What are pyramid schemes and how to spot them

As a job seeker, it’s important to be on the lookout for pyramid schemes. Unfortunately, there are many companies with ill intentions, who are looking to exploit unsuspecting applicants for their own financial gain.

These companies may constitute a very small minority in the world of business, but they are still out there, advertising misleading job roles that on the surface sound ideal.

Dig a little deeper, though, and you’ll find they’re up to no good. Here’s how you can spot a pyramid scheme and ensure that the role you apply for is legitimate.

What are pyramid schemes?

A pyramid scheme is a dodgy, unsustainable business model whereby a few top-level members recruit new members, who pay upfront costs to the top-level members who hired them. Newer members do so because they are promised payments or services for enrolling others into the scheme, instead of being paid for offering a service or the sale of products.

Early participants get paid through the money contributed by later participants, with a portion of returns from new recruitments ending up at the top of the pyramid (filling the pockets of the few people or single person who started the scheme). Most pyramid schemes profit from recruitment fees and rarely involve selling goods or services that have any value.

They are known as pyramid schemes because of how they are structured. For example, say one person, let’s call him Rich, sets up the scheme, sitting at the top of the company. He then recruits 10 second-tier people, who provide cash payment upfront for the privilege of joining.

Each of those members must then recruit another 10 people (so that’s 100 people in the scheme in total), and those new recruits will pay the two-tier members, who will be required to hand over a percentage of that income to Rich.

Theoretically, members should receive substantial payment from the many people they recruit. However, over time, the pool of potential clients invariably dries up, which means the whole scheme collapses. Pyramid schemes fail because there are never enough people to sustain them. When the pyramid scheme shuts down, those at the top walk away with loads of cash, while the lower-tier members are left empty-handed.

Are pyramid schemes legal?

In the UK, pyramid schemes are illegal. People who create, run, or promote such schemes can be prosecuted under government legislation called the Consumer Protection from Unfair Trading Regulations 2008. Worldwide, people have lost millions of dollars participating in pyramid schemes.

Their highly exploitative and damaging nature has meant they have become outlawed all over the world. But this doesn’t mean they still don’t operate. Pyramid schemes, of course, will do their best to hide their true intentions and take steps to present themselves as a legitimate business.

How to spot the signs of a pyramid scheme

If you’re looking for the next great business or job opportunity, then it’s vital that you keep your wits about you. Many people fall prey to pyramid schemes because they are determined to make money fast or achieve business success, but might not have the insight necessary to spot a pyramid scheme from a legitimate business. In order to help you avoid becoming a victim of shady practices, here are the signs of pyramid selling to look out for:

• Your income is based mainly on the number of people you recruit and the money those new recruits pay, rather than the sales of products or services to consumers
• The scheme involves selling goods and services that hold little value. They will tend to be goods and services that only serve to promote the scheme, such as information booklets
• There is an upfront joining fee or a large initial investment
• You’re asked to buy lots of inventory or stock
• You’re forced to purchase other things you don’t want or need just so you can stay on good terms with the company
• You’re not selling products or services to the general public, but instead signing up new members and selling to them

Pyramid schemes vs. multi-level marketing

Multi-level marketing (MLM) works in a similar way to pyramid schemes but they are quite different (and for this reason, legal). It’s crucial to know the distinction between the two since many businesses that appear to use MLM may, in fact, be involved in pyramid selling.

Like pyramid schemes, MLM depends on recruiting new members to become distributors of a product or service. As an MLM consultant, contractor, or distributor (they are varying names for essentially the same role), you make money by selling products or services to other MLM participants.

You also make money by signing up other MLM participants to become a part of your programme. There are usually bonuses for the number of products you sell and the number of new members you recruit.

Unlike MLM, the sole purpose of a pyramid scheme is to pocket your money and then convince you to recruit other members. The point of MLM, on the other hand, is to actually sell valuable products and services to people. The general idea that drives MLM is that the large network you have of distributors, the more products and services you can sell.

The easiest way to tell the difference between MLM and pyramid selling is that the focus of the former is on product sales, whereas the latter is more greatly focused on recruitment. In addition, legitimate MLM companies do not demand large start-up costs or initial investments from new members.

Make sure to keep these tips and insights in mind when you’re unsure about the legitimacy of a job position or business. Paying attention to the ethics and legality of business practices is essential if you want to achieve long-term success and maintain your professional integrity.

Sam Woolfe writes for Inspiring Interns. He is particularly interested in self-development, psychology, mental health, and the future of work. Most of all, though, Sam is passionate about helping people find work that is meaningful and fulfilling. You can follow him on Twitter and find more of his work at www.samwoolfe.com.