Pyramid scheme-What is it all about?

Pyramid scheme-What is it all about

Pyramid scheme is an unsustainable business model  that involves promising participants payment or services primarily for enrolling other people into the scheme.It is similar to Ponzi scheme in terms that a larger portion of the scheme stands to loose from it and only the starting few take can take advantage.

The characteristics of a pyramid scheme is that participants earns by recruiting more people to the scheme.There are mainly two types of pyramid schemes:

  1. Naked Pyramid
  2. Product Pyramid

Naked Pyramid

In a naked Pyramid no product is sold,In this scheme one person has to recruit a given number of persons into the scheme.The recruiter usually charges an amount usually called “buy-in” as a fee or donation to enter into the organization.As there  are more recruits the person moves up in the Pyramid towards the top.The recruiter earns an commission for every recruit under his down-line.

This scheme isn’t a sustainable one as the demand for new recruits increases exponentially.If one has to recruit 10 to get the payment then the 10 under him have to get 100 people to  earn the same profit and the 100 people have to get 1000 people to earn the same amount.After a number of levels have been formed the market becomes saturated with no one left to be recruited . Eventually there wont be enough people on the bottom line to support the pyramid .That’s when the pyramid topples and everyone at the bottom looses their investment.investment. Approx 88% of the participants of the scheme will stand to loose when it topples.It is illegal because people don’t lose money due to market force,but because the system requires them to lose so that the few on top will win.

Product Pyramid

A product based pyramid scheme is the same concept disguised  as a legitimate direct sales opportunity.Lets say a distributor recruits 10 people who each pay 5000 for a starter kit which is to be sold.The distributor gets 10% for each kit sold or each new recruitment done by his recruits.In this system the one on the top gets commission from everyone on the down-line.As the main product that is being sold isn’t that marketable and have very slim profits they prefer to have new recruits but the starter kit.After a period of time there will come a time when there are too many people trying to sell the same product with nobody wanting to buy the product and nobody to be recruited as well at this point this pyramid topples.It is estimated that an approx of 99% of people in this type of scheme stand to lose.

However there are many multi-level-marketing(MLM) companies that are authentic like Amway,tupper ware and Herbalife who have successfully used this channel to sell wide range of products.On the surface it is very difficult to differentiate between a MLM and a Pyramid Scheme.The main differences are as follows

  1. It simply doesn’t pay distributors for recruiting new salespeople
  2. The only way to earn is to sell the product or manage a team to sell the products
  3. They don’t impose the recruits to but starter kits or have minimum monthly order value to remain a member
  4. They don’t pay commission to sales made by recruits more than 5 levels of their hierarchy.

MLM aren’t bad but you should be careful if you are planning to join one!!

Take out our own conclusion :is it a curse or a boon?

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