We’re sure you’ve heard the term pyramid scheme before. But do you actually know EXACTLY what it is, how it works, and WHY you should be extremely cautious? Actually… let us back up. Perhaps you know this to be multi-level marketing (MLM), or network marketing? Whatever you want to call it, a pyramid scheme can affect your relationships, your livelihood, and your reputation. They are masterful, ingenious, and at first portray themselves as a ‘life-changing’ opportunity. (If it looks like a duck, quacks like a duck, it is a duck!)
We’re just going to warn you all first before we go on and we sincerely apologise if we offend anyone (but people NEED to know). We aim to be informative with this post rather than opinionated. However we will offer our opinion, otherwise we wouldn’t be doing our job.
Why Do They Call It A Pyramid Scheme?
When we were kids we couldn’t quite grasp why they called it a pyramid scheme. Like, what on earth has a pyramid got to do with business?
If you need to watch a funny video to see how it works watch this short Youtube clip here.
Ok, so say you have a product that you want to sell. You are sitting at the top of the pyramid. Then, you ‘sell’ this product to your friends and family, your hairdresser, anyone you know. Convincing them this product is amazing and that they can own their “own business”. In reality, with these ‘pyramid schemes’, you do not own your own business. You work for someone who created the network marketing business and products that you are trying to sell and recruit for. Essentially, your main role is to recruit others to ‘join your team’.
They entice you with the possibility of financial freedom, passive income, and travel opportunities. Heck, some even offer you a BMW or another fancy car when you ‘level-up’ like it’s some kind of game.
For those people you are recruiting there is is an up-front cost. They may have to pay around $50 for a ‘starter kit’ which has everything they need to get their business going. (Most recruiters will say the common… “you need to spend money to make money.”) In order to make the money back (and earn more), they simply just have to recruit more people to ‘join your team’. These words ‘join my team’ will often be used.
You (in all your glory sitting at the top of the pyramid) earn a commission when someone in your ‘team’ sells this starter kit, or whatever other packages are for sale.
Do you see what is going on?
The business is not about selling a product – yes the product may be alright and work for some people but that’s not the point. The business is about selling a BUSINESS! The more people you have sitting under you, the more commission you earn. The only trouble is, those people who arrive late to the party (we mean scheme), have very little chance of making big (if any) money usually because of the following reasons:
a) They have no skills in sales
b) There are not enough people willing to ‘join your team’ or ‘take on the opportunity’
c) They give up soon after realising they’re not making any money and feel defeated having wasted a bunch of time and money.
d) Following an online search they see the company affiliated with terms such as “scam”, “avoid” or ‘I want my money back’.
It’s Actually Illegal
Did you know it’s illegal to take part in a pyramid scheme? That’s why people are now referring to this type of business model as MLM – these are legal.
Now, we’re not saying there is anything wrong with MLM. It can work and some people do extremely well out of it (usually the people at the top or who joined at inception).
There are companies who also focus on selling the product alongside selling it as a business. Instead of companies having their stock sitting on shelves in storefronts and not moving, they advertise through consultants who are willing to drive sales for them.
If you are looking to be a consultant for one, you’re usually asked to pay up front for a starter kit. These are usually offered at a reasonable price (below $100). You’re told this is all you need to start your own business. Then, when you don’t end up selling anything, you go back to your recruiter and ask why. They then upsell you to the next package that you NEED to get sales going. These usually go for a few hundred dollars.
It’s a vicious cycle. You can regretfully thank Charles Ponzi who duped thousands of New England residents into investing in a postage stamp speculation scheme back in the 1920s… therein giving the name ‘Ponzi Scheme’, aka pyramid scheme.
The Warning Signs
I’m going to be completely honest here and admit that I’ve been intrigued by people who say they have an amazing job opportunity for you and you can work your own hours etc. As soon as they say there is an up-front cost though, and that I have to fork out money from my own pocket to get started, I’m immediately skeptical.
Yes, I know that you have to ‘invest in yourself’, but when I haven’t even tried the product, it’s going to be extremely hard for me to sell it. Actually, I didn’t even know what a pyramid scheme EXACTLY entailed until I watched a documentary on Netflix about Herbalife and realized that this kind of business model can destroy people’s lives. My opinion is that I don’t think it’s worth the risk or stress!
I spoke to my boyfriend about MLMs and he actually showed me a conversation via FB messenger he had with a guy he barely knew, who was trying to get him to ‘join his team’ and become ‘financially free’. The way this guy tried to ‘recruit’ my boyfriend was actually laughable and I couldn’t believe the tactics he was pulling (that and his grammar was terrible, so I was instantly turned off).
