What Is A Pyramid Scheme?

A fellow Naija entrepreneur brought a business proposal to me, when he was told that the business proposed is a pyramid scheme he got offended. He defended the business as being legitimate because he has proof that it works! That incident gave birth to this post, “What is a Pyramid Scheme?”

What makes an investment a pyramid scheme? Why should you not join a pyramid scheme even though it seems to be running successfully and people are aggressively promoting it? Let’s start from the first question.

Definition of a Pyramid Scheme

Wikipedia defines pyramid scheme as follows “A pyramid scheme is a non-sustainable business model that involves the exchange of money primarily for enrolling other people into the scheme, without any product or service being delivered. Pyramid schemes are a form of fraud” Pyramid schemes are fraudulent investment. Several entrepreneurs all over the world have lost fortunes to such schemes thinking that they were getting into a lucrative investment program. A lot of Nigerian Entrepreneurs are being lured into such schemes because people are being deceived that they are legitimate investment plans. Ignorance is quite expensive.

Since you don’t want to lose your hard-earned income to any con-artist posing as an entrepreneur, you need to understand what a pyramid scheme is and why it is a no go area for any entrepreneurs that seeks to be successful.

Going by the definition given above, one can see that even though pyramid schemes appear as simple business opportunities, they are actual fraud in disguise. Pyramid schemes are presented to potential investors as a business opportunity with high rate of return with little or no effort after the initial contribution. This post seeks to explain what pyramid schemes are and how to distinguish them from genuine business opportunities.

Why is it called Pyramid Scheme?

This kind of investment fraud derives its name from the structure it has. Just like the name, pyramid schemes are usually structured like a pyramid. It starts with the originator who is on top, at the apex of the pyramid. This person recruits one or more people and ask them to pay some amount of money to join the scheme.

The amount requested can be as little as $5. The total money paid by the first set of recruits  goes to the  originator of the scheme. The recruits are then instructed to recruit other people under them. The new set of recruits will now pay the same $5. These payment will in turn go to the first set of recruits who paid the originator.   In some cases, the entire amount will be paid to the recruiter while in some, only a percentage pre-determined by the originator will be paid to the recruiter while the rest is paid to the originator. In order words, the recruiter will only get his initial investment back and get some profit by recruiting people into the scheme.

Lets use a very simple example to illustrate the point I’m trying to make (in real life it is never this simple, it is usually complex). Let’s assume the originator recruited 1 person, Mr A, who paid him $5. That person he recruited will be asked to recruit another person under him who will pay $5 also. That means the originator recruits A who paid $5 to join the scheme. Then A recruits B who also pay $5 to join the scheme. The payment from B goes to A, meaning that A has recouped his initial investment in the scheme. If A continues recruiting more people, he will be making more and more money without selling any product or service. He simply tells them his own “success story” and show them prove of payments he has received from the scheme! (In Nigeria, a copy of the cheque showing payment from the scheme is enough to convince many gullible entrepreneurs.  But is payment received from an investment really sufficient prove that an investment plan is legitimate?) Well, let’s not digress. This is not just about Nigeria. Let’s continue with the illustration.

Each new recruit is in turn required to enlist additional people. Each new recruit is obligated to pay the person who recruited them. This sounds so exciting bearing in mind that each member only pay once to the person who recruited them but can continue to make more money by recruiting new people into the scheme!

The scheme will continue until the base of the pyramid is no longer strong enough to support the upper structure. That means, it will be successful until there are no more recruit. At that point, you will be having several recruits who are unable to recoup their money because nobody wants to join the scheme anymore! Why will people stop joining when there is so much success stories from those that have been rewarded by the system?

The World Population is Finite!

The reason why a pyramid scheme cannot be successful forever is because irrespective of how long it may take a day will eventually arrive when there will be no more new recruits! Let’s assume for instance that the entire population of the Nigeria decides to join a pyramid scheme. How long do you think it will take before everyone becomes a member and there is no more people to recruit! Since the population has a fixed figure we are about 150million for now, (new births not withstanding) it simply means that eventually there will be no more recruit, so the last set of recruits will be stuck as there will be nobody to pay them. That is how people become victims in pyramid schemes.

