If you are wondering how to tell if a company is a pyramid scheme so you can avoid one, please read this post!
Did you get invited to a party that just seems a bit off? Is your friend or a loved one is filling their social media with product recommendations? Did you go to a job interview that turned out to be a "business opportunity"?
If you answered yes to any of those questions, you might have encountered the long-reaching tentacles of a pyramid scheme.
In this article, I will talk about what actually are pyramid schemes, how to spot one, how they work and how you can tell if a company is a pyramid scheme.
First of all, I want to congratulate you on reading up on this information. Pyramid schemes, just like online marketing scams are very easy to get sucked into if you don't have the knowledge to spot them right away.
The good thing is that when you have the knowledge, you can spot them both a mile away or if they are borderline cases, you will know how to research for the necessary information.
I Hate Working is all about differing scams from legit business opportunities, both online and in the real world.
There is a huge business built around all sorts of unethical business models, Ponzi schemes, MLMs, and downright scams.
My mission is to help as many people as possible to succeed in making money online while avoiding all the scams, including pyramid schemes.
Before we get on with pyramid schemes I want to point out that it's important to realize multi-level marketing aka MLM is not the same as a pyramid scheme.
They share some commonalities but the most important difference is that pyramid schemes are illegal in most parts of the world.
MLMs can be anything from honest legit companies to unethical companies, operating on the borderline of legality.
My advice is to always be a bit skeptical of MLMs and do your research well but don't automatically categorize them as scams. It's not that simple.
Now that we got the basics covered, let's look at what are pyramid schemes and how they work.
What Is a Pyramid Scheme
Network Marketing & MLM
A pyramid scheme is a business system built on the network marketing model. In network marketing, also known as multi-level marketing, products are not sold through typical distribution chains.
They use networks of independent representatives or sales reps instead that sell directly to the consumers. The sales reps typically get rewarded for recruiting new reps into the system.
So in an MLM the reps not only get paid for products they sell to consumers, but they also get a commission from the salespeople they have recruited into the system make.
The people you recruit into the system and the people they recruit into the system are called you down line. The people who recruited you and the people above them are called the upline.
The down line will grow exponentially in most cases. It's easy to understand if you think for example that every people be required to recruit 3 new people.
So if you recruit 3 people, you have 3 people in your downline. They then each recruit 3 people and you have 12 people in your down line. They each then recruit 3 people and you already have 39 people in your down line (3 + 9 + 27).
Each level in your downline is called a generation or a tier. There are other names but these are the most common ones.
The amount of money you earn from your down line typically goes down on every generation. Depending on the system you might earn a commission from couple generations/tiers down to all generations down.
In a legit MLM, there will be actual products to sell to consumers and this is the main way money is introduced into the system and to the company.
So the focus of sales reps should be on selling products and recruiting people is just a way to expand the business.
A pyramid scheme is an MLM with a focus on recruiting new people. The focus is not on products sold to consumers, there might not even be any.
Money is introduced into the system by expensive entry fees. These fees can be disguised as training, investment or product inventory.
Training and courses are typical in self-help/spiritual pyramid schemes, investment in business/cryptocurrency schemes and physical products in health & wellness schemes for example.
In reality, whatever you get in exchange for the money is usually a lot less valuable than the amount you pay.
In pyramid schemes, the new recruits or reps can usually make their money back only by recruiting enough people into the system, not by selling products.
This often compels people who have gotten in to recruit other people into the by using any means necessary in an effort to minimize their own financial losses.
Since money moves up in generations as we talked about a moment ago, you don't have to be a mathematician to realize that the people at the top will earn significant revenue from every people introduced into the system.
And people at the can't earn their money back because at some point the pyramid scheme will always get caught and this is usually when the creators vanish with all the money unless they get arrested.
This video by TED-Ed explains the model very clearly:
Now that we know what a pyramid scheme is and how it works, let's talk a couple of words about legit MLMs.
