Pyramid schemes can be very seductive with promises of fast, easy wealth. Who doesn’t dream of getting rich overnight? While pyramid schemes are as old as money, the internet has given scammers a global reach. In the digital age, pyramid schemes have extraordinary power to steal from you. The internet has changed the form of pyramid schemes so much that most have become unrecognizable.
Selling the Dream.
A pyramid scheme thrives on recruiting people into their so-called opportunity with promises of making lots of money fast. This strategy is known as “selling the dream.” When an organization markets itself by selling the dream instead of selling a product, it is probably a pyramid scheme. While searching for a way to make money online, people often get scammed by pyramid schemes selling the dream.
The truth is, making money online is possible. Millions make money online every day, but it takes patience, commitment, and proper training. Hype and empty promises won’t get you there.
If you are searching for a legitimate way to build an online business, read my article How to Really Make Money Online and Never Get Scammed.
What Is a Pyramid Scheme About?
A pure pyramid scheme does not have a product. In theory, it simply recruits people who pay money to participate in the scheme. However, most pyramid schemes in real life offer a product to conceal their fraudulent nature.
The legal definition of a pyramid scheme tests for inventory loading and the absence of retail sales. Before the digital age, a pyramid scheme would force its recruits to buy large quantities of products at high prices. Forcing recruits to buy large quantities of products is known as inventory loading. In the past, people who thought they were a distributor for a Multi-level marketing company would often have garages filled with products they could not sell.
In a pyramid scheme, the recruits are the only ones using the products. There is very little or no sales to people outside of the organization.
What’s a Pyramid Scheme?
Pyramid schemes have taken on a slightly different strategy in the age of the internet. Instead of inventory loading with physical products, pyramid schemes now force their members to buy expensive digital products like “make-money-online” learning programs of dubious value.
The internet and sophisticated marketing strategies have given pyramid schemes the ability to cloak themselves with an air of respectability.
It can be extremely difficult to see their underlying fraudulent nature.
How to Spot a Pyramid Scheme.
. . . a pyramid scheme forces its members to pay money for the right to sell a product. (Source: FTC)
Because the following companies charge members large sums of money for the right to sell digital training packages of questionable value, I consider them pyramid schemes masquerading as MLMs.
Pyramid Scheme vs. Ponzi Scheme
Most people think of Ponzi schemes and pyramid schemes as the same thing. Both are scams, but there is a slight difference between the two.
A Ponzi scheme is investment fraud. A central character, the perpetrator of the fraud, does all of the recruiting. Typically, there is no product with a Ponzi scheme, and the members do not earn commissions. Instead, the perpetrator promises a high return on investment.
Instead of paying out commissions, in a Ponzi scheme the person at the top promises the recruits a high rate of return on a short-term investment. However, there is no investment. The person at the top of the scheme is merely taking money from new recruits to pay the older recruits.
Bernie Madoff ran a pure Ponzi scheme. Madoff pretended to be an investment broker. He took large sums of money from investors and paid them back enough to make them think they were earning a high rate of return, but he never invested the money. Read more about Ponzi schemes here.
Is MLM A Pyramid Scheme?
It’s easy to confuse MLMs with pyramid schemes. Most organizations resemble a pyramid with a few people at the top and a broad range of people at the bottom.
True MLMs are not pyramid schemes because they have real products and pay commissions earned on the retail sale of these products. However, with some MLM companies, it can be so difficult to tell if they are a legitimate company that only a lengthy investigation and ruling by the Supreme Court can make the determination. (See Is Herbalife a Pyramid Scheme)
Many pyramid schemes pretend to be multi-level marketing companies. The FTC has found pyramid schemes marketing a vast array of products, including vitamins, digital products, investments, charities, credit cards, jewelry, women’s clothing, cosmetics, cleaning products and electric power. A pyramid scheme can claim to market anything.
1. Assume an offer is a scam. Make them prove they are legitimate and can be trusted.
2. A free offer is not necessarily proof that a business is legitimate.
3. Avoid programs and so-called opportunities that “sell the dream” and promise you can make a lot of money quickly.
4. Avoid programs that rely solely on recruiting others into the business.
5. Avoid programs that require members to pay for the right to sell their products.
6. Avoid companies with complex compensation plans. If you can’t understand it, don’t get involved.
7. Avoid programs that sell products with inflated prices or that require new recruits to buy expensive inventory and digital products.
8. Avoid programs that claim they have a secret plan or special advantage.
9. Avoid programs that delay paying out commissions.
10. Avoid programs in a “pre-launch” phase.
11. Avoid programs that promote a cult-like zeal.
12. Avoid unsolicited offers.
13. Read How to Really Make Money Online & Never Get Scammed.
The Last Word on Pyramid Schemes
Pyramid schemes and their cousin Ponzi are here to stay. And the internet will continue to give them an extraordinary advantage for scamming you. The first sign of a pyramid scheme is their attempt to sell you the dream.
It’s exciting to believe you will soon be rich. However, it’s doubtful it will happen with some one-off program. In fact, if you chase after so-called opportunities the odds are you will lose money.
However, you can make money online. With consistent effort, you make a lot of money.
With the right training and support, you can learn to use the internet to your advantage and to achieve financial freedom, but you won’t do it chasing the dream of some pyramid scheme. To learn about a community of online entrepreneurs who will help you build a successful online business, Click Here.
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