Then it will dawn on them that even though they were deceived to believe that they will make money by joining the scheme, the fact that there was no product or service being sold means there is no wealth being created, so it is a matter of time before the entire system collapse . Why, simply because it is not sustainable! I get angry whenever I come across articles canvassing for Nigerians to join a pyramid scheme that is packaged to look like a lucrative investment opportunity.

Pyramid Schemes are Unsustainable!

The fact that a pyramid scheme cannot sustain itself as people are made to believe is a proof that it is a fraud in disguise! It is just a matter of time, somewhere down the line a group of people are bound to lose their money when the pyramid is no longer able to sustain itself. The victims are usually those at the bottom of the Pyramid. This kind of fraud is illegal in many developed nations, but in the third world countries, government rarely pay attention until it is too late and people have become victims.

Why Do People Join Pyramid Schemes?

It is all about getting rich quick. Too many people are attracted to the idea of making a quick buck with very little effort; many different forms of disguised pyramid schemes have succeeded in fooling people. Ignorance plays a major role. Often time, sincere people who are men and women of integrity actually promote such scheme thinking it is sustainable.

These armies of aggressive marketers are the one that go out to convince their relations, friends and colleague to embrace the scheme because they have proves in form of payments they have received from such scheme! The question a wise entrepreneur needs to ask is, can this scheme sustain itself forever, or there is a possibility of the whole system collapsing in the nearest future?

There are too many ways that con-artist can disguise pyramid scheme and present them as legitimate business opportunity. The onus lies on an entrepreneur to study and make research before committing into any investment opportunity. What is the business all about? What is the fund being invested in? What is the rate of returns? Answers must be provided to those questions before you commit yourself!

What about Multi-Level Marketing (MLM)?

Legitimate Multi-Level Marketing is not the same thing as pyramid schemes. Even though they have a form of resemblance, MLM involves being recruited in order to sell a product or service that actually has some inherent value. As a recruit, you can make a profit from the sales of the product or service, so you don’t necessarily have to recruit more salespeople below you before you can recoup your investment and make profit.

If it is impossible to recoup your investment in a Multi-Level Marketing program by just selling the product or service, unless you recruit new intakes, then it is not a legal MLM but a pyramid scheme in disguise. The simple difference between MLM and pyramid scheme is that MLM is about creating wealth by selling a product or service while pyramid schemes is about collecting money from recruits.

Pyramid Scheme MLM

A pyramid scheme MLM usually provide a product for sale. But such product will have no inherent or independent value of its own. Its value will be tied to the scheme and sales will only be possible to new recruits. For example, a report on activities of the scheme being sold to new recruit does not legalize a pyramid scheme. In this kind of pyramid scheme, you would be required to recruit new members into the MLM in order to make a profit from the product and keep the MLM alive. If joining the MLM is the only reason anyone would buy the products being sold, then it is not a legitimate MLM but a pyramid scheme being disguised as a legal MLM.

Chain Letters Pyramid Scheme

Chain letters pyramid scheme are letters sent via snail post or electronically soliciting that people contribute a small amount of money to the people on the list. The amount can be less than $1. The recipient is then asked to delete the first name on the list and then add his or her name before forwarding the letter to more people. The recipients are expected to repeat the process. If you ever do such, note that you are involving yourself in a pyramid scheme because you are asking people to give money with the promise of making money. Knowing too well that there will eventually be a time when some recipient of such letter will not be able to recoup their investment, it is a fraud!

Why You Shouldn’t Participate In Pyramid Schemes

Having seen how a pyramid scheme works, you will agree with me that irrespective of the way it is packaged and how successful it seems to be operating, it is a system built on lies and deception. People are made to believe that they can create wealth, get rich quickly, simply by joining an association that produces nothing! Wealth can only be created when you give out something that has value. The act of promising people money for recruiting others who are being giving the same promise is deceptive and illegal. It is obvious to one with a discerning mind that such promise cannot be kept. Some people along the line must become victims of the system.

