When presented with a certain type of business opportunity, it can be tricky to know if it’s shady pyramid schemes or an above-board multi-level marketing plan.
While certain multi-level marketing plans are perfectly legitimate, pyramid schemes are typically nothing more than a scam.
A few at the top of the scheme get rich, but those at the bottom must part with their hard-earned cash to purchase and then peddle products that nobody wants to buy, all while recruiting more people to the scheme.
In this article, CashLady looks at three tell-tale signs of pyramid schemes, from being forced to buy lots of stock to what types of customers you are encouraged to sell to.
What is a pyramid scheme?
Touted as an easy way to make money and enjoy a luxurious lifestyle, pyramid schemes require an upfront joining fee, with the only way to recoup your money by persuading other people to join the scheme.
Members of the scheme are often asked to sell goods or services, such as diet shakes or cleaning products to new members, instead of to the general public – with success based on the number of new recruits that you sign up and how much product they purchase.
The scheme works exactly like a pyramid. A few people at the top make their money from the joining fees of all the people lower down in the scheme, who rarely ever make their money back, let alone enjoy a profit.
Modern pyramid schemes
Last month Chinese authorities shut down a very modern type of pyramid scheme, that had accumulated $1.5 billion in bets made on World Cup matches using cryptocurrencies such as bitcoin.
Business Insider reports that an online gambling ring was running a pyramid scheme where recruiters could profit off of other new members.
“The bookmaker analyses the gambler betting manipulates the odds according to the betting ratio, and allows a small number of people to win,” according to a statement from the authorities.
Highlighting a less sophisticated version of such a scheme, the Plymouth Herald recently reported a pyramid scheme doing the rounds on Facebook, whereby a Facebook post was widely shared locally, encouraging people to part with £129 to eventually accumulate £516.
The post read: “Want to know how to turn £129 into £516?
“Inbox for more info!
“All it takes is a few days and it will be in your PayPal account. This is just one of the girls. She has cashed out a few times now and making pure profit.”
The newspaper reports that several people commented on the post saying that it was “illegal” and very similar to a “pyramid scheme” but many were eager to know more.
Three tell-tale signs of a pyramid scheme
Below we look at three tell-tale signs that the amazing new business opportunity that you’re being offered is actually a pyramid scheme.
#1 Earnings are based on the number of people you recruit
A legitimate business opportunity would typically base your income on the number of sales that you make to the public, while a pyramid scheme is typically based on the number of new members that you recruit.
#2 You’re required to purchase lots of stock
Being forced to buy lots of stock upfront should set alarm bells ringing, along with being persuaded to purchase other items simply to remain in good standing with the company.
If the items that you’re selling are of little value, such as information booklets about the scheme, then it’s likely a scam.
#3 You’re not selling to the general public
If you’re not selling your products or services to the general public but instead signing up members and selling it to them, then the signs all point to a pyramid scheme.
Similarly, if you’re asked to sell goods or services through franchisees or sub-distributors then it’s best to turn down the opportunity at once.
What to do if you’ve been approached about a pyramid scheme
Like with any type of scam, if it seems too good to be true then it probably is.
If you a suspect that you’ve been approached about a pyramid scheme, then warn your family and friends and report it to Action Fraud.