Pyramid Scam

In a pyramid scam, you will be asked to pay a relatively small amount of money to one or a few people that have enrolled before you. It is expected that later, when you will sign up new members they will be making similar payments to you. Your new recruits are commonly referred to as your 'downline'.

Pyramid scams have many variations. Some scams involves "chain mails". A typical pyramid chain mail is a letter or an e-mail where the mail recipient is asked to add his/her name and send certain amount of money to the people mentioned in the mail. The recipient is then asked to forward the letter to other people with the assurance that the recipient, in return will receive money from those who receive the mail.

Other pyramid scam involve buying 'reports' or 'softwares' or 'ready made websites', etc from those that joined before you, and selling those items to new recruits. The product that is sold may not have any value of its own. It is merely a ploy to add legitimacy to the scam. The main aim is to enroll members to sign up even more new members - in order to prolong the life of the scam. Pyramid scam is similar to ponzi scam.

Any money earned by a person in a pyramid scheme is taken from another participant of the scheme. There is no creation of any net wealth. Money coming in from new investors is used to pay earlier investors. In the end, due to the lack of any new investors the scheme fails. It is impossible for a pyramid scheme to sustain itself. People towards the bottom of the pyramid are most vulnerable to lose money. If anyone has earned any profit then someone must have lost money somewhere down the line. As the figure above shows, level 12 members have to recruit more than 13 billion new participants to make money - which is more than the current population of the world!

Multi-level-marketing also has a pyramid structure. But not all MLM schemes are scams. In a legitimate MLM scheme, you will be able to earn money by selling the product or the service that uses this sort of marketing, without having to recruit any new members. In other words, you may or may not have any members in your "downline" to earn profit whereas in a pyramid scheme, you need to have members in your downline to earn profits.

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