As an entrepreneur, you should always ask question before parting with fund. Any business proposal must be researched and thoroughly examined. Not all that glitter is gold. It is not only the originator of a pyramid scheme that is engage in an illegal activity, all those that participate are equally liable and guilty of committing fraud. Are you participating in a pyramid scheme? If you’ve ever lost money in a pyramid scheme, kindly share your story in the comments section. Cheers.

38 Comments Comments For This Post I'd Love to Hear Yours!

  1. Been there done that and I lost 1,500 to it but came out wiser. It was one of those Chain Letters Pyramid Scheme. I’m having a problem classifying this type of business. Here goes: I sell microwaves @ 5,000 naira but for you to get it @ that price, you need to get 3 people to join under you. Once these 3 folks have paid their 5,000 naira you get your microwave. Now these 3 folks have to find 3 people as well b4 they get theirs.
    What kind of scheme is this?
    Udegbunam Chukwudi | Make Money Online´s last blog post ..How To Sell A Blogger Blogspot Blog Without Hassles

    • NaijaEcash says:

      There is no other word for it than “fraud in disguise”. It is purely a pyramid scheme. If the population of the earth is finite, which we know it is. Then we know (even if we refuse to admit it) that somewhere sometime, somebody or a set of people will end up being the victim of this scheme because they will have NOBODY to recruit! That is what makes it a fraud.
      Whatever scheme makes some people benefit from the loss of another is a fraud.

      • Thanks for clarifying this ’cause I really needed someone to confirm my judgement. Now the sad thing, is how to tell a seemingly nice fellow blogger that his business model is 2fraud in disguise” as you put it 🙁
        Udegbunam Chukwudi | Make Money Online´s last blog post ..Red Alert! Akismet Might Be Deleting Your Comments

        • Ewealths says:

          I definitely know you are talking about me and my 15k laptops stuff, but after knowing this, I do have another definition given by the NGO behind the business I promote, which really I am crazy about because it worked for me, the NGO knowing that this kind of mindset might set in, has very strict rule of just one person per laptop, and they tagged theirs PLM, Parallel Level Marketing as against MLM, because everybody is in this for the laptop and basically nothing else.
          I am going to read this info all over again and see what I can make out of my business model, thank you for all you have done for me!

          • NaijaEcash says:

            Why do you think Chukwudi is talking about you? He may well be referring to another friends of his. I think it is better to take a good look at your business model and then explain it in such clear terms that people will not confuse it with a Pyramid Scheme.
            Also, note that I never suggested that MLM = Pyramid Scheme! If that is the impression you got, then you need to re-read the article above. Cheers.

  2. Ewealths says:

    I came to this blog through Chukwudi’s post mentioning your blog in his post, I have also replied his post and what I thought, though I am in transit now and I have not really digested your post very well but when I do, I may request for my reply to be a guest post here because it might actually be long…talk to you soon!
    Ewealths´s last blog post ..Building A Successful Blog- The Income Blogging Guide Blueprint Approach

    • NaijaEcash says:

      That won’t be a problem. Dr Chuks has carved a good name for himself among Naija bloggers. So a friend of his is highly welcome to Nigerian Entrepreneur, anytime, anyday. Cheers.

  3. @NaijaECash: Ewealths already knows that I was referring to him. We’ve sorted that out 😉

    • NaijaEcash says:

      Good to know that you guys are cool. We can disagree on issues without becoming online enemies. I always want to tow the path of peace, however, I don’t give a boot when I identify a scammer. I bring out all my arsenal and fire away. I’ve visited Ewealths blog, I still need to understand how his scheme works, until I do, I can’t classify it.
      By the way, how is the service going? You should be half way through now! 😉

  4. Eeeeew! Me no likey Dr. Chuks. Let’s keep it as Chuks. So much better. lol

    Towing the path of peace was the reason why I didn’t want to confront Ewealths with regards to his business model.

