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A Pyramid Scheme’s Rise and Fall in the Investing Community

Pyramid schemes

A pyramid scheme is a business scam that uses an illegal phishing scheme. The initial investors entice potential members with promises of high revenues and investments for recruitment’s sake. Once recruited, all they have to do is do the same and try to recruit others to join this pyramid that they entered. The earlier recruiters or investors are on the upper tier, while the freshest recruits are the ones that will be the very base of the pyramid. This setup is how the hierarchy runs. Another term for a pyramid scheme is networking or network market. The higher-ups raise revenue by taking money from recruits. The best and most well-known example is the Ponzi scheme, which is a form of fraud.

Two types of pyramids:

The naked pyramid

Let’s call “Mr. A” an individual who offers ten people to take part in a so-called opportunity that promises high revenue. These ten people now pay Mr. A $10 that acts as a recruitment fee, and then each of them will go ahead and tell the same to another set of ten people. If they succeed, they’ll end up raising a total of $90 as revenue. Now, 100 people need to recruit ten people each to grow $90 as well. If ever these 100 people recruit ten people each, that leaves the need for 1000 people to do the same. The cycle is endless. Most of the investors at the bottom of the pyramid end up on the losing side since they did not generate revenue.

The product-based pyramid

The product-based pyramid’s primary concept is almost the same. The only difference is that this pyramid is concealing itself in a legitimate business that sells products.

For example, distributor A invites ten people to pay $100 worth of skincare sets to sell individually. Distributor A’s commission is $10 or 10 percent for each skincare set sold and 10 percent of every single product that his recruits manage to sell. However, the number of skincare sets is not the way to earn fast but recruiting more people to recruit. Why? The products are not usually possessing great qualities, or they don’t sell well. This makes the people in the up line the only ones who manage to earn commission and not the people at the bottom of the pyramid no matter how hard they work since many people sell the same undesirable product that doesn’t entice potential recruits. In arithmetic terms, everybody can’t raise profit in these schemes. It’s impossible.

Multi-level marketing vs. Pyramid schemes

Business pyramids like multi-level marketing or simply MLM focuses more on putting their product out in the market for people to appreciate and support. They try their best to produce quality and desirable products. In contrast, pyramid schemes focus more on the fast profit and the endless chain where a recruited victim needs to recruit more victims while shelling out an immense amount of money. This is something that makes MLM different since one only needs to provide a minimal amount. MLM is legal, while the pyramid scheme is not since it forces victimized recruits to do the same illegal act.

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