What is a Pyramid Scheme?

Pyramid schemes now come in so many forms that they may be difficult to recognize immediately. However, they all share one characteristic. They promise large profits based primarily on recruiting others to join their program, not based on profits from any real investment or real sale of goods to the public.

There are two tell-tale signs that a product is simply being used to disguise a pyramid scheme: inventory loading and a lack of retail sales. Inventory loading occurs when a company's incentive program forces recruits to buy more products than they could ever sell. If this occurs, the people at the top of the pyramid reap substantial profits, even though little or no product moves to market. The people at the bottom make excessive payments for inventory that simply accumulates in their basements. A lack of retail sales is also a red flag that a pyramid exists.

Some people confuse pyramid schemes with legitimate network marketing and multilevel marketing. Multilevel marketing and network marketing programs are known as MLM's, and unlike pyramid schemes, they have a real product to sell. More importantly, they actually sell their product to members of the general public, without requiring these consumers to pay anything extra. Network marketing and multilevel marketing (MLM) companies may pay commissions to a long string of distributors, but these commissions are paid for real retail sales, not for new recruits.