    Service just dey there. Like 7 months to go. I hear say they will increase allowy to 18,000 naira. That would be awesome walahi! 😉
    Udegbunam Chukwudi | Make Money Online´s last blog post ..Top 3 Dofollow WordPress Plug-ins For Dofollow Blogs

  5. BTW in Opera 10.53, your sidebar from Drop Your Business Card down is kinda missing. It’s actually below the comment form. I wonder why. Probably some bug in your theme?
    Udegbunam Chukwudi | Make Money Online´s last blog post ..Too Much Ado About GTB Naira MasterCard

  6. Ewealths says:

    Like I said earlier, I am in transit, what I mean is this I was a corper before last week Thursday but after 2pm that same day I was no longer a corp member, so I am just returning back to my base, which is Lagos.
    The business model I promote is from flipafrica.org, I want to believe you would have heard about them, it is also the same business model that bestchoicenetwork.com is also patterned after, by the way bestchoicenetwork is under the control of TechClick owned by Gbeminiyi of SuccessDigest, I would like you to help me look into this issue and maybe help classify the business model, I would never want to lead people astray and will never want to termed a scammer!
    Ewealths´s last blog post ..Building A Successful Blog- The Income Blogging Guide Blueprint Approach

  7. Bros eh, have you started accepting spam comments like Kim Angelino and Dona Heydel?
    Udegbunam Chukwudi | Make Money Online´s last blog post ..How To Control Self-Hosted Email Via Googles Gmail

    • NaijaEcash says:

      Oh no! I didn’t realize they are spam comments. I actually felt I was been too strict. I’ll check them out right away. I’ve actually been busy offline and less attentive to the blog.

      • Ewealths says:

        NaijaEcash, I have waiting for you to consider my comment and give me your honest review based on earlier comment, thanks!

        • NaijaEcash says:

          I’ve gone through the explanation on your blog and I have visited the sponsor of the laptop scheme flipafrica.org all that I can see is that you and the sponsors are genuine entrepreneurs.
          Also, since the laptop you’re promoting has a value of its own irrespective of the subscription, then one can say that based on those two facts, the scheme is not a pyramid scheme.

          However, there is a disturbing issue that needs to be clarified by you. What happens to new intakes that fail to recruit others. Will they have a refund of their subscriptions?

          Remember no matter how good the scheme is, since the population of the earth is finite, it then means that eventually everyone that needs a laptop would have gotten one sometime in the future, then what will happen to the last batch of intakes that will have nobody to recruit? If those recruits can’t have a refund of their subscription, then the scheme becomes questionable! That is my sincere review of the scheme. Cheers.

          • Like I was thinking, the What happens to new intakes that fail to recruit others? question is the only thing that bugs me about this scheme cos sincerely speaking, I’m tempted to jump on board as I need to replace my laptop soon. It’s already approaching it’s 2 years half life for my electronics 😉
            Udegbunam Chukwudi | Make Money Online´s last blog post ..How To Fix Windows Live Writer Embed Video Error

          • Ewealths says:

            Thanks for replying and probably making this like a one-one consultation, am grateful.
            For the worrying part of your question, I think the NGO knows that this might come up and we marketer or what you can call agents, sometimes advise people that do not want to get involved in the mlm or plm part of the deal to either pay for the downlines they are suppose to get, that means instead of just going about to look for people and you do not want to do that you can just pay for the required downlines, that is you pay their respective N15,000 multiplied by the number of downlines for the type of computer that you want and you would still be in profit of at least N20,000, or you can contact agents like me, would help you source for downlines and pay me for my effort.
            If there something you like to clarify, I am always available to answer to the best of my knowledge, thanks!

  8. NaijaEcash says:

    @Ewealths
    Thanks for your prompt response. Base on the information you provided above, it can safely be assumed that anyone that subscribe to the scheme will eventually benefit whether he or she is able to recruit or not.

