What is a Pyramid Scheme?

The unsustainable geometric progression of a classic pyramid scheme, from Securities and Exchange commission report on pyramid schemes.

In reviewing my last couple posts, (What does it take to be a Successful Direct Seller?, Ethics and Direct Selling) you may be thinking that they have a lot more to do with direct sales, instead of the social media part of this blog. But that’s not entirely true. You see, with social media, the word about our industry gets around. People with opinions can put them forth as fact, and others believe them. Thus, it becomes even more important that we get the facts right about our industry, so the internet is filled with the truth.

And that brings me to the topic of today’s post, which is Pyramid Schemes.

Last week I mentioned that it’s illegal to pay people for the act of recruiting. And I got some questions about that. Not because any of you are being paid for recruiting. But because we may not understand what we are actually getting paid for.

So let me explain.

Here’s what Wikipedia has to say about Pyramid Schemes:

pyramid scheme is a non-sustainable business model that involves promising participants payment, services or ideals, primarily for enrolling other people into the scheme or training them to take part, rather than supplying any real investment or sale of products or services to the public. Pyramid schemes are a form of fraud.

So a pyramid scheme is when you get a payment for recruiting someone. It’s based on something YOU do, and not something the person you recruit does.

You will sometimes hear people confuse pyramid schemes and legitimate direct selling businesses, because in direct sales you do enroll people. However the important difference is that, in legitimate direct sales and network marketing, you are compensated for the sale of PRODUCT. You do not get paid for the act of recruiting. You only get paid when somebody sells something.

When I tell people I’m involved in direct sales and they say, “Isn’t that a pyramid scheme?” my standard answer is, “No, pyramid schemes are illegal.”

Every direct selling company that complies with the DSA Code of Ethics agrees to compensate its sales force ONLY when product sales happen. This is part of how we ensure that our business model complies with the law, and protects the rights of consumers.

So the next time someone asks you if your business is a pyramid scheme, you can say no, and tell them why.

How do you respond when someone asks if your business is a pyramid scheme? Would love to read your thoughts in the comments below.

21 Responses to What is a Pyramid Scheme?
  1. Gloria Faltstrom
    May 2, 2015 | 4:32 am

    I ask, “Are you looking for a pyramid?” Depending on their answer, I can explain what a pyramid is and how network marketing is different from a pyramid.

  2. Lisa Fehr
    March 20, 2013 | 5:05 pm

    Jennifer, once again, excellent content. THANK YOU for continuing to do what you do! The money I invested on your course several years ago is the best money I have ever spent on my training. Worth every penny and then some!

  3. Tex
    April 7, 2011 | 11:46 pm

    You missed 2 important points:

    1. The Amway Tool Scam, and other companies who operate similar

    2. The “$10,000” pencil theory. In other words, if the product is over priced, you are merely trying to play the thought process. What if the pencil were “only” $100? How about $10? Even $1? See what I mean? Many companies try to claim “high quality” but you can only ride that horse so far before it breaks down.

    Tex recently posted..The Case Against the Amway Tool Scam!

  4. Yvonne Desiree O'Neill
    April 6, 2011 | 12:07 pm

    This was very informative and right on time for me. I was invited to join FHTM and it sounded to good to be true. I appreciate these guidelines.

  5. Marjorie Serralles-Russell
    April 6, 2011 | 8:39 am

    I too begin with the standard answer that pyramids are illegal. I do acknowledge, however, that there were many pyramid schemes particularly in the 70’s that gave the industry a bad name….The DSA has done a great job in serving as an industry “watch dog” and creating standards that legitimate companies follow….

  6. Donna
    April 5, 2011 | 11:06 am

    Have you heard of this company. I have a friend of mine who keeps trying to get me to sign up for it. “MPB stands for My Premier Business a marketing arm for South Eastern Delivery Company.” To me it sounds like what you are talking about.

