A pyramid scheme is a business model that generally requires fees in exchange for membership which includes various products or services. These members are not required to purchase the products and services, but can seek benefits through adding new members in a chain or new additions to the ongoing network.
By doing so, they are entitled to receiving rewards or compensation in accordance with the company’s membership addition policy which generally specifies the investment of another individual from a current member. The same goes for the new enlisted member when they themselves recruit a new associate, creating a chain or network of membership listings.
A common occurrence found in such strategies is the eventual fading away of members’ interest to be involved. The first handful of new joiners in the scheme are able to receive great amounts of rewards and benefits after enlisting new members. However, in the long run, if member addition rates were to decline, the company could eventually shut down after collecting sales and fundings from its members. At this point, it is safe to say that new members would lose their expenses over nothing.
Nonetheless, there is debate over whether the Multilevel Marketing (MLM) approach can be considered as a form of pyramid scheme. The main difference between the two is that MLM companies tend to comply with regular check-ups and regulations.
Ponzi schemes are business models that rely on fundraising to develop their company. Companies employing Ponzi schemes lure in investors/members with the promise of receiving higher rewards in ratio to their investment money, while also influencing them to add new members to the network.
Most investors receive generally consistent rates of compensation in their first period being involved, however as time progresses, companies have been found to claim that they are facing financial difficulties and are unable to compensate their members, but in fact, the accumulated funds in that particular period would be allocated to previous members. In simple terms, the companies bite off a portion of the acquired funds and distribute the remaining to their current or outperforming members.
Characteristics of Pyramid and Ponzi Schemes
Low investments with returns too high to be true.
Excessive investment invitations with risk omissions.
Relies on inviting new members in return for rewards and compensation.
No evidence of regulation, documentation, or credibility.
Pyramid and Ponzi schemes generally have slightly differing methods of tricking members and compensating them. Pyramid schemes depend on enlarging their network for gradually increased rates of returns and profit. However, Ponzi schemes rely on fundraising and acquiring vestings.
Readers may develop the understanding that Ponzi schemes are more of a threat, but factually, both are harmful forms of trickery. Investors are advised to critically analyze company structures and be vigilant of any suspicious activities, while also steering away from any plausible scams.