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Home > Financial Resource Center Home > Avoiding Fraud and Scams > How to Spot a Pyramid Scheme a Mile Away

How to Spot a Pyramid Scheme a Mile Away

These days, it can be difficult to tell a real job offer from a pyramid scheme offer, especially if you’re looking for a job in sales. Here’s why pyramid schemes are doomed to fail and how to identify them.

What’s a Pyramid Scheme?

A pyramid scheme is an unsustainable structure where members pay to join. Members earn money by recruiting even more members. Recruiters take a percentage of all the money those who are “downstream” make. Nothing of value is produced and eventually there is no one left to recruit.

For example, John starts an organization and charges recruits $50 to join, as well as 20% of their future earnings. John is at Level 1. Five people join (level 2) under John, and he earns $250. Each of the five new members recruit five more (level 3). Level 2 members each earn $200, and John earns another $250. When these new members recruit a “fourth” level, they earn $200, level 2 earns $250, and John earns $1,250. This goes on and on until the early levels are earning millions—as long as there are people left to recruit.

Due to the exponential requirement of new members and the limited capacity of the earth’s population, such a collapse is a mathematical certainty. For example, a pyramid scheme may promise wealth and success if you sign up just five people, and they recruit five people, and so on. You can only repeat this cycle of recruiting five people thirteen times before you exceed the earth’s population!

Sadly, with no new members, there will be no source of income and the pyramid scheme will collapse. Those in the early levels will make a lot of money, and those in the later levels will be left with nothing to show for all their hard work.

Why Pyramid Scams Are Awful

There’s more reason to despise pyramid schemes than just their inevitable collapse. They tend to bring out the worst in people. Because recruitment is necessary for making money, deceptive and predatory practices are the norm. People who are struggling financially and are desperate to make a change in their lives are sold a lie that their hard work and diligence will translate into a life of success and financial independence — as soon as they “invest” in the hefty membership fee.

Further, to keep people from catching on that something is amiss, pyramid schemes often employ brainwashing tactics. Required videos and seminars touting the “company attitude and lifestyle” are filled with emotional appeals that reinforces the idea that success is just around the corner. People who leave a pyramid scheme often compare them to cults because they encourage you to cut ties with people who don’t “believe in your lifestyle” (those who try to tell you it’s a scam).

Red Flags

The following are all hallmarks of a pyramid scheme:

  • Someone you don’t know well offers you “a business opportunity that will change your life”
  • A friend invites you to dinner, but once you arrive you realize there’s a group of guests and you’re shown a presentation
  • Any questions you ask about how money is made are answered vaguely or outright dodged until you agree to a further commitment
  • Insistence that, “This organization definitely isn’t a pyramid scheme”

A Note on Multilevel Marketing

Although members receive income from those they’ve recruited, proper multilevel marketing is not a pyramid scam because they’re in the business of selling products. As long as the products are valuable and can earn members money with recruiting other distributors, the company is not a pyramid scheme. However, sometimes a pyramid scheme disguises itself as multilevel marketing by involving a worthless product that cannot reasonably be sold. Because a product is involved, the company is deemed a legal multilevel marketer, but the only way for members to make money is by recruiting more members. Eventually, such a company will collapse. If you’re interested in a multilevel marketing company, look out for the warning signs above and remember: if it seems too good to be true, it is.

These scams are all over the place, but now you know what to look for, and you’ll know better than to drink the Kool-Aid.

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