  7. Pat Zahn
    April 5, 2011 | 10:56 am

    I usually say the same thing, “Pyramid schemes are illegal” then I say that in a true pyramid, if I recruited someone, that person wouldn’t be able to make more money than me or achieve a higher level in the career plan, but that is not the case – you can surpass me.
    Pat Zahn recently posted..Direct Sales and The Tribe

  8. Robin R. Price
    April 5, 2011 | 10:36 am

    I tell them that Pyramids Schemes are illegal too and that my company, Team National, is structured like every other legitimate business in America and I sketch a business model like the US government or their place of work to show how it is structured, being sure to place them somewhere in one of the lower levels of the diagram. Then I say, “see, it LOOKS like a pyramid, right? Then I ask the question, “What are the chances of you, in 3-5 years, moving from where you are now, to the top of this diagram? Oh course the answer is “probably never”. Then I show them, how they can start, like every other CEO started, at the top of their own organization and with hard work, BUILD a structured business like hundreds of thousands of other successful business owners.

    • Alice Andreat
      February 16, 2014 | 12:28 pm

      Great answer Robin! I might have to use that one!

  9. Helen Tanner Askins
    April 5, 2011 | 9:14 am

    Fantastic knowledge and insight! My response to the pyramid scheme question has been the same as yours, that it is illegal. However, I am printing this article out for myself and my team to have on hand so that they can better explain to those who ask this question about our business. Afterall, documentation beats conversation! Thanks for your valuable content, Jennifer!

  10. Erin
    April 4, 2011 | 4:04 pm

    Thanks for the post today. I was looking for a business tip to write about for my company’s newsletter and decided to write on this idea. I’m glad you wrote a post about it because it is true that a lot of people don’t understand how pyramid schemes work. I didn’t, actually. So thanks for the education!

  11. Jay
    April 4, 2011 | 3:48 pm

    All financial situations are in a pyramid structure in that the money of many is required to make it succeed. The world pyramid is faltering because the economy is in recession across the world. This is caused more by fear than lack of money. The circulation of money eliminates recession. This is a way to make more money circulate and help people have money to spend.

    In our particular business the one at the top can make far less than one deep in the business working hard. I make more than several of those above me because I keep working. That doesn’t happen in a true pyramid. In my business we get paid for advertising instead of TV and printed media.

  12. Marjorie Nesbitt
    April 4, 2011 | 2:40 pm

    Another great article, Jennifer. One of the things that sets a great direct sales/network marketting company apart is the balance they have between using and selling the product, and the expansion of their business through recruiting and teaching the new people to use and sell the product. You have to have both oars in the water and the balance makes the business sustainable and rewarding. And it’s a business model that’s available to everyone.

  13. Trish Ackemrann
    April 4, 2011 | 2:40 pm

    Jennifer your insight, wisdom and factual information is worth sharing far and wide! I look forward to passing your website on to others in my field!
    Thank you!
    Trish Ackemrann recently posted..What is a Pyramid Scheme

  14. Nancy Laichas
    April 4, 2011 | 1:31 pm

    Great post, Jen. Here’s another resource that illustrates the difference between a legitimate direct selling company and a pyramid scheme. http://www.bbb.org/us/article/is-it-a-legitimate-opportunity-or-a-pyramid-scheme-22462

    • Jennifer Fong
      April 4, 2011 | 1:53 pm

      Another great article! Love all that the Direct Selling Education Foundation (DSEF) does for our industry. Thanks Nancy!

  15. Carl Webb
    April 4, 2011 | 1:23 pm

    Thanks for the insight! I knew that what you are saying is true, but just had never been able to put it in words as well as you have here!
    I think it’s important for others to realize that there is a different way of business available now that is taking our economy by storm, but with the same problems of getting past ‘mind sets’ that franchising struggled through in the early 1970’s….I think it was around 1973 that franchising passed thru Congress by only 7 or so votes? Were would we be today without McDonalds, Burger King, and others.
    I look forward to being a part of the billion(s) dollar industry of direct selling!
    BTW…really enjoyed your workshop this past weekend!

    • Jennifer Fong
      April 4, 2011 | 1:54 pm

      Thanks Carl! You’re right, direct selling can certainly make a difference in a lot of lives. It’s just a matter of getting the facts out, and avoiding the hype. Thanks for attending the workshop this past week!

      • Carl Webb
        April 5, 2011 | 9:02 am

        Jen the pleasure was all mine in attending your workshop…I’m a dedicated follower!

  16. Alicia
    April 4, 2011 | 1:16 pm

    What do I say? I usually say, “A corporation is a pyramid, the person on top makes the most money, and the people underneath do all the work and get paid less.”

    However, I think that by the definition, I will probably borrow your answer!!!

    Thank You! Now I understand how to answer that question a little bit better!!!

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