When someone promises you a quick and easy way to get money, our natural instinct as human beings is to jump at the opportunity without thinking twice. Pyramid schemes are not a new concept, they have existed for around a century, but do not confuse pyramid schemes and Ponzi schemes.
A Ponzi scheme is one where investors are promised high returns when they invest in a certain non-existent product or service. The schemer sources for new investors to pay off the initial investors just to keep them satisfied. The mastermind will then pack up and leave, having sold nothing but clouds and empty promises.
A pyramid scheme, on the other hand, is where one person recruits other people to participate in a “no-fail investment opportunity”, for example, Public Likes. In Public Likes, one would get a commission on every like their invitee performed but only if that invitee upgrades their account. Let’s say I managed to convince 10 of my friends to join and upgrade their accounts for Ksh.4,500 each, I would get Ksh.1000, daily without doing anything else. For them to recover their “investment” fast enough, they would need to invite more people and convince them to upgrade.
The whole idea seems simple enough but the problem is finding new recruits at each level of the pyramid. Using our above example, the first 10 recruits I made, might each find 10 more people to recruit and upgrade their accounts. This will mean that the platform now has 100 new users who, in turn, will have to find 10 recruits each to make Ksh.1000 daily, in profit. That means they have to collectively find 1,000 people willing to join and if they somehow find 1,000 people, the next level of the pyramid will need to find 10,000 people in order to make a profit.
Eventually, there won’t be enough recruits at the bottom of the pyramid to support the level above it, because, in a Pyramid Scheme, the money earned from new recruits is used to compensate the older ones. That’s when the pyramid topples and everyone at the bottom loses their investment.The first step to avoiding being sucked into a pyramid scheme is to be able to identify one. Generally, Pyramid schemes and online scams that fall under this category have the following characteristics:
The first step to avoiding being sucked into a pyramid scheme is to be able to identify one. Generally, Pyramid schemes and online scams that fall under this category have the following characteristics:
- Enrollment fees
Pyramid schemes get their name from the fact that they have a small group of investors at the top that requires a large base to support the scheme, thus the whole thing looks like a pyramid. In a Pyramid scheme, an emphasis is placed on recruiting new members rather than selling products. Same thing with Public Likes, one was lured into a more lucrative earning if they upgraded their account and if they got more people to join.
If a program focuses on recruiting others to join it’s likely a pyramid scheme. Especially if you will earn more for recruiting others than for actual sales.
- Confusing compensation plan
Compensation plans often have provisions involving “breakage”, a period which you do not earn anything because you have not met your targets. Using our example of Public Likes, the breakage period was up to Ksh.2500. This would take you three months if you’re on the basic level, but if you upgrade for Ksh.4500, you earn Ksh.7500 in a month, and you can cash in much faster.
So, you will have to pay the same company that claims to be paying you just so that you can reach the set targets faster.
- No genuine product or service is sold
Is the product or service being sold hard to value? Pyramid Schemes use fancy-sounding products and mostly tech-related services to confuse you as to what exactly is going on. When you analyze what they claim to sell, it does not make financial sense and you will be left with blanks on how they are making money.
- Promises of high returns in a short time period
If the company in question is promising to pay you within a short period of time, say weekly, then be on the lookout. There’s a high possibility that they are using the money from new recruits to pay you and not from actual profits made.
- Easy money or passive income
You get paid for simply clicking on ads or liking Facebook pages. All these should be signs that you are joining a Pyramid scheme. The most common type of online scam is those that come with the flashy tag, “Work from home and earn $5,000 a month!” Pyramid schemes are so successful because they prey on our desire for quick and easy money.
The truth is, Pyramid schemes are very attractive and people have made money from such schemes, however, it is mathematically impossible for everyone to make money in a pyramid scheme. Pyramid schemes don’t work unless somebody is losing money. According to Pyramid Scheme Alert, 88% of the members in a Pyramid Scheme will be on the bottom level and will lose their money.
In conclusion, Pyramid schemes are illegal because people don’t lose their money due to normal financial and economical forces, but because the system is set up for them to lose so that a few at the top will win.