Recognising a Pyramid Scheme
The following is special feature from the Consumer Council of Fiji in a bid to educate and create awareness for consumers when buying goods and services.
Many Fijian consumers may be unfamiliar with pyramid schemes, how they work, how to recognise them and why they should be extremely wary of being recruited to join one. While these schemes may be relatively new to Fiji, they are already a popular means used internationally to fleece money from unsuspecting consumers.
Pyramid schemes are difficult to recognise at first because of their complexity, they often masquerade as legitimate businesses however the general structure and manner in which they share profits are a clear indication of their true nature.
As more and more consumers look to invest their money in profitable businesses, it is important that they are fully aware of unscrupulous business practices and recognise the signs of dishonest business practices.
What is a pyramid scheme?
A pyramid scheme is a business model that makes money by recruiting new members to join the scheme. These new members must pay a large fee to join the scheme and in return they are given products to sell.
These products may range from beauty goods, alternative medicines and even technology.
However, the catch is that these products will often have no real value, nor is there a demand in the marketplace for them and therefore moving the inventory is quite difficult.
The real opportunities to make money comes from recruiting other new members.
In the pyramid scheme, a few top-level members recruit newer members, who pay upfront costs to those who enrolled them. This is the major revenue earner. As newer members in turn recruit underlings of their own, a portion of the subsequent fees they receive is also kicked up the chain.
Examples of pyramid schemes
The following is an example of how the scheme works.
James person sits at the top of the scheme. He recruits 10 members and these members must pay him membership fees.
These ten members then recruit 10 more people each - gaining a further 100 people. These 100 new members must also pay hefty membership fees.
A portion of these membership fees is paid as commission to the 10 recruiters and then kicked further up the pyramid.
These 100 new members are then tasked with recruiting a further 10 members each, making a commission from each new member recruited.
This is then repeated at all levels of recruitment where a percentage of membership fees is shared through the pyramid.
In this scheme, those at the top of the pyramid will get the majority of payments. Even though all members will be given products to sell in order to make money, these products are often of low quality and people must recruit new members to actually make money.
Why are pyramid schemes bad?
The reason that pyramid schemes are not a wise investment is because the business model is unsustainable. Theoretically consumers will be able to make more money as they receive cash from the recruits below them.
But in practice the prospective member pools tend to dry up over time.
And by the time a pyramid scheme invariably shuts down, the top level operatives walk away with loads of cash, while the majority of lower - level members leave empty - handed.
It should be noted that because pyramid schemes heavily rely on fees from new recruits, the vast majority do not involve the sale of actual products or services with any intrinsic value.
Council Advice Checklist for Recognising a Pyramid Scheme
Consumers can use the below information to identify whether they are being recruited into a pyramid scheme.
■ Are you required to “invest” a large amount of money up front to become a distributor? This investment request may be disguised as an inventory charge. Legitimate businesses do not require large start-up costs.
■ If you do have to pay for inventory, will the company buy back unsold inventory? Legitimate companies will offer and stick to inventory buy - backs for at least 80 per cent of what you paid.
■ Is there any mention of or attention paid to a market for the product or service? If the company doesn’t seem to have any interest in consumer demand for its products, don’t sign up.
■ Is there more emphasis on recruitment than on selling the product or service? The pyramid scheme focuses on fast profits from signing people up and getting their money.
If recruitment seems to be the focus of the plan, run.
■ Is the plan designed so that you make more money by recruiting new members rather than through sales that you make yourself ? This is the signature of a pyramid scheme operation.
■ Are you offered commissions for recruiting new members? Another pyramid scheme trademark.
It’s the number of people who are willing to sign up that matters in a pyramid scheme, not the products or services being offered.
The Council also further advises consumers to exercise their responsibility to be critically aware and research any business before choosing to invest. Consumers who need further advice in this regard can contact the Consumer Council of Fiji on tollfree number 155 for further assistance.