Pyramid Schemes: What Are Pyramid Schemes and How They Work

Pyramid Schemes:
What Are Pyramid Schemes and How Do They Work

Pyramid selling schemes are recognized by how they actually work, not by how the promoters claim they work. If most of the money earned and gaining promotion within the scheme comes primarily from recruiting new people to the scheme, and those new people are incanted to recruit more people into the scheme, and these new people must recruit more people, etc., and so on... rather than from sales of actual products or services, then it is almost certainly a pyramid scheme.

Pyramid schemes are considered, in most countries, to be unfair trade practices because they are likely to be unfair to most participants in the scheme, the rewards for those at the top come from those below, and because eventually it will become impossible to recruit the number of people needed to produce reasonable financial rewards to participants. This means that only the first several levels of people in the company will profit.

Multi-level marketing v pyramid selling

Multi-level marketing usually involves commercially viable (at least somewhat viable) products (typically: clothing, jewelry, cosmetics, health products, cookware) which present genuine business and income-earning opportunities through repeat sales to clients.  This does NOT mean that MLM's are going to work for you, and many MLM's use aspects of pyramid schemes and thus border on illegal, and likely to be unprofitable, except for early participants.

Clear pyramid selling schemes often involve "gimmick" products (eg, certificates) or grossly overpriced products or services that have little or no resale value (such as many programs selling personal development programs, pre-paid legal services, cosmetics, magazine subscriptions).

Why can't a pyramid scheme work?

The fact that a pyramid scheme can not work for all, or even most participants can be proven mathematically and shown by this example: 

This table shows how many new paying members must be recruited at each level for programs (schemes) that require each new member to recruit 4, 5, 6, 7, or 8 new members.

Level Each person must recruit Members that must be recruited by each level (total) to be profitable for that level if each member must recruit the following new members:
4 5 6 7 8
1 4 5 6 7 64
2 16 25 36 49 512
3 64 125 216 343 4096
4 256 625 1,296 2401 32,768
5 1,024 3125 7,776 16,807 262,144
6 4,096 15,625 46,656 117,649 2,097,152
7 16,384 78,125 279,936 823,543 16,777,216
8 65,536 390,625 1,679,616 5,764,801 134,217,728
9 262,144 1,953,125 10,077,696 40,353,607 1,073,741,824
10 1,048,576 9,765,625 60,466,176 282,475,249 8,589,934,592
11 4,194,304 48,828,125 362,797,056 1,977,326,743 68,719,476,736
12 16,777,216 244,140,625 2,176,782,336 13,841,287,201  
13 67,108,864 1,220,703,125 13,060,694,016    

You will notice that the reddish colored cells signify levels that are unachievable because there aren't that many people on earth (approximately 6 billion people)! The orange colored cells signify levels that are practically unachievable: there are no existing companies on earth with this many employees or members.  The yellow colored cells indicate levels that are mathematically possible, but would mean that the company would be huge by most standards (7,000 to 1 million employees) and this is VERY unlikely. The uncolored cells are levels that are possible and maybe even practically achievable - by really good con men! This does NOT mean that we are recommending  them!!!!

You can see that for most "programs", you'd better not have more than 3 levels of members "distributors", etc.) above you!

For the sake of this example, let's assume that the scheme depends on each participant recruiting 6 new members into the scheme. The figure below shows how many people will need to have joined the scheme at each level, in order for those above to be paid. Since the current total population of the world is approximately 6 billion people, after only 13 levels there are not enough people on the planet to keep the scheme going!  this means if there are 11 or 12 levels of "distributors" or "representatives" (or whatever they call the participants) above you, you can not possibly make a profit!

Some pyramid schemes also require participants to use an agent, provided by the scheme operators, to recruit others on their behalf, instead of having to recruit new participants themselves.

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