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What is a Pyramid Scheme?

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  • Written By: Tricia Ellis-Christensen
  • Edited By: O. Wallace
  • Last Modified Date: 06 October 2014
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A pyramid scheme is a type of scam which promises the investor that their initial investment will make them extraordinarily rich. In reality, the pyramid scheme does not deliver on promised profits. In most cases, only the people who originate the pyramid scheme, and a few of the initial salespeople or people who get in at the top of the pyramid will make any money. Most people merely lose money because their money only benefits those already involved in the scam.

The pyramid scheme tends manifest itself in products with exciting labels like “get rich quick,” or “make millions without working.” The hallmark of the pyramid scheme is that no actual product is offered. Instead, people pay a one-time fee to sign up to be part of the scheme, or may purchase materials instructing one how to sign up others. To make any money, the person must then sign up other people. Part of the revenue from new recruits must be given to those who signed one up for the program. These people in turn give part of their money to those who signed them up. Money flows upward toward the top of pyramid and the people who originated the pyramid scheme.

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A similar strategy is employed in businesses like Amway and Mary Kay. However, since both companies offer actual products such as cosmetics and household goods to people, they are considered multi-level marketing and not pyramid schemes.

Another type of pyramid scheme is the chain letter requesting people to send money to the top name on a list of names. The person then crosses out the top name and forwards the letter on in the eventual hope that his or her name will eventually be at the top, at which time he will receive money. While this scheme promises to ultimately make one lots of money, it never works. Further, this chain letter pyramid scheme is illegal.

For person-to-person pyramid schemes, the following strategies are employed:

  • Very little mention is made of any actual product;
  • A sales pitch will emphasize repeatedly the amount of money one can make;
  • Any product sold is at a price well above market value;
  • Income comes chiefly from signing up other people;
  • Later enrollees make little to no money;
  • People who originated the pyramid scheme make the most money.

    People can avoid the pyramid scheme by looking for its identifying characteristics. Chain letter pyramid schemes belong in the shredder, or should be turned over to local law enforcement agencies. Chain emails with pyramid scheme features should be reported to Internet providers. Further, promises that are too good to be true, and vagaries concerning how one makes money in these “get rich quick” schemes should alert one that he or she is being targeted by a pyramid scheme. Never give money to a person who cannot clearly define how a program works and who does not clearly define the product/products prior to purchase.

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    anon28280
    Post 3

    Isn't Social Security a Ponzi scheme?

    anon14563
    Post 1

    Mona Vie is a pyramid scheme. The product is a "miracle" nutrition supplement. It is priced way above its value. The sales pitch is over the top.

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