August 31

What Is Pyramid Scheme?



If you landed here, chances are you have been scammed by a pyramid scheme before or you want to make sure you are not going to in the future … Very wise. =)

Perhaps you are the creator of a pyramid scheme and will ask me to remove my post after reading it ? (which I won’t of course ! ) 

Anyway … What is a pyramid scheme? Well simply put, it’s an illegal and risky get-rich system. It’s called a pyramid because it looks like a pyramid on paper! =)



Why Are Pyramid Schemes Illegal?

Pyramid schemes are illegal because they promise their members to pay them in exchange for recruiting more members. This system is unsustainable because the remuneration of its members is not based on the sale of a real product but on the enrollment of new members. These new members’ entry fee only serve to pay the members above them.

Pyramidal schemes are bound to collapse at some point for the simple reason that there are not enough people on Earth to sustain them … That’s right! Take a look at the chart below to understand what it takes for a pyramid scheme to pay its members.

Capture d’écran 2015-08-31 à 16.55.35

You do not need to be a math teacher to see it’s just impossible for all the members of a pyramid scheme to make money. Even if you need to recruit only 2 people to get your initial payment back, the 28th level would need to recruit nearly 300 million people… Imagine what it takes when you need to recruit 10 people on your first level…

People lose money with pyramid schemes because there are not enough people on the planet to sustain the system and only a small percentage of the members will actually earn a lot of money. 


Do Not Confuse Pyramids Schemes With Hierarchy

Most (if not all) people involved in a pyramid scheme will use the following argument against their “haters” : “a corporate is a pyramid scheme like any other, with a boss at the top who makes all the money and employees who work hard for much less. ” Really?

You need to understand that when people are caught up in a pyramid scheme, they are taught to overuse this unfounded argument so as to enforce the pseudo legitimacy of the company they have joined. 


Nevertheless it is very easy to disassemble this “argument” :

  • nobody requests an employee to pay a fee in order to get their paycheck
  • as an employee you will get paid at the end of the month without having to recruit new people… thank god!
  • if bosses earn more money than employees it is simply because they ARE bosses and have done long studies to earn this position or have been in the company longer than you. Or they just have long fangs =) 
  • even if a boss gets a bigger check at the end of the month, one should not forget that he/she is subject to heavy social, tax and employer charges. 
  • being a boss means having more responsibilities > hence the bigger check. Someone who is at the top of a pyramid scheme doesn’t have more responsibilities, they just have more people enrolled below them… 

A pyramid scheme has nothing in common with corporate hierarchy, except perhaps the fact that there is someone at the top….? And people at the bottom… of the “pyramid”. 



Is There A Difference Between Pyramid Schemes & MLMs?

Yes and no! =)

Pyramid schemes are often (and wrongly) distinguished from MLMs when in fact they both use the same system. The only difference between a pyramid scheme and an MLM company is that the latter holds its legitimacy from the (more or less) quality and efficient product(s) they sell. 

MLM sounds like an attractive business model to many people : it offers the opportunity to become involved in a system for distributing products to consumers.

But the truth is, joining an MLM or a pyramid scheme is almost one and the same thing, except for the products these companies are (or are not) selling. Many companies sell “air” or unreliable products to make their pyramid scheme legal.

Regardless of the product an MLM is selling in the first place (skincare products, advertising coupons, weight loss solutions, supplements…), it’s only a matter of time until their distributors end up trying to make more new members rather than selling the company’s products.


Warning Signs

If you are considering joining a company that fiercely assures you it’s not a pyramid scheme watch out for the below warning signs :

  • are your future benefits primarily based on recruiting new people
  • if the company sells products : is it a camouflage or do the products get positive reviews from the public (and not from the distributors who will always only say good things about them!). Do the products have inherent value?
  • where is the company based? Who are the owners? How long have they been out there and what is their reputation?
  • does the status of the people within the system matter more than their actual business? Does your future status within the company imply more profits? Not as a boss, but as an enroller.
  • are they selling a future/miracle product, or something vague that will “start soon” and that they want you to invest in? Something usually revolutionary…
  • if you do have to pay for inventory, will the company refund unsold inventory? Legitimate MLM companies will offer and stick to inventory buy-backs for at least 80% of what you paid.
  • is the compensation plan easy to understand? Is it designed so you will make more money by recruiting new members rather than through direct sales?
  • do they have good member support?  what’s their spelling like… ? Does it sounds like they don’t really answer your questions? Are you confused after reading an email from them? A legit company should show transparency and be clear.
  • do you have to pay to enter the system? Is there a free membership that still enables you to earn money? Or is it compulsory to pay a monthly fee ? Do you have to buy monthly products to be eligible for commissions?
  • do they have a serious customer service
  • have you tried the products? would you use them yourself? Or does it matter little because the compensation plan is based on recruiting more people? 
  • are you offered additional commissions for recruiting new members? It’s the number of people who are willing to sign up that matters in a pyramid scheme, not the products or services being offered.


Pyramid schemes are unsustainable and the people who joined last and are at the bottom of it will inevitably lose money.

Because a pyramid scheme is initiated by someone who recruits investors in exchange of guaranteed high return, the earliest investors do receive a high rate of return. But this money is paid for by new enrollments and is not a return on any real investment. That’s why it’s illegal.

At some point these recruiting schemes slow down and eventually the whole system collapses. So you better join a pyramid scheme at its baby stage… or not join it at all for that matter! =)

Don’t waste your time with pyramid schemes, get started with affiliate marking !


Thanks for dropping by, all the best! 


Earn Money Online

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4 Comments on "What Is Pyramid Scheme?"

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Hi Sarah

This is a very comprehensive and informative article! I didn’t know that pyramid schemes are illegal.

A friend of mine is a Network Marketer and to be honest she makes a decent income from it but like you said above, people in this type of profession are always on the lookout to recruit newbies. It gets a bit annoying and I personally would not sell a product that I didn’t believe in just to make a few bucks.

Are MLM’s illegal too?

Thanks for sharing.


Johann H Ragnarsson

Thank you for both very interesting nad useful information. Special how to avoid this pages.

One question came to my mind when I was reading it. Can company/website be a pyramid system even so it´s free for like a month? If you are not what they are selling even so, you have this free time to walk around.