While pyramid schemes have been around for some time and suffered from plenty of negative press, the age of social media has revitalized them for a new generation.
If you aren’t aware of Facebook pyramid schemes, you might end up falling for a scam that costs you both time and money.
So, in this article, we look at what pyramid schemes are, how they work, why they’re so prevalent on Facebook, and how to stay spot them in order to stay safe.
What Is a Pyramid Scheme?
A pyramid scheme is a business setup that relies on participants recruiting more members into the scheme. The organizers claim that each participant will make additional money as they bring more people into the business.
They’re called “pyramids” because as they develop, an exponentially increasing number of participants are required to keep the scheme alive. As you can see in the illustration below (which assumes each member has to recruit six new people), this forms a pyramid shape with larger amounts of people towards the bottom.
It’s easy to see how this becomes unsustainable. At level 11, the number of participants is larger than the US population. And once you reach level 13, you need more people than exist in the world! Thus, all pyramid schemes eventually collapse.
The people at the top typically make the most money from these schemes, while those at the bottom pay in but never receive much back.
How Do Pyramid Schemes Work?
A “naked pyramid scheme” refers to a setup where no products are sold. In this format, the director might ask 10 people for $100 each to participate in a “business opportunity.” He then tells the initial 10 people to each recruit 10 more people and get $100 from them, and it goes from there.
A more common form today, especially with Facebook pyramid schemes, involves products. In this setup, the director recruits 10 people, who each pay him $300 for a starter kit of products like energy drinks, cosmetics, or similar. The director gets a cut of the profits for any products the people under him sell, which continues down the line.
However, the focus is usually on bringing other people in by recruiting them to buy starter kits. Participants are encouraged to do this so they can make money from everyone below them.
Pyramid Schemes vs. Ponzi Schemes
People often use the terms “pyramid scheme” and “Ponzi scheme” interchangeably. While similar, they are different types of scams.
As we’ve seen, pyramid schemes are built around members recruiting others and eventually fail because the world runs out of people. A Ponzi scheme, however, involves a central schemer using a series of phony “investments” where he uses people’s money to pay off earlier participants.
In a simple example of this scam, the organizer takes money from Alice on the basis that he has an investment opportunity for her. However, he next goes to Bob and tells him about the same “opportunity.” When Bob pays in, the organizer takes a cut for himself, then uses some of Bob’s money to pay Alice “dividends”.
This continues to grow until the organizer runs away with the money or the participants want their full “investment” back. The key difference is that Ponzi schemes are built around a central schemer, while pyramid schemes involve members bringing in new participants on their own.
What About Multi-Level Marketing?
In any discussion of pyramid schemes, you’re likely to see mention of multi-level marketing, or MLM. This is a business strategy where the main company makes money through individuals that sell its products, while participants make money both from selling products and taking a cut of earnings from those beneath them.
There are endless debates about whether or not MLM is just another type of pyramid scheme. The main difference is that a “legitimate” MLM setup allows you to make money through selling products, not just recruiting people under you.
Many MLM schemes skirt this line. They might not require you to recruit new people, but offer bonuses, such as waived fees, if you bring in new people. And sometimes, if you fail to grow your “downline” (the salespeople beneath you), the MLM company urges you to take part in expensive training seminars.
MLMs vs. Pyramid Schemes
While many people defend MLM as a legitimate alternative to pyramid schemes, there’s no denying that the two have some deep similarities. MLM business operate across the US, and are not illegal.
However, we recommend reading the FTC’s guide to MLM businesses and pyramid schemes for some important considerations. For instance, you need to consider your sales plan and risks, as well as research the product, if you decide to enter a MLM business.
Particularly concerning is an FTC report which found that 99 percent of people who join MLM schemes lose money. That statistic alone should give you pause for thought.
Modern-Day Pyramid Schemes on Facebook
The core of pyramid schemes really hasn’t changed much in the decades since their inception. What has changed are the methods that people use to recruit others.
Before the internet, you had to go out and talk to people in person to sign them up under you in a pyramid scheme. Now, you can share a post on Facebook and reach thousands of potential “business partners” or “clients” with a few clicks.
The problem is that we often let our guard down with people we consider friends. We’re much more likely to trust and even meet up with someone we know, even if we haven’t talked to them in some time. Someone who’s desperate to bring new people into a pyramid scheme will likely take advantage of any familiarity they have with you.
As you know, a lot of social media is selling an image to the world, even if it’s not accurate to your actual life. Those deep into MLM businesses often try to project an image of their perfect business that makes them a ton of money with little work, with barely any focus on the actual product.
In reality, using your friends in this way could end up burning a lot of bridges. Even if the MLM someone asks you to join is legitimate, you probably won’t want anything to do with a “friend” who only reaches out because they want to make money from you.
Facebook Pyramid Schemes: The Warning Signs
Let’s look at some common signs of pyramid schemes and dubious MLM offers. Like the other ways people use Facebook to scam you, being able to spot Facebook pyramid schemes will help you protect yourself.
First, you should be wary of old friends whom you haven’t talked with in years suddenly reaching out. If they dive into a discussion about a business they work in after a bit of small talk, they’re almost certainly looking to get you involved in a scheme.
If you receive an invite to an event that’s vaguely worded, and mentions business opportunities without any specifics, it’s probably a pyramid scheme. Also remember that people don’t typically invite acquaintances into their home or out for lunch, so you should press a bit to make sure you don’t commit your afternoon to a seedy sales pitch.
In case you end up discussing the offer, be wary of these telltale signs that you should stay away:
- The other person drums up how great the opportunity is, but doesn’t discuss details clearly.
- There’s an emphasis on recruiting new people instead of the actual product.
- Pressure, where the host suggests that you should only pass this up if you don’t want easy money and cool perks.
- Promises of extravagant prizes if you meet certain goals.
- Confusing compensation setups.
- Reassurance that other members have done their research and that this is all legitimate.
If you’re really not sure, don’t sign up straight away. Take a step back to do more research; you’ll likely find valuable information online.
Google the name of the company with “scam” or “complaint” and see what others have said. If you know the names of the company founders, look them up and see if they’ve ever been involved in legal trouble. This should help you weed out shady companies.
Stay Safe From Pyramid Schemes on Facebook
Pyramid schemes are illegal in many countries because they’re a scam where most of the participants lose money. Meanwhile, MLM businesses can operate in legitimate ways, but don’t end up profitable for the vast majority of people who join them.
We recommend staying away from both; knowing the signs that one of your Facebook friends is looking to recruit you will greatly help you with this.
If you really want to earn some extra money on the side, there are some legitimate survey websites where you can earn some extra money.
Read the full article: How to Spot Facebook Pyramid Schemes and Avoid Being Scammed