There are major differences. First of all, earnings are based on exchange of products at network marketing companies. That means the source of income is not the losses of new recruits. There is no transfer of funds between the participants, in other words. Secondly, as network marketing is economically a sustainable model, it can last for decades offering all participants the same opportunity to earn as high. Pyramid schemes however, are bound to fail.
Hakki Ozmorali is the Principal of WDS Consultancy, a management consulting firm in Canada specialized in providing services to direct selling firms. WDS Consultancy is a proud Supplier Member of the Canada DSA. It is also the publisher of The World of Direct Selling, global industry’s leading weekly online publication since 2010. Hakki is an experienced professional with a strong background in direct sales. His work experiences in direct selling include Country and Regional Manager roles at various multinationals. You can contact Hakki here.