The Truth About Pyramid Schemes

Entrepreneurship has become fashionable. A lot of people want to become entrepreneurs and are in need of ideas and resources which they can use to create the business of their dreams. This tendency has been exploited by many firms in the past century. A new type of scam called the “pyramid schemes” has come into existence. The perpetrators of these scams mostly play on the minds of gullible people who have high aspirations but are somehow stuck living menial lives.

These so called “business opportunities” are nothing more than confidence tricks designed to entice unwary investors into parting with their hard earned money. The problem with pyramid schemes is that they are not outright frauds and therefore cannot be pinned down by the law. Every now and then, some company pops up offering the allure of quick money and swindling millions in the process. In this article, we will have a closer look at pyramid schemes.

Tell Tale Signs of Pyramid Schemes

  • No Retail Sales outside the Network: Pyramid schemes pose as legitimate businesses. They claim to have some kind of groundbreaking product which is not yet recognized by the mainstream society but will soon be! However, as an investor, one must understand that good products do not only sell within a closed loop. Good products have extensive distribution networks that are sold across a lot of distribution points. Pyramid schemes, on the other hand, has lousy products. Lousy products do not sell in competitive markets and therefore require personal selling within an individual’s network.

  • Products are Over Priced: Pyramid schemes often involve products which are not main stream. They will always have some technology which they believe is better than the market but has not been heard by the society at large. Their products are over-priced in comparison to other products. This is what makes them lousy.

  • Emphasis on Recruiting New Distributors: In pyramid schemes, the products are often just an excuse to convince people that the business is legitimate. The products do not matter at all. The company earns money when it recruits new distributors who pay them money. It is for this reason that these companies will always be on the lookout for new distributors. Normal companies require a certain number of distributors after which they believe that their distribution network is saturated.

How Pyramid Schemes Recruit People

  • Recouping Your Own Money: Pyramid schemes grow like zombies. Till a person has not invested his/her own money, they are able to exercise some amount of common sense while making decisions. However, once they have paid in the money, they realize that they are in a soup. These people are usually stuck with difficult to sell inventory. It now dawns upon them that being an entrepreneur after all isn’t as easy as buying a membership! They then go on to perpetuate the greater fool theory, trying to use the same gimmicks that were used to entice them and the scheme perpetuates itself.

  • Focus on Top Layer: An essential form of marketing pyramid schemes is the focus on top layer of people who invested in these schemes. It is true that some of these people are indeed making insane sums of money. However, a pyramid is a bottom heavy structure. The number of people at the top is a miniscule 0.5% to 1% whereas the vast majority is stuck at the bottom. The focus on certain individuals is therefore misleading to say the least.

  • Trust: Pyramid schemes would not work as well if they were sold to you by strangers. These schemes are mostly sold by friends, family and near and dear ones. They add more credibility to the proposal. For this reason, people end up buying into these claims no matter how far fetched they seem when thought about in hindsight.

The Truth about Pyramid Schemes

  • Investment: Pyramid schemes are not get quick rich schemes. They require a lot of investment and hard work. A lot of times, the opportunity costs attached to the investment make the scheme unviable. Investors calculate their gains or losses based on out of pocket costs that they incurred and completely fail to account for the opportunity loss.

  • Time Cost: Pyramid schemes require people to work additional hours after their day jobs. They do not get paid for working these additional hours. If they take into account the number of hours they did work and consider their normal wage rate, they will see that the earnings generated from these schemes are minuscule and not worth the effort.

  • Other Expenses: Pyramid schemes usually involve expensive networking seminars. There is also a cost associated with socializing. People meet in restaurants to explain their so called business proposals and end up buying meals for their prospective customers. All these add to the already huge investments that have been made.

All in all, pyramid schemes are a swindle. They transfer wealth from people at the bottom to the people at the top. These schemes work out badly for the vast majority of people and only work out well for a handful. Also, there are severe costs associated with the loss of respect. Once a few people in your network lose money to these pyramid schemes, word quickly spreads causing a grave loss in reputation.


❮   Previous  Article Next  Article   ❯

Authorship/Referencing - About the Author(s)

MSG team comprises experienced faculty and professionals who develop the content for the portal. We collectively refer to our team as - “MSG Experts”. To Know more, click on About Us. The use of this material is free for learning and education purpose. Please reference authorship of content used, including link(s) to ManagementStudyGuide.com and the content page url.

Entrepreneurship