What Is Pyramid Schemes About? Read Full Explanation Here
A pyramid scheme entails a business set of designs that hires members by assuring payments or services once you are able to bring other individuals into the pyramid scheme, instead of equipping either investments or trade of outputs or utilities.
With the multiplication of hiring into the pyramid scheme, the hiring process might prove to be elusive, and it might be impossible for participants of the pyramid scheme to benefit. This makes pyramid schemes untenable and unsuitable because it conflicts with state legislation.
Pyramid schemes are thought to have existed for nearly a century in varied modes and presentations that displayed various behaviors and emotions that some people thought was intended to be deceit. This made pyramid schemes become less popular as they were associated with lies between individuals, where some people benefited from other people’s hard work.
Basic pyramid scheme models
Members of an organization willing to join the pyramid scheme are at times subjected to coercion to make payments with an assurance from the organization that every member will get a share of any fund derived from the additional membership that they could hire into the pyramid scheme.
Managers of these schemes are also a part of the share of benefits derived from the new pool of recruits and the organization’s membership fee. The managers believe that they are obliged to both hire and even channel the funds received to the directors of the pyramid schemes for them to prepare finance accounts needed to maintain the scheme.
Organizations with pyramid schemes rarely involve the sale of merchandise or utilities with any value, and as such, the only strategy to keep the organization afloat and generate more revenue streams will be through recruitment of additional members. This maintains and increases the pool of funds required to both run and motivates the directors and other older members who share the profits realized.
The science behind the existence of pyramid schemes would be a mathematical exponential growth formula, whereby each level will be deduced to be much bigger than its predecessor. This means that the pyramid scheme will have to keep on expanding indefinitely for it to realize profits in the long run. Mostly, those at the top of the pyramid receive more profits, unlike those who have recently joined and are at the base of the pyramid.
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Shortcomings of the pyramid scheme
#1 Of concern, expanding indefinitely might not be possible as the world demographic trend is infinite, and if by any chance the pyramid scheme runs out of new hires, which means a reduction in revenue stream, it crumples since in a logical geometric progression higher values are at one end, while most individuals will be at the bottom levels of the pyramid, considering that the lower level has the highest number of recruits.
#2 Most of the pyramid schemes have individuals within the top layer benefiting at the expense of those at the bottom who might tend to lose their money because a bigger percentage of the scheme is at the bottom, making other participants not benefit at all.
Normally, with the collapse of these schemes, most of the individuals will find themselves at the bottom layer making them unable to get any profits. This gets even worse because they have already paid money to join the pyramid scheme in terms of membership and subscription fees.
#3 A pyramid scheme will normally be associated with a few individuals who earn huge profits at the expense of many others, who join the scheme and end up losing their money. The system is imbalanced since only some few people make money from others.
Models of pyramid schemes
#1 The “eight balls” model pyramid scheme
A large number of pyramid schemes prove to be complicated, rather than being simple and easy to understand. Occasionally, hiring a larger pool of individuals into the scheme becomes difficult, thus bringing the need for a simpler model.
Under this pyramid scheme model, each individual is tasked with bringing two others into the scheme, making it very easy to make profits since the vigor to get back invested funds also improves tremendously. The principle in this model is an individual who “hires” two other members who in turn do the same through bringing two new members into the scheme to get income. This recruitment process continues until there are 15 members, which is the maximum number this model can have in a single scheme.
A captain, who is normally the individual at the top of the pyramid scheme, will occasionally receive funds from his chain of recruits. However, if they intend to leave the scheme at any time, they still have the advantage and capability of re-entering the scheme once again as a “passenger.” Once they’ve re-entered, they can hire other members to enable them to enjoy a second, subsequent payout.
#2 Matrix pyramid scheme
Under this pyramid scheme, members pay money to join the scheme, although the process of joining is not immediate. Before joining, one has to be on a wait list in line with a particularly desirable merchandise that only a meager percentage is paid back.
Due to their constant use of geometric analysis, there is a likelihood of them cramping easily over a period of time. Apart from that, these schemes operate through getting incomes from their new members who join at a higher figure. These pyramid schemes will often collapse when fewer people are willing to join because the chances of being in front are infinite.
Under this model, organizers are not authorized to make this a gambling scheme whatsoever by law. This has made some nations rule out these schemes as they are not allowed by their legislation.
#3 Connection to Ponzi pyramid schemes
Both pyramid schemes are related in the sense that both are financial fraudulent gimmicks, although they are totally different. Pyramid schemes are pegged network marketing that entails each section of the scheme taking a reward, while still making sure that the money gained goes to the top of the pyramid scheme. The tendency to fail often occurs due to insufficient individuals, who are part and parcel of the scheme as one central entity which solicits funds from individuals, keeps some and takes the rest to those who had initially invested.
#4 Connection to multilevel marketing (MLM) companies pyramid schemes
Companies branded as Multi-Level Marketing (MLM) normally do business as pyramid schemes making their customers confuse them with some legalized multi-level marketers. In fact, there is a very strong contention that MLM schemes are legitimate pyramid schemes.
Legitimacy of pyramid schemes
Schemes are normally branded and regarded as illegal by many countries and regions all over the world. They are even termed as marketing and investment fraud since a greater emphasis is on selling distributorship than merchandise to its prospective members. This exhausts both potential the supply of investors and the final result, making it very hard for members to get a regular source of income.
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