Last Updated on November 2, 2020 by Emma @ Making and Saving Money
Pyramid schemes are bad news for people who want to make money online; they’ll set you on a path to lose money. A pyramid scheme will generally involve you paying an initial fee to join a business opportunity, with an ongoing cost each month for inventory. The fundamental way you make money is through recruiting others who then buy the products, rather than through the company offering a product or service to the general public.
By learning how to identify a pyramid scheme, you can protect yourself, your friends and family from being deceived by one of these unethical companies.
Disclaimer: This article may contain affiliate links. If you decide to use them, my blog may earn a small commission at no additional cost to you, which helps to fund more helpful articles for you to enjoy. Nothing in this article constitutes financial, or other, advice. These are my views and the results of years of research, testing and learning.
How to Identify a Pyramid Scheme: the Signs
Here is how to identify a pyramid scheme:
- Your earnings or commissions come from people who you recruit into the business, when they buy a product a service, rather than money from sales to the general public. Therefore, you spend the majority of your time recruiting. This is the main sign that you are dealing with a pyramid scheme and it can be difficult to tell at an early stage of your research where the company is making its sales from.
- The company is unwilling to show you evidence that it earns money from selling to the general public, rather than to its associates.
- You have to pay a fee to join.
- The company puts you under pressure to buy regular amounts of stock.
- The company relies on a lot of motivation and mindset work to brainwash you into believing it is an opportunity to change your life and the life of others who join.
- The company claims that people who leave the organisation are bad, or uncommitted and you are encouraged to cut ties with them to avoid hindering your success.
- The company’s marketing claims you can make earnings that seem to be too good to be true and gives a picture of easy, passive income (earning money while you sleep).
- The commission structure is deliberately complicated.
Are Pyramid Schemes Legal?
Pyramid schemes are illegal because the people who join them lose money, while the founder can walk away with millions. If you come across one, you should report it to the appropriate body in your country, such as:
- ActionFraud in the UK
- The Federal Trade Commission in the US
- The Australian Competition and Consumer Commission (ACCC) in Australia
Can I Get Into Trouble For Being in a Pyramid Scheme
Yes. If you knowingly recruit other people into an illegal pyramid scheme, then you are breaking the law.
Is a Pyramid Scheme the Same as an MLM?
MLM stands for Multi-Level Marketing. An MLM company is not the same as a pyramid scheme because it primarily earns money from selling to the general public, through a distributor network. The focus of a legitimate MLM should be on selling high-quality products and services to the general public, not on selling product or business opportunities to its distributors.
The focus of a pyramid scheme is to recruit people into the business opportunity. The products and services disguise that the people at the bottom of the pyramid are lining the pockets of those at the top. The scheme collapses as soon as the inflow of new distributors ceases.
What Are Some Examples of MLM Companies?
Many health and beauty companies operate this way, such as Herbalife, Amway, Arbonne, Juice Plus etc. However, if you google a list of MLM companies, you’ll find that several have faced allegations of being pyramid schemes. These allegations state that there seems to be more focus on recruiting, and selling starter kits to recruits, than direct selling of the products to people outside of the company. There have also been many allegations of toxic cultures and cults within MLMs.
Generally, the lower down you are in an MLM, the harder it becomes to make money. The people who do well tend to lead huge groups of leaders of teams. For this reason, I am not personally a fan of the MLM business model, and I believe there are much better ways to earn money online. You can read about some of them in the following articles:
What Should I Do If I Think I’m In A Pyramid Scheme?
If you start to suspect you are in a pyramid scheme, do not send them any more money and do not recruit anyone else into the company because you would be breaking the law. Instead, report the company to the relevant authority in your country.
You could also try to reclaim any of the money you have invested by asking the company (without tipping them off) and speaking to your financial provider.
How Can I Avoid Pyramid Schemes?
Remember, the key sign of a pyramid scheme is that all the income is coming from new distributors paying a fee to join the company and buying its products and services. Awareness is critical to avoid becoming a victim of a scam.
When considering a new business opportunity, you can consider the following questions:
- How does this business make money?
- Is it ethical? Does it sell a high-quality product or service that I would use myself, or that I can see an apparent demand for?
- Can I find legitimate information out about the company online from sources that I trust?
- Does the opportunity sound like an easy way to quickly earn money? If so, be very cautious. Building any form of success takes time and effort.
- Is the company happy to share information with you so that it’s easy to understand how the opportunity works? A reluctance to answer questions, and a focus on lots of mindset work to get rid of ‘negative thought patterns’, can all be a sign of a scam.
How Can I Earn Money Online Legitimately?
There are many ways to make money online legitimately, and to feel good about how you make money. I’ve listed some of my favourites in the following articles:
Many companies also now allow the flexibility to work from home fulltime and part-time as part of a normal 9 am to 5 pm job.
What are Your Thoughts and Experiences With Pyramid Schemes?
Would you know how to spot one now?
Do you know someone who has been the victim of one of these scams?
How do you know which business opportunities are legitimate?
Please share your thoughts below.
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8 thoughts on “How To Identify A Pyramid Scheme”
Hello there, I must say a very big thank you for put out this awesome article I know it would be of great help to the public as it has been of help to me. Over time I have fallen for some schemes that I think could have actually been pyramid schemes and I lost a lot of money. However, with this knowledge, I’m confident I would be able to avoid them now.
Thanks for taking the time to share your experiences Eva. I’m sorry to hear that you have been the victims of scams in the past.
If you enjoyed this article you might also enjoy How To Prevent Being Scammed Online: Top Ten Tips.
Very interesting article Emma
To me the most important thing to remember is selling on these schemes to others is illegal
So don’t fall for them as it could result in you breaking the law
When I did my project work we always sought information on contractors via a ore qualification document
The contractor had to prove that they had the right personnel resources and financial stability to deliver the project
Yet when people make financial decisions they often don’t carry out checks on the organisations offering too good to be true schemes ie scams
Look forward to more great advice
Thank you David, great to hear that you found value in the article! You make a great point about doing research before jumping into an opportunity.
You may also find this article helpful: How To Prevent Being Scammed Online: Top Ten Tips
I have been researching about Carlo Ponzi and your post came up. I was wondering if all MLMs were pyramid schemes. And now I know that the answer is no. I had the terms confused but reading your and several other posts I have completly understood this.
From now on, I’ll apply these points to every platform I come across to see if it stands the test. Thank you very much!
You are so welcome Ann. Yes it can get confusing between Ponzi schemes (which tend to focus on investment opportunities rather product-based businesses), pyramid schemes and MLMs.
If you enjoyed this article, you may also find value in this one: How To Prevent Being Scammed Online: Top Ten Tips.
I wish you every success!
Finally, someone has shown me how to catch these thieves, not someone who is just there to try and scam me. Now I understand what’s the difference between an affiliate marketing business and a pyramid scheme. I will definitely be able to spot the scams myself now and they not be able to scam me out of my money anymore. Thanks!
You are very welcome Jackie! Yes, if we are vigilante we can beat the scammers.
You may also find this article helpful to beating online scams: How To Prevent Being Scammed Online: Top Ten. Tips