What is Pyramid Scheme? How to differentiate it from MLM

what is pyramid scheme

Pyramid Schemes are similar to MLM (Direct Selling), the major difference arises with the products.

Pyramid schemes are fraud schemes and considered illegal, for existence pyramid schemes use dummy-products and pretend to be MLM.

What is Pyramid Scheme

The arrangement of members in a pyramid scheme is like a pyramid, narrow from top and expand towards bottom, the same scenario is with MLM.

Then what make pyramid scheme a fraud?

MLM actively involves sales of product/service which company provide and commission is based on these sales. At the same time, Upline can also get commission on purchases made in downline.

On the other hand, Pyramid scheme takes joining fees from every member and whenever a new member is recruited upline gets their commission according to company’s compensation plan.

Pyramid scheme is a money-circulation, company forward money of new member to existing member and same process goes on in a predefined manner.

The older member gets heavy cash on each recruitment which motivates other members for further recruitment.

On average, a Pyramid scheme spread quickly compare to an actual MLM, cause it is more lucrative and offers high commission on each enrollment.

Pyramid scheme company appoints leaders and motivational speakers to show scheme as a crazy opportunity.

Initial member actually gets high margin, and newer one remain bare-handed.

Members intentionally promote pyramid scheme to earn good commission or get back the money they paid to join the scheme, for this they plug more people to scam and same activity goes on.

Till when pyramid scheme company gets shut down or legal actions are taken, a massive scam has already taken place.

We are an MLM

Being declare illegal, most pyramid scheme now operates as MLM. For that pyramid scheme have dummy-products. Oftenly dummy-products are shown as magical products and huge amount is charged from every member.

These products are required to purchase during joining. So company gets a decent amount to circulate in the network.

Currently, these pyramid schemes got advanced. They customize themselves in such ways, like using some old-school education courses or cryptocurrency as products. It becomes difficult to identify these scams.

Identify a Pyramid Scheme

Still their few red flags, helps to differentiate an actual MLM from fraud pyramid scheme.

Huge Joining Amount

If a company asks for big amount during joining in any way such as joining fees, security amount or an initial investment then avoid such companies.

MLM companies are not allowed to take any money from its member other than product purchase amount.

But nowadays pyramid scheme uses dummy-products, hence this assessment method not work every time.

Analysis Company Products

Analyzing products of company is easy and best way to spot a pyramid scheme.

On given three parameters compare product/service offer by company to the actual market.

  • Product Price
  • Demand
  • And Quality

If products of company are highly overpriced or company selling some rubbish products or product quality is extremely inferior than market products, then more likely company is running a pyramid scheme and using dummy-products.

As said earlier, Dummy-products are used by pyramid scheme companies to pretend as MLM. Pyramid scheme company try to achieve maximum commission on each product purchase from every member so that they can rotate that money in network and lure more people by offering high commission.

High on Motivation and Recruitment

Pyramid scheme company don’t want to talk about their dummy-product. Therefore they hire motivational speakers who share inspirational stories and divert distributors for more recruitments.

Such things are also seen in actual MLM, Yet it is more frequent in pyramid scheme companies.

Pyramid Scheme Vs Ponzi Scheme

Many people consider ponzi and pyramid scheme equivalent. Both are illegal but have some major difference.

Ponzi scheme was first started by Charles Ponzi. Ponzi scheme company promises to give high-return with zero risks.

Most Ponzi schemes are investment scheme, takes money from investors and promise to give high returns. To attract more investors, they actually give a very high return to early investors. Greedy investors bid more money and lose all at once.

Somewhat Ponzi scheme also performs money-circulation, but it doesn’t have member structure and rigid compensation plan as pyramid scheme.

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