What Is A Pyramid Scheme

What is a pyramid scheme?

Whether it is ponzi games, a multi level marketing scam, or an envelope stuffing operation, find out the definition here.

In order to stay a stay at home mom, we’re supposed to avoid pyramid schemes and ponzi games like the plague.

They are evil, right?

Especially the triangular shaped schemes.

If you want to stay a stay at home mom, you’d better keep far away from those!

But what, exactly, is a pyramid scheme definition?

What Is A Ponzi Scheme?

In the early 1920s, Charles Ponzi, an Italian immigrant, invented the pyramid scheme (and therefore the pyramid scheme definition).

Back in those days, postage reply coupons were exchanged in foreign countries for stamps.

And since some areas of the world had a struggling economy, a postal reply coupon had a varying exchange rate.

Ponzi found that if he purchased these postal coupons in poor economies, and exchanged them in America, he double, tripled, or quadrupled his money!

He liked to brag, so soon friends and acquaintances wanted in on the deal.

Ponzi promised a 90 day 100% return on investment, meaning that whatever amount of money you invested in these coupons would be doubled in three months. Word spread. Those first few investors in the Ponzi game were making money hand over fist! Soon the whole country wanted in.

Ponzi was taking in over a MILLION DOLLARS A WEEK…in 1920! Business was booming. Ponzi was becoming a very wealthy man, and so were his investors. Everything would have been fine, except…

…he never really bought the postal reply coupons. You see, buying the coupons, exchanging the money, and sifting through bureaucratic red-tape was time consuming. Ponzi promised a quick ROI (Return on Investment). He didn’t have time to actually buy the coupons.

So, he paid his investors with notes due from the pool of funds of the new investors. Eventually, a guy Ponzi hired to take care of public relations caught onto the scam, and exposed the scheme. In the end, 40,000 people were out $15,000,000…again, in 1920.

He was sentenced to jail, spent a couple years there, got out, tried a few more swindles, got caught, and so on. But he will go down in history as the inventor of the Ponzi Scheme aka Pyramid Scheme.

Pyramid Scheme Definition: What is a Pyramid Scheme?

Pyramid scheme definintion: A pyramid scheme is robbing Peter to pay Paul. Its an organization that profits not off a product or service, but off of the new addition of money/recruits to the group. Money flows up the pyramid, but nothing flows down.

Eventually, the money stops flowing up the pyramid. Either those at the bottom do not continue to bring more victims into the scheme, or the scheme is exposed as the illegal pyramid that it is. Either way, only the guys at the top made any money.

The Chain Letter

The chain letter pyramid scheme definition is this:

You are sent, in the mail, a letter with a list of 10 names and addresses from a “friend”This friend tells you that all you have to do is send $5 (or another amount) to each of the names and addresses of the top 5 people on the list

Then you delete #1’s information, add yourself in as #10, and mail the letter to 10 friends

By the time you get up to the #5 position, there will be thousands of people sending you $5!The trick, you are reminded, to this pyramid scheme definition, is to be honest, and not to break the chain. How can you lose? It’s only $25, and you’re sure to make that back, right? After all, you want to stay a stay at home mom and this could be your ticket!

(Note: pyramid scheme definition: in the electronic world, instead of physical letters, chain letter pyramid schemes are now emails or posts on message boards.) Why don’t chain letters work? Well, for one, people aren’t honest!

But, more importantly, the numbers don’t add up for the pyramid scheme definition. Let’s look at the numbers.The letter you received was sent to 10 people.

10 People

You, and each of the other 9 people sent the letter to 10 more people. You are now #10 on the list.

10 People sending 10 copies = 100 People
100 People = You #10 position

Now those 100 People send to 10 People each and you are now in the #9 Position, and so on:

100 People = You #10
1,000 People = You #9
10,000 People = You #8
100,000 People = You #7
1,000,000 People = You #6
10,000,000 People = You #5

So, in order for you to start getting paid, the letter would have had to successfully get to 10 Million People. How many of those people are honest?

