Definition and Misconceptions of Pyramid Schemes

by on November 16th, 2010
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Many places on the internet you can find discussions about whether a company engaged in a business form called pyramid scheme or not. But what exactly is defined by a pyramid?

Pyramid schemes are defined as a marketing concept, where the participants need to recruit new members to earn money. Members should not be customers, but direct employees who must work under one self. You pay an often considerable sum to be able to participate in the pyramid scheme.

When you get recruited you are forced to recruit many others to earn your money again and begin a surplus. This gives you a percentage of the amount that new members deposits to become a member. Often, people become members with the promise that within a relatively short time they can become rich by recruiting new members, which also recruits members, etc.

Pyramid schemes have been the victim of much criticism, as one shall be involved right from the start of the company to earn good money from it. Additionally, the company’s sole purpose is money shift, meaning that there is no product of real value, which is included in the revenue of the company, but that the only activity taking place is money that changes hands. Pyramid schemes are therefore also illegal marketing in most countries worldwide.

Another similar marketing concept is Multi-Level Marketing, also abbreviated MLM. MLM is characterized by the inclusion of a real product of value for a significant portion of the revenue. However the structure of an MLM business is close to similar to a pyramid company, as also here there are several levels of members, the upper often making more money because several other representatives work below them. It is important to point out that MLM is not pyramid schemes and MLM is legal to carry in most if not all countries worldwide.

One advantage of doing business for MLM concept is that you are able to market and distribute its products directly to consumers via personal reference and direct sales. In MLM companies participants earn money on the products they sell and not directly from recruiting more members.

Examples of legitimate MLM companies: Tupperware, ACN, Nuskin.

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