In my experience in life I had watched family go through many different pyramid schemes... some involving makeup, some jewelery, and some were simple health products of some sort; the thing that never changed though is the fraud. So a pyramid scheme is generally stated as being a scheme where you get recruited to sell a product by recruiting other people. Now each time a family member of mine joined up on another one of these entrepreneurship ventures there were a few things that happened that should be noted to show that these were truly pyramid schemes.
- The company does not exist anymore
- They were convinced that it was new and upcoming
- They were told that the recruiter was making $10,000+ a month
- They only make commission from the sales of those that they recruit
Now the last one the recruiter may not tell you right away about or will use statements like "You gotta spend money to make money" but in every case that I have seen it was my family that lost; they deserved it though. As the saying goes, fool me once shame on you, fool me twice shame on me.
This post from here on out is going to be informational on how to spot a potential pyramid scheme and how to avoid getting caught up in the scam. I hope that this information may be helpful to at least 1 person in order to prevent either themselves or someone they know from being fooled.
The above image shows a pyramid scheme where each person recruits another 6 people (assuming perfect recruitment) and it is found that after 13 steps the required number of people that need to be recruited is almost double the current human population. If after only 13 steps in the pyramid you get a required recruitment of more than the human population to continue then already that shows that the entire scheme falls apart, and relatively fast (within months)
Now lets say you made 30% commission off of your sales, 15% from the people you recruited, 7.5% from the people they recruited and so on. Now while the percentage drops to small values, you have to remember that the number of potential sales increases. So lets say you are on level 1 and there are 6 levels where each person sells $100 worth of product a month. You make $30 from your sales, but you would make $90 from the sales of people in level 2. $270 from level 3, $810 from level 4, and $2,430 from the 5th group. That comes to a total of $3,630 per month for everyone on the first level, but the people on level 5 are only making $30 a month, but if they are selling $100 worth of product a month then they have to first buy $100 worth of product meaning that the people on level 5 actually lose $70 a month.So the net of each person in this particular pyramid scheme is as follows:
Level 1: $3530
Level 2: $1100
Level 3: $290
Level 4: $20
Level 5: -$70
What this means is while each person pays the same amount of money for the product, they each gain different amounts of money simply based off of their position. Now this would be fine if that was where it ended but due to this hostel environment people are basically set up to fail. Now some people may be confused as to how some people are losing money and the reason for this is most pyramid schemes require the person whom is selling the product to first buy it for part of its cost, then they sell it for the rest of the cost (so a $200 ring may require being bought by the seller for $100 then they sell it for the other $100)
Now the logical response for this is for the seller to increase the price, but they can't... They are not allowed to. Instead they are told by those above them that the more they sell the better they will pave the path for themselves in the future, and only when they have put up enough of their own money will they receive a key to the treasury. Not all schemes will be set up like this though, some of the "worse" ones will actually be set up in such a way the the newcomers to the pyramid will be able to either break even or make a small profit but why they are "worse" is that they are much more volatile and much more likely to collapse.
The Key Concept of Spotting a Scheme
- "I make X dollars a month doing this and you can too!"
- "You get a discount of X% if you become a memeber and try to sell your own!"
- "You have to spend money to make money!"
- and sometimes "The more people you recruit the more money you make!"
So all of this so far has been under the impression that recruitment works in perfect succession... but it doesn't. In a perfect world, sure everyone whom got in early enough will be making tons of money that would ever outperform any costs to get there but in real life we have a very very sinister truth... only about 1 in 20 people will ever actually succeed at raising themselves up the ladder. So lets say you start at level 5 in our aforementioned 5 level pyramid above, you have about a 5% chance of succeeding in getting someone below you, then they have a 5% chance of getting someone below them, and so on. So your chances of getting 4 levels below you so that you can turn a livable profit is 1/3200000 or 0.00003% (this is using the statistics for success rate in the accusation of herbalife being a pyramid scheme) now if you multiply that percentage by the number of people by level 5 (7760) meaning that you have [a little higher chance than] 1/500 chance of actually getting the $3000+ a month. Now specific to the herbalife scheme it was stated that you have 1/5000 chance of making it to the 100,000+ a year meaning we are only off by a factor of 10, but then again our profit would only be in the realm of 30,000-40,000 a year.
You can work the system and make money!
So if you are proposed with a potential pyramid (or ponzie scheme but I won't get into that here) and you want to make money from it, although it is illegal in many countries to knowingly take part in such a scheme, here is a checklist of things to do.
- Recruit Recruit Recruit
- Buy and Sell very very little (remember you make more from others selling)
- convince the people you recruit to recruit as many people as possible to get higher rewards
- And finally, when it inevitably crashes, you walk away happy with what you did
Now the only problem that you have to realize that you scammed people out of their money but if you are okay with that then go ahead.
Legal Disclaimer I am not responsible for anything you do meaning if you follow a pyramid scheme and get fined from it then that is on you.