What’s A Pyramid Scheme And Why Are They A Scam?

I’m sure at some point in your life (maybe even this week) you’ve either come across as opportunity online or had a friend tell you about an amazing program you could join.

Usually the pitch is something like… by signing up to our program for $100 bucks a month, you can easily start earning 5 to 6 figures by the end of the year.

All you have to do is recruit 2-3 people into the program, teach them also how recruit more people into the program — then as time goes by you’ll eventually have hundreds if not thousands of people in your down line.

Now this is the point where you’re probably questioning how legit is this opportunity — and if you were to do a simple Google search about the program, you’d probably hear people calling it a pyramid scheme.

Now if you’ve never heard of this term before, you’re probably wondering what’s a pyramid scheme, how do they work, and are they a scam?

Well if you continue reading on, you’ll not only discover what pyramid schemes are — but learn why they are illegal, how to spot one online, and most importantly how you can you avoid joining them in the first place.

What’s A Pyramid Scheme?

To describe exactly what a pyramid scheme is in one word, would be to simply call it a scam.

Why is this?

Because a pyramid scheme is business model that says people can make money simply by recruiting other people into the same program. The program itself doesn’t need (and usually won’t) have any kind of product or service to provide to their customers.

How Do They Work?

As I just mentioned, pyramid schemes are basically where you’re recruiting people to make money.

However they are designed in a very unstable way to where the very first investors can make a lot money — while everyone that joins later has to struggle to earn a profit. With each level that is added, it takes more investors for someone to make a profit — which eventually makes the shape of a pyramid.

How does a pyramid scheme work?

For example here’s how a typical scenario usually works:

  1. A person recruits 6 people to participate in an amazing business opportunity
  2. The 6 recruits each pay the recruiter $100
  3. The person then tell his new recruits to go out and find 6 more people to do the same thing
  4. If each recruit is successful, they’ll all end up with $500 in profit from a $100 investment.

Sounds pretty simple right? But here’s where the problem arises.

The first 6 recruits need to find 6 more people in order to make a profit — which totals out to 36 people (6 for each recruit).

Now each of these new recruits need 6 people, making a total of 216 people to become successful. Then these 216 recruits have to find 1,296 people to make a profit, then it goes to 7,776 people, 46,656 people, and so on and so forth.

Eventually though their’s not going to be enough people to support the upper level, which is when everything starts to fall apart.

This is typically why you also see these kinds of opportunities only last 2-3 years — because by then its literally impossible for anyone to join and make a profit.

While this is the basic version of how a Pyramid scheme works, there’s also other variations out their as well.

For example, some will have it to where anytime a new member joins a company — their’s investment is divided and distributed to every single person above them.

This type of pyramid scheme allows people at the top to become very rich quite fast — while again leaving people at the bottom penniless and frustrated.

Here’s a short 3-minute clip showing how this method works.

 

Why Are Pyramid Schemes A Scam?

Pyramid schemes are scam because of the simple fact that there’s no product being sold, nothing to invest in, no service that’s provided, and basically no wealth being made.

People simply make money by bringing people into the system — and if at any point they stop they whole pyramid crashes.

On top of this, only a certain number of people can join an opportunity like this and earn a profit. As the pyramid grows, it becomes literally impossible for the people on the bottom to recruit enough people to pay the people above them.

What Are The Signs Of A Pyramid Scheme?

Pyramid schemes while at first may seem like a once in a lifetime opportunity — are nothing but pure scams out to steal your money. Therefore learning how to spot one ahead of time, will save you a lot of money and time in the long run.

So anytime you see one of these signs within a company — take a step back, because you’re more then likely about to join a pyramid scheme.

1. You make most of your money by recruiting other people. If you join a company and make most if not all your income by recruiting people — then it’s a pyramid scheme. Not to mention it’s extremely difficult if not impossible to succeed if you join a company that’s been around for a while.

2. There’s no product or service within the company. If a company isn’t providing any sort of value to their readers like a product, service, or investment opportunity — then this too is a pyramid scheme. You’ll then have to solely recruit people to make money, which goes back to the first sign I just talked about.

3. They claim you’ll become rich. Many pyramid schemes will try to trick you into thinking you can become rich if you join their program, and even show a few members driving fancy cars and living in big homes. However what they fail to tell you is the ones making all the money are people at the very top of the pyramid, and more then likely you’ll be joining toward the bottom.

Last but not least an easy way to avoid pyramid schemes is to simply use common sense and extreme caution. If something sounds too good to be true, and it talks about how you can become rich real fast online — take a step back and see if what you’re about to join is a pyramid scheme or not.

Are MLM Businesses And Pyramid Schemes The Same?

MLM vs pyramid schemes

Even though MLM (multilevel marketing) business is a lot like a pyramid scheme, in that they both encourage you to recruit people into your down line — there are two main differences that set them apart.

