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What are the risks of pyramid schemes?

Thanks to social networks, more and more “business opportunities” are promising good results and financial independence.

Illustration of a pyramid and the peso sign.

Beware of businesses that are presented as the way to achieve financial independence. / Photo: LatinAmerican Post

LatinAmerican Post | Ariel Cipolla

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Leer en español: Negocios piramidales en redes ¿Cuáles son sus riesgos?

The emergence of social networks allows communication between people, even if they don't know each other too much. The idea of generating “incredible income” through smartphones is proliferating today, thanks to different systems that promise “guaranteed success” in a short time.

One of these was mentioned by the newspaper El Periódico, which said that a company that acted in Spain, Portugal, and France would have obtained some 12 million illegitimate euros, due to a multilevel system that had scammed those who had trusted and entered its structure.

Therefore, we note that this idea of pyramid schemes not only occurs within organizations but also among people close to us. Everyone knows someone that has promised them a "spectacular business", with a proposal that sounds too good to be real.

The camouflages are several: claiming that they are investments for companies that operate internationally, or that they are based on digital marketing systems. Therefore, let's understand a little how pyramid schemes work, to analyze whether there is the possibility of generating profits or if they are a real scam.

What do we know about pyramid schemes?

According to what La Nación mentions, it all started with Carlo Ponzi, an Italian businessman who invented this system in 1919. Basically, he was a scammer who promised to generate huge profits for his investors, with a 50% interest rate within 90 days, something that never happened.

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

Una publicación compartida por Howie Reggae (@howiereggae) el

 

Today, we know that this method has evolved in different ways. We could define it as a business scheme in which the participants trust a certain investment, with the intention of being able to recommend and attract as many clients as possible, with the aim that the new members generate profits and benefits for those who have invited them.

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That is to say, the “true profit” is not generated so much by selling a certain product, but in the possibility of generating passive income at the expense of other people. If we recruited 1000 people, each of them would provide us with a percentage of the sales they achieve.

Likewise, we could also make money through the recruits of our recruits, so the system promises “the possibility of having infinite profits”, even without moving from our house. A truly attractive proposal, especially when the Internet allows us to generate mass communications for different audiences.

What is the problem with pyramid schemes?

At first glance, everything seems to be a dream opportunity: if we invest our time - and money - we can have an entire community that generates profits for us. However, there are some traps that nobody mentions when entering a pyramid scheme.

First, the system can be easily corrupted, something that will happen in case no more people enter the pyramid. You can notice this fear in people who are already involved in the matter, as they have a tendency to be too insistent with your inclusion in the structure.

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

Una publicación compartida por AMVD (@amvdmexico) el

 

The people who will try to recruit you will be losing money if they do not get more people to work for them. Why? Well, the head of the pyramid will always be the organization itself, which will need investment from each and every one of its members to make more and more money.

Therefore, if you invest a certain amount, your opportunity to recover it will be through your recruits and not from the profits you make from the sale of the product you purchased. That is, the sale of the product you buy from the company is only an excuse, because your profit will be minimal. What really counts is passive gain through others.

In case you cannot pay for the investment you made on a regular basis, you will be at a loss. Therefore, to avoid that situation, you will have to attract people to that structure, which will be in the same situation: forcing others to enter to avoid continuing on this deficit wheel.

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How to avoid falling into this trap?

There are some ways to avoid pyramid systems. First of all, you should distrust those business plans that promise high profits in a short time, especially if a private person speaks to you and not the member of a company. Generally, in the conversation, they will highlight some of your business savvy (which they don't know) and try to explain everything "in person".

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

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The idea of speaking "face to face" implies a commitment on your part. This also reveals that these people, who will try to get you into the system, also feel imprisoned. Because to recover all of their money, they will have to trick as many people as possible, the system becomes impossible to beat, so they are both scammers and scammed.

Similarly, if you ask them specifically what the business is, they will tend to give you a vague answer, which is always explained: "better in person." They will always try to avoid mentioning the business for what it is. They will not admit that it is a pyramid scheme but will give it another name, such as “multilevel marketing strategy”, “network marketing structure”, etc.

By their own composition, all these schemes are destined to perish. The problem is that, unless you are in the lowest part of it, at some point you will realize that you are trapped. You only have two options left: withdraw with a loss or scam others so they don't scam you. Beware of these proposals!

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