    If I get you right, inability of a subscriber to recruit new intakes will only increase his or her personal cost of acquiring the laptop. But even at that, the laptop would still be below normal market price

    If that is the case, then your business model cannot be termed a Pyramid Scheme.

    @Chukwudi
    I guess, your question is answered. 😉 Cheers.

    • From my own understanding, here’s the conclusion

      “Once you pay, you ain’t entitled to a refund. The only way out is through getting downlines or paying up for your downlines.”

      Am I correct?

      The profit of N20,000 depends on where one scouts the market. I being a quality bargain shopper can get an Acer laptop with qualities better than the Acer aspire as5315-2326 (GOLD CATEGORY) for N85,900 from Gafunk Nigeria Ltd.

      • Ewealths says:

        The profit of 2Ok, is just to add to my earlier claim that this not a pyramid scheme and the aim of the NGO, is to reach at least 1 million African by 2015!
        I did not know that Doctors too engage in petty bargaining too!

        • NaijaEcash says:

          Don’t be funny! Doctors too want to buy things at the cheapest price possible. As long as they are sure they are not being penny wise pound foolish. 😉

  9. @Ewealths: @ some point in time, Nigerians will have to get over that notion that doctors are rolling in millions cos it’s a BIG FAT LIE! Doctors dey suffer for this country. The only ones enjoying are those with private hospitals where they charge ridiculous prices for their services.

    I hate buying something for a particular price only to find out down the line that someone bought that same product for far less.

    In London, a pack of biscuits which cost £3 @ a “designer supermarket like Marks and Spencer can be gotten @ 2 for £1 in PoundLand. Same quality same everything.

    Ain’t nothing wrong with saving a little bit of money and not feeling cheated 😉

  10. promovare online says:

    Great post… thank you for sharing…

  11. Mackenzie says:

    multi-level marketing can really give you lots of profits if done right,*,

  12. Mary Thomas says:

    This is why one MUST do their due diligence in researching a company!
    I am glad that the writer made the distinction between scams, chain letters and such from LEGITIMATE network marketing companies!

    I have been in this wonderful industry since 1990 and you CAN provide a wonderful lifestyle for your family and be a blessing to the body of Christ!

    God Bless you All

    Mrs. Mary Thomas
    http://www.2sizesin10minutes.com use promo code 4044196908

  13. kishor says:

    A successful pyramid scheme combines a fake yet seemingly credible business with a simple-to-understand yet sophisticated-sounding money-making formula which is used for profit.

  14. A good rule of thumb is that if it sounds too good to be true, it probably is. Nothing comes easy. Just beware, these scams are out there!

  15. Omo Naija says:

    Are the following MLMs pyramid schemes ?

    Mary Kay,
    Ardyss
    Forever Living Products

    Based on your analysis

    • NaijaEcash says:

      If you read the article well you will notice that those MLM cannot be classified as pyramid schemes because members can always recover there investment by selling the products at a profit. Mary Kay products for example has become a household name in Nigeria. So members don’t need new recruits to re cover their investment in the scheme.

  16. lauren says:

    I do not have much experience in MLM, but somehow I feel that the pyramid scheme gets saturated after a certain time and people who are on top of the pyramid receives the benefit, not those who are at the bottom part of the system.

  17. I’ll never forgot an MLM rep sitting me down and claiming it wasn’t a pyramid scheme, it was a TRIANGLE scheme. Hilarious.

  18. just_curious says:

    Hi:

    To the OP, some things confuse me in the original post and I have reason for personal interest in them that are kind of confidential [I’M not in a pyramid scheme, but there’s someone I know who has run across one . . . ]

    You are based in Nigeria; I get that. You make inconsistent references to the lack of legality versus the Nigerian government just not caring.

    For research purposes: enforcement priorities aside, ARE/IS there a law(s) on the Nigerian lawbooks making a pyramid scheme illegal there?

    Thanks so much.

  19. Miss Sandra says:

    Is this to say that if people who are at the bottom of the pyramid can request for a refund, then it make the pyramid less a fraudulent scheme?

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