What is a Pyramid Scheme?
A pyramid scheme is a non-sustainable business model that generates profit by recruiting more and more participants, rather than by providing valuable goods, services, or investments. The schemes are often disguised as sales or investment opportunities, and can grow rapidly before collapsing when there is a shortage of new recruits.
Types of Pyramid Schemes
Pyramid schemes typically fall into two categories, naked and product-based. In both types, participants profit primarily by recruiting new members rather than by selling a product, service, or investment. However, they differ slightly in their approach, as explained below.
Naked Pyramid Schemes
Participants charge recruits a fee to participate in an “investment opportunity” claimed to return a large lump sum once the recruit finds enough new members. In this scheme, there is no product or service being sold, only the opportunity to profit by recruiting new participants.
Product-Based Pyramid Schemes
The product-based scheme differs from the naked scheme because, as its name hints, the scheme typically uses the sale of a product or service to mask its true nature. In product-based schemes, new participants typically purchase a starter-kit or pay an initiation fee in order to become a distributor for the product or service. However, participants do not profit by selling the product, which is typically difficult to sell and yields narrow profit margins. Instead, participants profit by recruiting new participants who also pay to join the scheme.
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