MLM Is Not Automatically A Pyramid Scheme
Like I said before, an MLM is not necessarily a pyramid scheme, actually, most of them aren't. So if someone you know is having Tupperware diners or Arbonne parties, don't presume they are a part of a pyramid scheme.
While most MLMs don't really produce significant income to their sales reps, industrious people can actually earn a lot in a legit MLM.
The business model encourages social outreach and generally just being in the face of people all the time. While this can be annoying to most people, if you are willing to do it, you can make big bucks.
Many MLMs also have extremely high-quality products that they can sell for cheaper directly to consumers, skipping the expensive distribution chain. Melaleuca is a good example of this.
The only problem with legit MLMs like Primerica, Avon, and Tupperware is that they can encourage aggressive sales tactics which include guilting and pressuring people into buying products or to join in.
If you have ever been into an MLM "party" or a "shower" you know that most people there can't wait to get out. In many cases, they don't mind leveraging personal challenges and other emotional tactics to try and get you to buy something.
You have to remember most legit MLMs don't encourage business tactics like this, but the sales reps are all individuals. People use tactics like this because they work.
Getting enough sales and recruits in MLMs is hard work so that creates the incentive to use shady sales tactics.
This is why I don't personally like MLMs even though I do like working for myself from home. That's why I've chosen another business model that you might be interested in. You can check it at the end of this post.
How To Tell If a Company Is A Pyramid Scheme?
The tell-tale signs of a company being a pyramid scheme differ a bit from it being an MLM. You see, most legit MLM businesses are actually fairly upfront about their business model.
Some of them, like Avon, have been around for over a century after all. You can spot an MLM simply from the fact that they will disclose their commission structure or payment plan that clearly shows there are several levels or generations on the system.
But with pyramid schemes, it's usually a lot shadier. A tell-tale sign of a pyramid scheme is that the company is relatively new because pyramid schemes are short-lived.
You won't usually be able to find honest reviews about the company. Usually, search engines will show reviews that might be created by their reps.
Another thing that pyramid schemes almost always do is to promise riches. In short, they often sound too good to be true and this is because they are.
It's not uncommon that pyramid schemes build around investment promise huge return of interest but of course require you to invest a lot upfront and you aren't allowed to withdraw your money.
Pyramid schemes built around self-help/wellness/spirituality etc. often promise anything from healing to superpowers and the ability to create huge wealth spreading this word. Of course, you have to pay a hefty premium.
Which is the final way to tell a company is a pyramid scheme. They ask a ton of money in exchange for vague products or promises.
So let's recap. You can spot a pyramid scheme from these three things:
- The company is new and doesn't have trustworthy reviews/information online
- They seem too good to be true
- They ask a huge investment in return for vague products or promises
Do Pyramid Schemes Work?
So why do pyramid schemes even exist? Do they actually work for their creators?
Well if you think about it, the answer has to be yes. Pyramid schemes, unfortunately, do work when they are built correctly. But they are illegal!
It's the same reason why any schemes, scams or hoaxes exist.
There are always dishonest people that are willing to take advantage of the unsuspecting.
And don't be fooled, many con artists are extremely talented in pulling off their hoaxes. In many cases even if the victim initially suspects or hesitates, the con artists are masters of persuasion.
Even rational, well-educated people can fall victim to scams when the conditions are right. And the con artists know exactly how to manipulate your feelings and weaknesses.
They might even disguise as your friend in your darkest hour just scam you. So don't let your ego fool you into thinking that you are safe from them.
While it's true that being educated and intelligent will reduce your risk of getting scam, you have to realize there are just tons of smart people who have lost fortunes to pyramid schemes.
Pyramid schemes work because they promise a huge return of investment and often have convincing evidence to show for this.
What they leave out, of course, is that the money is always being siphoned to the top and the only aim of the system is to introduce new recruits.
But if you get in early on and don't mind conning people, you could make a ton of money even if you are not at the very top.
