I recall seeing an wall ad on campus several years ago about a 2-hour financial independence seminar. Thinking it was related to investing and personal finance, I excitedly attended. In the conference hall, there were about 50 others already there. I noticed people from all walks of life there. I saw young guys suited up with slick hair and elderly couples who were dressed modestly. I saw pairs of friends and individuals. I guess there were all interested in financial independence, like I was!
The spokesperson got on the stage and asked everyone a question, “Do you want financial freedom?” Everyone there echoed loudly back, “YES!” Afterwards, he spent the rest of the time hyping the crowd with one liners on wealth, freedom, providing for family, fancy yachts, etc. Somewhere in the middle of all that spiel, he slipped the actual product he was selling…it was a regular phone with a video screen attached to it. As soon as I saw that, I laughed and left the conference.
What is a pyramid scheme?
So what exactly is a pyramid scheme? Well according to Investopedia, it is any scheme based on a “hierarchical setup”. It goes with something like this, someone comes to you with a job offer or a service or product. You have to pay for the initiation fee to join, and then you are allowed to sell that product or recruit others. You then recruit your friends and family and get them to pay you the initiation fee, and so forth.
How do I identify a pyramid scheme?
This is the more important question you should be asking. “Pyramid schemes” and legitimate businesses are actually very blurred in concept and are in fact very similar in properties. There is no single factor that identifies a “pyramid scheme”. In fact, “Pyramid schemes” is an economically brilliant idea and plays on our greed, laziness, abuse of trust, and ignorance to take our hard earned money.
To demonstrate, I will pretend I am the guy convincing you that I am NOT selling you a pyramid scheme. You, on the other hand, are the skeptical person.
You say, “Pyramid schemes are overpriced!”
While it is true that many pyramid scheme’s sell overpriced products, such as a set of knives for $200, that factor alone doesn’t make it a pyramid scheme at all. Many household products are considered “overpriced” yet have sold millions. Hint: white logo of a bitten fruit.
You continue with, “Pyramid schemes rely on advertising to friends and family!”
That is also true. However, many successful products and movies rely on word of mouth. “Hey, that film was great! You should go see it!” That is no different than, “Hey, this really expensive knife set / video phone set is awesome! You should buy it!”
You go on with, “Pyramid schemes focus solely on financial freedom or being a self Boss!”
Yes, I completely agree as well! However that factor alone doesn’t solely identify a pyramid scheme. Many investment seminars from legitimate retail banks spend a majority of their seminar discussing financial freedom and protecting your wealth.
You say, “But Pyramid Schemes require a huge initiation fee!”
True! However, many products and services ALSO require a hefty initiation fee. In fact, my internet service provider charged me $150 for a 10 minute job setting up the router! Borderline robbery? Absolutely. Pyramid Scheme? Definitely not!
You finally plead, “Savvy Buck! But the underlying service or product is garbage!”
Agreed! However, I could point out many products at high margins and near 0 intrinsic value. For example a $120 “luxury” APC T-shirt sold by Kanye West was sold out shortly after release. The “intrinsic value” of that shirt was probably $1 and $119 of it was marketing and hype. Alas, I’ve yet to see a single comment calling it a Pyramid Scheme or MLM Scheme.
As you can see, there is no single factor that ousts it. It is a combination of all of the above working hand in hand which creates pyramid scheme.
A guy comes up to you discussing financial freedom, spends the majority of time talking about wealth, casually slips the garbage product he is selling at an grossly marked up price, tells you the initiation fee and how you can also become rich. Then you know it is a pyramid scheme.