A pyramid scheme is a business model that involves the exchange of money primarily for enrolling other people into the scheme, without any product or service being delivered. Pyramid schemes have been in existence for at least a century. The method of conducting business known as multi-level marketing (MLM) often closely resembles pyramid schemes.
Pyramid schemes come in many variations. The earliest schemes involved a chain letter distributed with a list of 5-10 names and addresses on it. The recipient was told to send a specified small sum of money (typically $1 to $5) to each of the people listed. Having done this, the recipient was then to remove the first person on the list, move all of the remaining names up one place, and to add their own name to the bottom of the list. Finally, this person was to mail the letter out to as many people as possible.
Success in such ventures rested solely on the exponential growth of new members. Hence the name "pyramid", indicating the increasing population at each successive layer. Unfortunately, simple analysis will reveal that within a few iterations the entire global population would need to subscribe in order for all of the members to earn any income. This is impossible, and the vast majority of people who participate in these schemes simply lose their money.
Although pyramid schemes have been declared illegal, they still persist in many forms. While schemes simply involving the blatant exchange of money have generally disappeared, many schemes persist that purportedly "sell" a product to mask the primary intention of simply enrolling new members. The distinguishing feature of these schemes is the fact that the product being sold has little to no intrinsic value of its own. Examples include "products" such as brochures, cassette tapes or systems which merely explain to the purchaser how to enrol new members, or the purchasing of name and address lists of future prospects. The costs for these "products" can range up into the hundreds or thousands of dollars. A common Internet version involves the sale of documents entitled "How to make $1 Million on the Internet" and the like.
There are numerous pyramid schemes that sell such intrinsically worthless products which market themselves as "multi-level marketing" programs. This is unfortunate, because there are in fact a number of perfectly legitimate businesses which use this MLM business model.
The key identifiers of a pyramid scheme are:
- A highly excited sales pitch
- Vaguely phrased promises of limitless income potential
- No product, or a product being sold at a price ridiculously in excess of its real market value.
- An income stream that chiefly depends on the commissions earned by enrolling new members.
- A tendency for only the early investors/joiners to make any real income.