Meaning of Pyramid Scheme
- It basically is an unsustainable business model where a few top-level members recruit a set of newer members and this is called a pyramid scam.
- These schemes tend to funnel earnings from the lower levels of the organization to the top.
- Additionally, these schemes rely on profiting from recruitment fees.
- The scheme is called a "pyramid" because at each level, the number of investors increases.
- These are illegal in numerous countries.
How does it work?
These schemes work progressively from top to bottom, where it is wider at the bottom and narrows toward the top. The promoters are usually religious or social organisations, sports teams etc.
Why do people invest in pyramid schemes?
There are three main categories of people who invest in these kinds of schemes, namely, people who participate out of greed, those who believe that they are joining an "investment club" or a "gift program"; and those who believe that the products or services are legitimate.
Types of pyramid schemes
There are numerous types of pyramid schemes that exist. They are as follows – - Multi-level marketing (MLM) is a legal business practice, but unlike traditional pyramid schemes, this model involves the sale of actual goods or services. It is such that the business is not required to close in actual sale of goods and services. - Chain emails ensure that naïve recipients donate money to individuals listed on the email list. After the donations are done, the donor is to delete the first name on the list and replace it with his own. - Ponzi schemes also form a component of pyramid schemes that promise high returns to the existing investors by taking in new investments.
To conclude
A pyramid scheme is doomed to fail as the success depends on the ability to recruit more investors. Since there is an outer limit to achieving the same the pyramid scheme will ultimately collapse. Therefore, it has a limited life and tends to fall apart over time.
