Understanding pyramid schemes

By definition, a pyramid scheme is defined as a business model that is unsustainable and

By definition, a pyramid scheme is defined as a business model that is unsustainable and which entails the original investors making money through the recruitment of other people, usually through the selling of actual services or products. The pyramid scheme’s business model usually makes new investors make upfront payments to join the scheme. Usually, the money received from the recruits is used to pay the earlier investors. The new members can then recruit more individuals into the scheme promising these new members’ earnings. The concept of pyramid schemes seems very simple; however, it is usually presented to investors in a highly disguised form. It is thus imperative that one acquits themselves with how pyramid schemes work and their different forms. One can get the needed knowledge from investment advisers such as Motley Fool.

How pyramid Schemes work

Just as the name implies, pyramid schemes take the shape of a pyramid. It commences with an individual who is at the topmost of the hierarchy and also the original recruiter. This individual must recruit a person who invests a given sum of money upon which this original recruiter is paid an upfront payment. The recruit then recovers their investment by recruiting other members under them, who will also make an upfront payment. The more people that recruits can get, the more substantial profit they will have earned from just a small investment amount. The chain continues with each new member being required to bring more members and reaches a point where the scheme is no longer self-sustaining. At this point, those at the very top of the pyramid will have already earned a significant amount of investment while those at the base of the pyramid end up losing their investment. The problem with this model is that it cannot thrive for a long time. In reality, members are deceived into thinking that they will make lots of profit, while the scheme hasn’t resulted in creating any wealth, nor has the organizers of the scheme bought any assets.

There are many forms of pyramid schemes. One can always find the various forms in Finance online reviews. Some of these forms include:

1.  Multi-level marketing (MLM)

Unlike other types of pyramid schemes, multi-level marketing is a legal business practice. It includes the recruitment of members who help one to sell a service or products which provide value. When recruits sell the product, they are not required to recruit more individuals, and they typically earn a profit. The main difference between this pyramid scheme with the others is that it offers a genuine service or product, while other pyramid schemes don’t. However, one should also be very careful with MLM, as some are just normal pyramid schemes. Typically MLM pyramid schemes sell services or products without any value. It can, for instance, sell printed materials such as courses on investments. Such a scheme can only sustain itself through recruits’ luring to purchase the non-valuable products, usually at high costs.

 

2.  Gift promotions

Some pyramid scheme types disguise themselves as gift promotions, often occurring as investment clubs. They work so that the recruiter is offered a gift; if the recruit can get more to join, he is offered gifts from those he can recruit. Gift promotions are usually illegal and are part of club programs.

 

Characteristics of pyramid schemes

·       They emphasize recruiting

If you find a program that is putting too much weight on joining as opposed to selling a service or a product, most probably, it’s not legitimate. Checking reviews from sites such as ReviewsBird US can always prove handy to help one know the truth.

 

·       Promises high returns in a short time

If you find a program enticing you with promises of getting quick cash within a short time, always be skeptical. The only way that quick profits can be yielded is when the recruit’s payments are used to pay off early investors.

·       No sale of areal service or product

When you find that a scheme doesn’t sell any genuine service or product, be very cautious. Fraudsters are prone to creating products that sound fancy to come up with ways of deceiving people.

·       No proof of revenue from retail sales

The first step before getting to join any scheme should be asking for proof of revenue. For example, one can ask to confirm their financial statement and look out for details such as if a professional CPA personnel audits them. The record will also display the type of activities that a company is involved in. A general rule is that a scheme should mainly be getting revenue from the sale of services or products and not recruiting individuals.

In conclusion, one should be very careful when joining pyramid schemes based on unsustainable business models. One should always avoid such.