How to Identify a Pyramid Scheme

Pyramid schemes have been around for a long time. They are illegal and can be hard to identify. Pyramid schemes are also known as multi-level marketing (MLM) programs. Here is a way to try to identify a pyramid scheme.

Difficulty: Moderately Challenging

Instructions

1. A classic pyramid scheme attempts to earn money by recruiting other people into a business or to purchase a particular product. It is able to pay people who join early, but eventually multiplies enough to not be able to support all the people involved.

2. Pyramid schemes often look legitimate, but have some type of tell. To attempt to identify product based pyramid schemes, a question to ask is whether or not the purchase or sale of a product or service is tied in some way to the income of the program.

3. If the purchase or sale is related to the program's income, then ask whether the person who is distributing the products will move up through multiple levels of distributors by recruiting more people. These new product distributors recruit under the distributor who recruits under the distributor -- confusing, yes.

4. To avoid getting involved in a pyramid scheme you need to be cautious about joining programs where you are recruited into a chain of participants that are organized into multiple levels. This is very true if your success depends on when you joined the program and your recruitment of others.

5. Another way to recognize a pyramid scheme is whether or not the business encourages you to recruit an unlimited amount of people. When this happens it becomes very difficult to recruit new people and sustain the current business.

6. Look for signs that you have to continue to contribute or buy products in order to remain eligible for bonuses and discounts, or that program's specific offer. Not having to continue purchasing some kind of product does not eliminate the possibility of this being a pyramid scheme, but means that it might have more sustainability on the market.

7. The basic idea of the pyramid scheme is that people on the top, or who are in early, benefit directly from those who are producing under them, and even because of their production.

Tips & Warnings

• some people earn a lot of money, however, most people lose money and time from these pyramid schemes
• if a program's compensation plan lets the seller make a lot of money selling at competitive prices without recruiting a person, this is probably not a pyramid scheme, or if it is the results might not cause as much harm
• these programs can be hard to identify, so be cautious when
• always be cautious when investing, joining a new program, or getting involved in any new business deal
• do more research about pyramid schemes by looking up MLM schemes or scams, get rich quick scams or schemes, and MLM companies or opportunities (these are just a few other names that may offer more information if you are interested)

Resources

• How to raise money for a nonprofit organization or charity.
• How to set attainable goals using the SMART technique.
• How to make important decisions.
• How to avoid email scams as a way to prevent identity theft.
• Pyramid scheme website.

[larryzafran]

on 1/15/2009 This is great advice. There are a lot of these schemes around, and not enough government intervention to put a stop to them.

[kohuether]

on 1/4/2009 Great tips though. Just wanted to clarify something. :)

[kohuether]

on 1/4/2009 I agree with cadence - there is a big difference between MLM and pyramid. Some MLM can be pyramid. If that's the case, it's illegal for them to do business. Legit companies like Mary Kay have been called "Pyramid Schemes" but this is false.

[Susang6]

on 12/20/2008 Very detailed information on the pyramid scheme, you explained your stsps very well. thanks for sharing

[Susang6]

on 12/20/2008 Very detaile information on the pyramid scheme, you explained your stsps very well. thanks for sharing