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 illegal in many countries, including the United States, the United Kingdom, France, Germany, Canada, Romania, Colombia, Malaysia, Norway, Bulgaria, Australia, New Zealand, Japan, Nepal, Philippines, South Africa, Sri Lanka, Thailand, Iran, and the People’s Republic of China.
Pyramid schemes exploit greed and gullibility. A successful pyramid scheme combines a fake yet seemingly credible business with a simple-to-understand yet sophisticated-sounding money-making formula. The essential idea is that the mark, Mr. X, makes only one payment. To start earning, Mr. X has to recruit others like him who will also make one payment each. Mr. X gets paid out of receipts from those new recruits. They then go on to recruit others. As each new recruit makes a payment, Mr. X gets a cut. He is thus promised exponential benefits as the business expands. In this regard, pyramid schemes bear a strong resemblemce to Ponzi schemes, named after Charles Ponzi.
Such schemes may try to downplay their pyramid nature by referring to themselves as “gifting circles” with money being “gifted”. Popular scams such as the “Women Empowering Women” do exactly this. Joiners may even be told that “gifting” is a way to skirt around tax laws.
Whichever euphemism is used, there are 15 total people in four tiers (1 + 2 + 4 + 
in the scheme – the person at the top of this tree is the “captain”, the two below are “co-pilots”, the four below are “crew” and the bottom eight joiners are the “passengers”.
The eight passengers must each pay (or “gift”) a sum (e.g. $1000) to join the scheme. This sum (e.g. $8000) goes to the captain who leaves, with everyone remaining moving up one tier. There are now two new captains so the group splits in two with each group requiring eight new passengers. A person who joins the scheme as a passenger will not see a return until they exit the scheme as a captain. This requires that 14 others have been persuaded to join underneath them.
Therefore, the bottom 3 tiers of the pyramid always lose their money when the scheme finally collapses. Consider a pyramid consisting of tiers with 1, 2, 4, 8, 16, 32 and 64 members. The highlighted section corresponds to the previous diagram.
If the scheme collapses at this point, only those in the 1, 2, 4 and 8 got out with a return. The remainder in the 16, 32, and 64 tier lose everything. 112 out of the total 127 members or 88% lost all of their money.
During a wave of pyramid activity, a surge frequently develops once a significant fraction of people know someone personally who exited with a $8000 payout for example. This spurs others to seek to get in on one of the many pyramids before the wave collapses.
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Tags: Internet Pyramid, MLM, Multi Level Marketing, Pyramid Money, Pyramid Scheme