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Pyramid schemes/Ponzi schemes

What Is a Pyramid Scheme?

A pyramid scheme, also known as a pyramid selling scheme, is an illegal form of multi-level marketing (MLM). The idea is to buy a product and then resell it. Customers are then encouraged to resell the product as well and become partners. You make money through your own sales, but you also receive a share of the earnings of all the partners you recruit.

The sale of a usually valuable product is the main focus. An MLM system becomes a pyramid scheme when the focus is no longer on selling the product, but on recruiting as many new partners as possible.

So-called “gifting circles” are also often considered pyramid schemes. In gifting circles, you do not receive a product or any other equivalent value for your money. Instead, you move up the pyramid and have more partners below you, from whom you receive a share of the money.

How Can I Recognize Pyramid Schemes?

There are several characteristics that can indicate a pyramid scheme:

  • You are often promised that you can make a lot of money quickly with little effort.

  • The company’s structure is often unclear or difficult to understand.

  • A very expensive and supposedly new product is sold that is claimed to be available “nowhere else.”

  • Critical questions are avoided, and risks are either not mentioned or denied.

  • Alleged success stories are presented that are very similar to one another.

  • You have to pay an entry fee to participate.

  • Recruiting as many customers or partners as possible is the main focus.

Important: A scheme can still be a pyramid scheme even if not all of these characteristics apply. If you are unsure about a company, take your time and research it thoroughly before getting involved.

Are Pyramid Schemes Dangerous?

In most cases, pyramid schemes can have serious consequences. The person who created the system logically makes the most money because they are at the top of the pyramid and receive a share of the earnings of all the partners.

As a result, the further down you are in the pyramid, the less money you are likely to make. Since the initial price of the product is often very high and the number of interested people is not unlimited, participants can also suffer significant financial losses.

As a result, people may become desperate and start recruiting friends or family members, who may then also lose money. This means that you may not only lose money, but potentially also friends or your relationship with family members.

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