One of the simplest descriptions of a pyramid scam comes from Jerry ‘Rhino’ Clark.

“In a pyramid scheme, value flows just one way – up!”


Picture a classic illegal pyramid with you at the top.

You recruit Lucy and Ricky and get them to give you $500.  In return, you give them nothing of value – no service and nothing in a bag, bottle, or box.

Money has flowed ‘up’ to you, and nothing of value has flowed ‘down’ to them.

All you give Lucy and Ricky is ‘permission’ to find other people who will give them $500 in return for no service and nothing in a bag, bottle, or box.

So far, you have PLUS $1000, and Lucy and Ricky each have MINUS $500.

You are happy, but Lucy and Ricky think they might have been fished in.

Now Lucy and Ricky go out and find Ralph and Alice and Ed and Trixie who are willing to part with $500 in exchange for no service and nothing in a bag, bottle or box the same way they did.

Now you have PLUS $1000, and Lucy and Ricky each have PLUS $500.
Ralph and Alice and Ed and Trixie each have MINUS $500.

You and Lucy and Ricky are now happy, but Ralph and Alice and Ed and Trixie are not happy yet.  We can go on, but you can see that there will always be more unhappy than happy people in this scheme.  There will always be people ‘out of pocket’ when the police arrive.

$500 is always moving up the line, but nothing of value is coming back down.  This is ILLEGAL.

Now consider a legitimate MLM business.  Each person sends $500 to the company and in return, each receives a big box of vitamins, some bottles of juice, or some legitimate service worth $500.

Money has flowed UP, and goods or services of equal value have flowed DOWN back to the consumer.  Just like going to a store, right?

Commissions are paid to the upline out of the $500.  Just like commissions paid to salespeople and managers and owners in a store, right?

Now here is where it first gets confusing.  Don’t worry – it gets worse later!

Many companies have a legitimate product or service, but charge too much for it.  Often it is available elsewhere more cheaply or free!

We spoke to a woman recently who paid $1700 for a training package worth, in her estimation, about $200.  She paid the money to her sponsor (red flag) overseas (red flag) by wire transfer (red flag).  The sponsor kept $1000 (red flag) and sent $700 to the company (red flag).

Let’s forget for a moment that she had to give up her first two sales (Aussie two up red flag), and concentrate on the money flow.

$1700 has flowed UP, and $200 in dubious value has flowed DOWN.  There is a missing $1500 in value!

How does a distributor make up that missing $1500?  You’ve got it!  By recruiting others!

In a scheme like this, you have to constantly be recruiting others, and selling them a package which you KNOW is not worth the price.  Tough on the conscience, we think, and not something you would suggest to your church as a fundraiser.

Now if that’s not confusing enough (we promised you it would get worse!), consider the companies that have BOTH aspects in place – a legitimate goods and services side, and an illegal, immoral pyramid side!

Many companies (e.g. communications, energy, and travel) will sell you a $500 briefcase to get started and tell you it’s a small price to pay for a million dollar opportunity.  Then they will pay your sponsor and upline good bonuses out of your pocket and call it residual income.  Usually the pyramid side of the business covers up the poor commissions paid on the legitimate side.  Just talk to any ex-Excel rep!

To decide whether any company (or any part of a company) is legitimate, just check to see if the money flowing up matches the value of the goods or services flowing down.  If more flows up than down, it’s an illegal pyramid!

Thanks again to Jerry ‘Rhino’ Clark for a great test!

P.S.  To learn more about how to avoid scams, get a free copy of Success in Ten Steps by Michael Dlouhy.

Bob and Anna Bassett
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