pyramid scheme
A business model that recruits members by promising payments for enrolling others, rather than from any real investment or product sales, eventually collapsing.
Example
“The multi-level marketing company was shut down as a pyramid scheme — 99% of participants lost money.”
Memory Tip
PYRAMID scheme = recruit others who recruit others. Only those at the top profit. Always collapses.
Why It Matters
Understanding pyramid schemes is critical for protecting your money and avoiding financial loss. These schemes inevitably collapse, leaving most participants with nothing, so recognizing the warning signs can save you from losing your savings or damaging relationships by recruiting others into a fraudulent operation.
Common Misconception
Many people believe that multi-level marketing companies are the same as pyramid schemes, but MLMs can be legitimate if they actually sell real products and generate revenue from those sales rather than solely from recruitment. However, the line between them can be blurry, and some MLMs operate very similarly to pyramid schemes by emphasizing recruitment over product sales.
In Practice
Imagine a scheme where you pay 500 dollars to join and recruit 10 people, each of whom also pays 500 dollars and recruits 10 more, totaling 5,000 dollars per level. While early participants might make money from recruitment bonuses, the scheme needs an impossible number of recruits to sustain itself, and when it collapses, the thousands of people at the bottom lose their entire investment with nothing to show for it.
Etymology
PYRAMID (hierarchical structure) SCHEME (plan, arrangement). A scheme structured like a PYRAMID with each level recruiting the next.
Common Misspellings
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See Also
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