Before I started looking for ways to bring in extra cash, I didn’t know much about pyramid, Ponzi, and MLM marketing schemes. I guess I instinctively knew to steer clear of get-rich-quick schemes, you know, those “too good to be true” offers that promise big profits with little or no work. But I didn’t know how these work, and that they were so widely spread, and that a person could get hooked into one of these without knowing it. So, in this article, I will discuss some well-known pyramid schemes, how they compare to Ponzi and MLM schemes, and what you should watch for and do instead.
What is a Pyramid Scheme?
“A pyramid scheme is a business model that recruits members via a promise of payments or services for enrolling others into the scheme, rather than supplying investments or sale of products. As recruiting multiplies, recruiting becomes quickly impossible, and most members are unable to profit; as such, pyramid schemes are unsustainable and often illegal. Pyramid schemes have existed for at least a century in different guises. Some multi-level marketing plans have been classified as pyramid schemes.” This is according to Wikipedia
OK, so that’s a lot of goblty gook. Google’s dictionary defines a pyramid scheme as a form of investment (illegal in the US and elsewhere) in which each paying participant recruits two further participants, with returns being given to early participants using money contributed by later ones. This is a little easier to understand.
It is a scam and illegal because the investors at the top take the money, and the ones at the bottom end up losing what they put in. This is because there is a finite amount of people that can be recruited for such an endeavor. When you run out of people at the bottom, no more money will come in.
A Pyramid Scheme is Not a Ponzi Scheme
“On March 12, 2009, Bernie Madoff plead guilty to the largest Ponzi scheme in history. He successfully swindled investors out of $65 billion. Although many Wall Street experts revered Madoff as a genius, many financial professionals were not surprised to learn that he was one of the biggest crooks they had ever come across. Some people were afraid they’d be ostracized if they spoke out against Madoff, and they simply kept quiet about their concerns about his investment portfolio and earnings. Unfortunately, Ponzi schemes are fairly common, but this one was one of a kind. Most Ponzi schemes operate on a very small scale, but Madoff was clearly a big thinker who caused major damage.” This is from an article in MoneyCrashers.
The Ponzi scheme is named after Charles Ponzi, who became notorious for using the technique in the 1920s. A Ponzi scheme is more of a “robbing Peter to pay Paul” type of scheme. This is where money is taken from one investor to pay money to another investor.
Ponzi carried out this scheme and became well-known throughout the United States because of the huge amount of money that he took in. His original scheme was based on the legitimate arbitrage of international reply coupons for postage stamps, but he soon began diverting new investors’ money to make payments to earlier investors and to himself. This is all according to Wikipedia.
It’s not a pyramid scheme because Ponzi’s investors were not required to recruit people to invest under themselves.
What is the Difference Between an MLM and Pyramid Scheme?
People will often use the term Multi Level Marketing (MLM) and Pyramid schemes interchangeably. While sometimes Pyramid schemes have MLM aspects and can be presented as an MLM, the two schemes are quite different.
| Multi-Level-Marketing | Pyramid Scheme |
| Provides products and or services of real value | No obvious product |
| Low startup costs that often include tools to help sell company products and/or services | Encourages a large initial investment and continual reinvestments |
| Ability to out earn anyone above you | Inability to out earn anyone above you |
| Is upfront that earnings are generated from direct sales or from others you have recruited and that earnings are ultimately based on your effort | Promises large earnings with little effort |
| Comprehensive training and support on products, recruiting and sales communication | Poor or non-existent training |
| Presents the opportunity and explains how it works allowing people time to ability to make a well informed decision. | Often aggressive in its approach and may use false information, deadlines to urge people to join quickly. |
From Wikipedia.
What Other Pyramid Schemes Are There?
There are a couple other configurations of pyramid schemes that you should be aware of.
8-Ball Scheme or Airplane Scheme
One is the 8 Ball scheme, or sometimes called the Airplane Scheme, where each investor must recruit two other investors, When there are basically four layers established, including one, two, four, and eight investors respectively, the top one investor takes his payout. The original pyramid then splits into two pyramids, and the second tier investors become the single investor at the top of the two pyramids. The layer of four investors must then recruit two investors each, until there are eight again at the bottom tier, and the top investors take their cash, and the whole process begins again, splitting the two pyramids into four pyramids.
There is also the matrix pyramid structure. (This one was a lot harder for me to understand, so please bear with me!) This structure is more like a queue, where a certain amount of people need to line up in the back of the queue before the first investor in the queue gets paid It’s more of a first in, first out type of structure than focusing on how many people are under you. All the members of the queue try to recruit people to line up, so it doesn’t matter who recruited you, it matters WHEN, and the ORDER in which you were recruited that determines the payout.
What to Watch Out For
- Find—and study—the company’s track record.
- Learn about the product.
- Ask questions.
- Understand any restrictions.
- Talk to other distributors.
- Consider using a friend or adviser as a neutral sounding board, or for a gut check.
- Take your time.
- Think about whether this plan suits your talents and goals.
What You Should Do Instead
Instead of trying one of these get-rich-quick schemes, try something that is tried and true: working hard and getting paid for it. You can do some honest work and get paid by doing affiliate marketing. If you work hard enough, and set up a foundation of a good website, then work every day, the funds will come in. You can do this without a huge investment, and without buying a large inventory of product.
Perhaps the best way is through Wealthy Affiliate. They have a free membership, where you can try it out. You can even stay at the free membership for as long as you like. The really nice thing is, that the premium membership is only $49 per month, so you really aren’t putting out large sums of money here. If it doesn’t work out, you are not out that much, and you are not risking a fortune you may already have.
If you join today, I can give you $30 off your first month of premium membership.
Thanks so much for putting this information together. I have always struggled to understand the difference between these three money making models. I used to think they were all the same but you have made things so clear for me to understand. It is amazing how simple something becomes after you understand it. I really appreciate the comparison between MLMs and pyramid schemes as I think those two are always used interchangeably.
Thanks Marlinda for the comment. I was confused about it until I researched this article. I thought they were all the same. Sure helps to know what they all are so we don’t get trapped into them. Again, thanks for visiting my website and for commenting!
Hello Rhonda,
Thank you for your thoughtful explanation of Ponzi schemes and MLM schemes. I had heard some definitions in the past but none as good as you have given here today.
I personally had a MLM pitched to me by a neighbor many years ago but at the time I did not realize it was one. Thankfully my gut told me to stay away and I did not sign up for it. What a disaster that would have been for me.
As long as people have had to earn a living one way or another there have been people willing to steal it from others. Not sure why but it is frustrating none the less.
In life I have learned there are no real get-rich-quick deals to be found. Only experiences that make me want to find a legit way to build something you can be proud of, help people and leave to your children and grandchildren if you desire. Wealthy Affiliate is one such business that will allow you to do this by teaching affiliate marketing. I KNOW this will work, like you say it will take time, effort, perseverance and patience. I have been searching on and off a long time for a legit way to make money and I can attest to the fact Wealthy Affiliate is it.
Thanks for sharing the information,
Appreciate it,
Proud papa of two,
Jody
Hi Jody, thanks for reading and commenting. I agree, there are no get-rich-quick schemes that work. If it’s too good to be true, it usually is. That’s why I like Wealthy Affiliate, because they tell you up front that you will have to work, and that it’s not a get-rich-quick scheme. And as far as sending them money, it’s a small monthly fee to use their platform, that’s it. So, yes, I agree, Wealthy Affiliate is the way to go. Thanks again for your comments! Rhonda