The real problem with the numbers comes into play for the people below you. When you are #5, someone else, brand new to the scheme, is at #10. They have to be, that’s how you get paid.

When you are in the #1 position, that person will finally be in the #5 position. Let’s see how that would work.

10,000,000 People = You #5, Newbie #10
100,000,000 People = You #4, Newbie #9
1,000,000,000 People = You #3, Newbie #8
10,000,000,000 People = You #2, Newbie #7
100,000,000,000 People = You #1, Newbie #6
1,000,000,000,000 People = Newbie #5

So, the chain letter would have to reach, what is that, a trillion? A trillion people, before the first person to pay your $5 would see a return on his money.

(Just in case you don’t know, there are only about 7 Billion People in the world)

The numbers simply don’t add up. Ten Million people need to join in order for the first round of paying people to get paid.

Multi Level Marketing Scams

MLM Companies, that is, companies that promote a product or service, are not pyramid schemes and most do not involve multi level marketing scams. In MLM, money flows up the chain, and value (or product) flows down.

Each participant receives a valuable, quality product in of itself. He/she would likely be purchasing the product, for the same amount of money, even if a business opportunity did not exist.

So why is MLM confused with a known illegal activity? People commonly mistake a legitimate MLM opportunity with a pyramid scheme, because they are both shaped like a pyramid!

Now, before you smell a rat, realize that all companies are shaped like pyramids. You have the owner, or company president, at the top. He/she oversees a small, select group of CEOs or managers, who then oversee a larger group. At the bottom of the structure are the employees, who are the selling force to the customers.

WalMart is structured this way, Microsoft is structured this way, heck, even the US Government is structured this way! The shape of the MLM company is the same.

At the top, is the company, who started off with a handful of distributors, who each enrolled a handful of distributors. It flows out, like a pyramid or fan, as it goes. But here is where a MLM company differs from typical corporate America and from its illegal counterpart: Each newly sponsored recruit is the tip of his own pyramid.

What does that mean? Unlike Walmart, a Network Marketing participant has the opportunity to earn the same amount of money, or more, than the person who sponsored him. Each and every distributor in a Multi-Level company has the same resources, the same pay structure, and the same incentives.

Everyone Has the Ability to Succeed

Now, I still hate to use the word “pyramid,” even with this pyramid scheme definition. I can’t tell you the number of conversations I’ve had with prospects or potential recruits about how the company I am offering them is real, and not multi level marketing scam.

I once spent an hour on the phone with a new team member’s husband (she wanted to stay a stay at home mom), trying to convince him that despite his fears, his wife was not going to go to jail because she enrolled. I had to explain and reexplain the pyramid scheme definition. So, usually, when I am speaking to someone about MLM, I avoid the word “pyramid” altogether.

The numbers, unlike in a Ponzi game or the pyramid scheme definition DO pan out with MLM, because they are not intended to go out as wide or as deep. You do not have to wait until the chain has reached its 5th or 6th level in order to get compensated; that happens on the first level. Instead of waiting until 10 million people have joined the chain, you get paid starting with the first person.

Hmmm…1 or 10 million? Sounds like an easy choice to me! Plus, network marketing companies WANT you to succeed! The better you are, the more they will eventually make as well, so they give you the training, tools and resources to succeed. They take the tedious out of business and give you the time you need to build yourself a team.

It is important to note that some pyramid scheme definition will claim to be legitimate MLM companies, but will in fact, be a front for an illegal multi level marketing scam. Investigate companies before you join them. Google them. If you want to find out all the negative about a company, google their name and the word “scam”.

If you cannot find any information, or find bad information, then you do not want to be involved with such a business. Ask for samples of their product or order once as a customer so you can see the quality (or lack thereof) of the product being distributed.

Follow your instincts with this pyramid scheme definition. If they say something is wrong, then walk away.

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