In most countries, pyramid schemes are illegal, and for good reason. The practices of companies that operate a pyramid scheme are deceptive to consumers and their participants. According to Yahoo Finance, a pyramid scheme is “a form of fraud that involves promising participants payments or services, primarily for enrolling other people into the scheme, rather than supplying any legitimate investment or sale of products or services to the public.” So, in essence, this illegal business model is unsustainable and quickly crumbles. Unfortunately, many people easily fall for the get-rich-quick schemes. Often, they invest their life savings to get started selling with companies that are pyramid schemes. In the end, they are usually left with nothing instead of getting rich. Here are the strategies behind pyramid schemes and why they are so alluring.
Fast Money
Pyramid schemes usually promise money fast and with minimal effort. Masterminds behind pyramid schemes sell a dream, often to vulnerable individuals who need the money. Not only are you tasked with selling a product, but you usually have to invest money upfront to purchase your own inventory. This sum of money is usually a sizable amount, and you’re required to purchase a good amount of inventory upfront. This is the money that fuels the company for a period of time.
Build an Empire
Not only are you responsible for sales, but you have to recruit others to join the company. The more people you recruit, the more you earn, based on their earnings. In a pyramid scheme, the top producers are making the largest sum of money while the bottom of the pyramid struggles to make a profit. Even though not everyone is making money, pyramid schemes are good at showing off the elaborate lifestyles of the top producers, including their bonuses. It’s easy to fall for this and want to be a part of the community that has found success.
While leaders of the company are successful for a period of time, the pyramid scheme dream is often short-lived. In reality, it’s impossible to keep selling that much inventory, and the company keeps filtering through new recruits. This kind of churn-and-burn mentality is unsustainable.
Pyramid Scheme in Action
Have you seen the documentary LuLaRich? It details the famous pyramid scheme of LuLaRoe, a fashion leggings company. A consumer protection lawsuit was filed in Washington State, and the company had to pay $4.75 million to settle the case. Many of LuLaRoe’s independent retailers were sold on the idea of building their own successful business, but in the end were left with thousands of dollars of unsold inventory, which was often damaged. Many of these sellers had to take a loss on this product and were left with significant debt. Some were left in financial ruin from getting caught up in the scheme.
Have you ever fallen for a pyramid scheme? Let us know your experience in the comments.
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Teri Monroe started her career in communications working for local government and nonprofits. Today, she is a freelance finance and lifestyle writer and small business owner. In her spare time, she loves golfing with her husband, taking her dog Milo on long walks, and playing pickleball with friends.
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