So in a way pyramid schemes are networks of a con artist with the worst of the worst at the top and the lower you go the more likely it becomes people are just unsuspecting honest people who got suckered into the system.
Experienced con artists don't get into pyramid schemes unless they can get in at the very top. They know they will only lose money otherwise.
Another thing you have to realize is that pyramid schemes have evolved a lot over the years. They disguise themselves better than ever and then there are MLM companies that walk the fine line of being legal vs. a pyramid scheme.
In MLMs like these, most reps don't make any real money except for the top dogs. They get money from the investments new recruits make.
So in conclusion pyramids do work for their creators, if they can get away with it, but they are naturally illegal. Don't get involved with them in any way.
How I Make Money Online
While this post is about how to spot a pyramid scheme, I thought I'd share how I make money online, in case you are somebody who is looking to earn an income working online. Don't worry this is 100% honest and not a pyramid scheme!
I use a business model called affiliate marketing combined with search engine optimization. That's how you ended up here.
This business model has several benefits over other home-based and online business models:
- As an affiliate, you simply refer customers, no need for inventory, shipping, handling customer complaint etc.
- The system is automatic. You use affiliate links, when someone buys through them you earn a commission. No need for manual actions. You get traffic through organic search engine results.
- Passive income. A single web page or a blog post can produce income for years to come on total automation. The affiliate links will take care of it. Write once, get paid for years.
- The system is scalable. You can create an unlimited amount of pages and websites with affiliate
- Freedom. Everything can be done 100% online, you can work from anywhere in the world.
- You choose what you want to market. No need to recommend products you don't believe in or to write about stuff you are not interested in. There are affiliate programs for every niche.
As you can see, affiliate marketing has some serious benefits over a regular job or most business opportunities.
But this comes with a price. And I don't mean a high price tag, the required investments are actually really cheap. (Check out my top recommendation)
But you have to work for it and it takes time to start seeing results. This is not a get rich overnight type of deal. But you can create significant income in a year or two realistically.
You see, the income model in online affiliate marketing is cumulative. You typically make nothing in the beginning as you first create your business (essentially create content).
Let's say for the sake of argument that each one of your website's posts creates $5 dollars per month. But it takes three months before your site has enough content to even rank in search engines.
So let's say that for the first three months you make nothing. You create 30 successful affiliate pages in those 3 months.
Each of those 30 pages starts producing $5/month at the three-month mark (in reality it doesn't, of course, work exactly like this, the process is gradual and some pages produce more and some less income).
So you start making $150/ month and get excited. You create a new post every single day for the fourth month. Now you have 60 pages = $300 / month.
I bet you can see the potential here, the income adds up really fast. Keep in mind those are very crude examples, you can make a lot more per month on a single post and there are other tactics as well.
But that's the basics why I love this business model. If you can write, you can succeed in this business, it's not rocket science and you can even turn your passion into a profitable niche website.
I have one about strength training and another about airsoft guns. Besides this one about the online business of course.
If this is something you might be interested in, definitely check out my free 7-day course for getting started with online. It will help you create the foundation for your online business and to avoid 99% of the common beginner mistakes.
That's it for today! If you found this post useful, I would really appreciate any social media share, you can find the buttons on the left.
Thanks for reading and see you next time!
Here are some shady and not so shady companies you might be interested in:
2 replies on “How To Tell If a Company Is A Pyramid Scheme?”
You explain this perfectly and the support video is fantastic. Can I ask you, as an affiliate marketer, how do you conduct your research into products to decide if they are an MLM or a pyramid scheme? What is the first thing you look for?
Glad you liked it Catherine! I always start by looking at the basic history of the company. I check their website, if they have a Wikipedia page, Indeed and Glassdoor reviews etc. The first thing I look for is if there have been any trials, especially ones including FTC as this is a sign the company has been suspected of running a pyramid scheme of some sort. I also check how their business model works and how long the company has been around. If it’s a realtively new company, I do more digging to find out if they are running a pyramid scheme or bordering on it.