1. First and foremost MLM companies offer real products or services for you to sell, unlike pyramid schemes that solely focus on recruiting

2. Secondly MLM companies are usually inexpensive to join, unlike Pyramid schemes that can cost up to thousands to join.

 

Now many people including myself don’t like MLM companies, because even though they are considered legal since they offer products and services — most people make very little money and struggle to find people to join the company.

So no MLM is not a pyramid scheme — but at the same time don’t expect to make a lot of money through them due to the fact that selling the products and recruiting people is extremely hard and time-consuming.

Final Thoughts

Pyramid schemes simply put are scams. They offer no value to their readers, while at the same time telling people they can become rich simply by recruiting people into their opportunity.

Now even though MLM companies are not technically pyramid schemes, they still encourage you to recruit people into your down line — which to me is a terrible business strategy, and probably why over 90% of people fail when they join one.

Therefore I recommend you avoid both of them at all cost, as you’ll just end up wasting your money, time, and hard work over nothing.

If however you’re interested in a legit way to make money online, I encourage you to check out Wealthy Affiliate.

They have taught millions of people including me how to build a REAL business online through affiliate marketing — which doesn’t involve recruiting people, and lets you sell whatever want online.

So if you are tired of being scammed and lied too, check out my full review about Wealthy Affiliate here — and see exactly how they can help you earn a regular income online.

Wealthy Affiliate

I hope you enjoyed this post, and now understand what a pyramid scheme is and more importantly how to avoid them in the future.

If you have any other questions or concerns you want to ask, leave a comment below and I’ll be glad to help you out. 🙂

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6 thoughts on “What’s A Pyramid Scheme And Why Are They A Scam?”

  1. Hi, Michael. 

    A Pyramid Scheme in my opinion is like you said, earning money by recruiting person. This will give people a feeling of no service, it also regards people as money-making machines, and does not really show the attitude of product service. 

    This will give people a shadow that will always hate this similar fraud company. You also mentioned the MLM business model, but this is not something I hate because they have an actual product. Your article has great values and thanks for sharing.

    Reply
    • Exactly! With pyramid scheme companies, people treat their recruits basically like ATM machines that will give them money each and every month. However as I said in the post, only the people at the very top of the Pyramid are going to earn money, but even then this won’t last forever.

      And some MLM businesses are kinda of the same way, except they do sell a product or service making it seem like they are legitimate — when in fact they still are a scam.

      This is why I have used affiliate marketing as my method to make money online — as it doesn’t involve recruiting people — and I can sell products to actually help people solve a problem they are dealing with.

      And thanks to Wealthy Affiliate, I have learned the proper way to go about building a business and promoting products to other people as an affiliate marketer. 

      Reply
  2. Thanks for the thorough explanation of pyramid schemes Michael! It’s really unfortunate that there are so many programs out there like this that take advantage of poor people desperate to make money. 🙁

    I’ve had some experience with MLMs and even though they’re more legit I’m still not a fan of them. Particularly I hate the same script that they all use at their meetings where one person talks about how successful they are in the program and how you can be too. It’s never as easy as they make it out to be otherwise more people would be successful at it I think.

    Have you had any personal experience with any MLMs or pyramid schemes?

    Reply
    • Thankfully I have never joined an MLM company or pyramid scheme in my life (mainly due to the fact that I’m very cheap with my money and don’t like spending it unless it’s necessary). 

      I do remember several years back though someone tried to get me to join a program called Talk Fusion — but after hearing what they were trying to get me to join, I simply declined  and continued looking for better opportunities online. 

      Again I tell anyone before you join a program or opportunity, seriously look into the program and see how legit it is — that way you don’t end up being scammed out of your hard earned money. 

      Reply
  3. I’ve been sucked in by a few scams, the money sounds nice but if it looks to good to be true it usually is (too good to be true).

    I love how you explain the difference between a scam, a pyramid program, and a multi level marketing program. It is a very well rounded article which in my opinion offers a true opportunity, Wealthy Affiliate. Great job. Did you wonder what kind of program this was going to be when you first started reading into it?

    Reply
    • If you’re talking about Wealthy Affiliate then yes of course haha. When I first heard that thousands of people were making a regular income online without having to recruit people or spend thousands of dollars, it really peaked my interest.

      Of course shortly after I signed up and saw exactly what WA was teaching, the tools they were offering, and a huge community all of who I could ask help from — I simply fell in love with it and knew this is what I had been looking for all these years. 

      Again though whether were talking about Wealthy Affiliate, A Pyramid Scheme, or some other type of online opportunity — always do you OWN research and base your decision off of what you found and not only off of what other people say.

      This is the best and most sure fire way to keep from getting scammed or joining an opportunity that won’t interest you. 

      Reply

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