He also told me a story involving his past housemates who all got involved in a Pyramid Scheme – one week they were discussing how they were going to be flying to different cities ‘for work’.
When they asked my boyfriend why he hadn’t yet joined them on ‘the opportunity’ he asked if they had actually read the terms and conditions, which outlined how many ‘starter packs’ they needed to sell before even making any money.
None of them had and the next week they didn’t want to talk about what a failure the whole thing had been. I thought this story was a good example of how these MLMs play on peoples emotions in order to drive a sale. People see the shiny stuff, the cars, and the others who have made it work and readily hand over their money. A little due diligence would go along away and should be practiced before any investment decision.
I then had someone contact me via LinkedIn and they said they were researching successful people in Australia and they came across my profile. Like pls, there are PLENTY of people out there who are more successful than me and I guarantee my profile did not come up when you were on your search. I just happened to have ‘looking for new opportunities’ under my profile title as I was looking for a new job at the time.
I didn’t really have that much interaction or awareness of pyramid schemes until I started my undergrad. I knew what they were though because I had always listened to ‘adult’ conversations and heard the term ‘Ponzi Scheme.’
However, the very first interaction I had with a pyramid scheme was in high school. I was new to the high school and making new friends. One of the guys I swam with at high school invited me over to hangout and told me his family were hosting a ‘wine tasting party.’ I was excited! Then I realized it was complete utter bullshit.
His family was pitching to others ‘MonaVie,’ which is a pyramid scheme that distributed products made from blended juice concentrates, powders, and purees. They literally were trying to get me to convince my parents to jump on board. Oh, by the way ‘MonaVie’ defaulted to the tune of US$182 million then went into foreclosure. Fun fact, fewer than 1% qualified for commission and of those, only 10% made more than $100 a week.
Uni was when I had the most interaction, heck I even decided to give it a try to shut-up my classmates that kept high-pressuring me and pleading with their life that it wasn’t a pyramid scheme. It was a pyramid scheme!
I would sit in on the ‘team meetings’ where they explained to you your uncapped earning potential, level up progressions, presented you with forecasted earnings, and a lot of other bogus information.
The thoughts going through my head that I’d later speak would just say, ‘nah not interested it’s a pyramid scheme.’ They would take offence, our friendship would be over, and well… I would unfollow them on every social media platform I could because I was sick of seeing… “I’m looking for 3 motivated people that want to own their own business.”
So, here are the warning signs or red flags you need to watch out for if someone is trying to ‘recruit you’!
- They firstly butter you up with compliments. Saying you seem like the type of person who is a go-getter, successful, and business minded etc
- They explain how they ‘own their own business’. How you can live an amazing financially free life and can do whatever you want. Like pls, you are 22, out of uni and probably have a crap load of student loan debt.
- Promises of high returns in a short period of time with skewed forecasted earning reports
- Complex commission structures
- Easy money or ‘passive’ income (being wealthy doesn’t come easy, it takes HARD WORK!)
- They ask you to ‘join their team’, to make it sound like you can be part of something amazing. You have to recruit new members in order to make money
- It entails up-front costs (buy-in required)
- You call them out on it being a pyramid scheme and they are quick to reply it’s not. That it’s simply networking marketing
- Once the recruiter is told no, they enquire if you know of anyone who would be interested and ask for a referral. They then clearly state they make most of their money through referrals
- Often those accused of working in pyramid schemes will post images explaining that a proper corporation also is a ‘pyramid’ with the CEO at the top.
To us, this just screams that the person knows they work in a pyramid scheme… but wants to rationalize. Don’t let this fool you, or confuse you!
Ok, so it’ pretty clear as to how we feel about a pyramid scheme by now.
What To Do If You’ve Been Scammed
Report it and get out! You’ll probably have to come to terms with the fact that you’ve lost your money. That’s ok! We all make mistakes and that’s how we learn. For those in Australia you can report a pyramid scheme to the Australia Competition and Consumer Commission (ACCC) through their report a scam page.
For those in America, you can contact the Federal Trade Commission (FTC) or use their online complaint assistant form.
Have you ever been tempted by a pyramid scheme? Or have you entered into one before? Perhaps you’re part of one already and you’re killing it! We’d love to know your opinions guys. Where do YOU stand on the concept of a pyramid scheme? Leave us a comment!
If you’re keen to watch the documentary that inspired this article, it’s called ‘Betting on Zero’ on Netflix!
Amanda & Julia xx