Monday, 11 April 2011

What is Pyramid Selling?

We would like to start by saying that we are not associated in anyway with any pyramid scheme. This article explains the schemes that became known as “Pyramid Selling” which is a term that most people have heard of and yet few people understand. This article is intended to explain what is pyramid selling and also what is not a pyramid scheme.

There are fundamentally two types of  scheme that fall into the “Pyramid Scheme” category and both will be explained but before that let’s look at a couple of things that are not Pyramid schemes.

It’s a popular misconception that any organisation where one person has several others “reporting” to them and they in turn have others reporting to them, who have others reporting to them etc is thought to be a pyramid. Well, this is the fundamental structure of a pyramid scheme, but it is also the fundamental structure of most large bodies of people. Examples of this would be most conventionally run companies with a Chief Executive, who has their board of directors, who in turn will have several managers reporting to them, and the managers will have their supervisors and the supervisors will have their teams. The Army, the Police, the Goverment are all of a similar structure, even our own families!

It’s also a common misunderstanding that any marketing or sales team that is encouraged to recruit others into the team is a pyramid scheme. Clearly this is not the case; this type of organisation, commonly known as “Network Marketing” or “Multi Level Marketing” (MLM) is a very efficient and effective method of distribution operated by many respected, long established and highly successful companies.

Pyramid schemes are illegal in most countries and are certainly unethical wherever they are. Let us look at the two types of Pyramid scheme in turn:-

Pyramid scheme 1.

This is where the person or company at the top of the pyramid sources a product and then recruits others to buy stock which they are told to sell at a marked up price to other people that they are to recruit themselves. This second level and all subsequent levels are told to do the same. i.e. mark the price up to ensure that they make a profit and then sell it to others who mark it up to sell to others and so on. The problem with this scheme is that there are no consumers of the product and the product is getting increasingly expensive the further down the organisation it goes. The net result is that there will always be lots of people left with a garage full of stock that is so expensive they can’t sell it. With this type of scheme where there are no genuine consumers there will always be a lot of  people losing money. Fortunately these product based schemes have largely died out as they are illegal.

Pyramid Scheme 2.

This is where people join the scheme and then get paid for getting others to join the scheme. They recruit others on the promise that when the new joiner recruits others them self, they too will be making money. The key to whether this is defined as a pyramid scheme or not depends on whether there is a product or service involved. If people are joining an organisation for the products or services that it offers and they are pleased with the value that they are getting from those products or services, it is logical for those people to invite others to get involved too. That is fine and there are many commercial organisations that work this way. Where it becomes a “Pyramid Scheme” is where there is no product or service and people are only joining on the promise of being able to make money themselves from just recruiting others. To get around this it has been known for companies to offer a “service” for the joining fee which bares no relation to the cost. For example the service may be that they will add you to a mailing list and then your monthly subscription charge will be to maintain that mailing list and send you a newsletter; hardly a product or service! This scheme is clearly devised to get around the legal requirement of offering a product or service and where that product or service is so minimal and overpriced it clearly falls into the Pyramid Scheme category. These illegal schemes should not be confused with ethical legal businesses that are offering genuine products or services.

So in summary a pyramid scheme is identified not by its organisational structure, but by whether a genuine product or service is involved, and not just an opportunity to get paid for recruiting others. For details of what is certainly NOT a pyramid scheme check out

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