The desire of every person is to thrive in life. Thus, to achieve this, it requires investment. You can invest in a business or other saving schemes. With this understanding, legit and illegal investment schemes have come up. These investment opportunities apply lucrative strategies and business models that can easily attract a wide range of investors. Some of the model they use pyramid schemes.
Certainly, you have come across it online or offline. Some may also be victims of a pyramid scheme. The scheme is illegal in many countries. But how does the pyramid scheme business model work? Does it have some benefits? This article will offer answers to these questions. So keep reading to get to know more about this business model.
What is the Pyramid Scheme Business Model?
A pyramid scheme is a business model where investors generate revenue by recruiting other investors. These businesses do not sell actual products or services. The model involves encouraging people to join by paying an initial investment then ask them to recruit new members to enable them to receive some money.
Money received from the new recruits goes on to pay the earlier members sharing a percentage according to their pyramid position. While this sounds like a simple concept, the founders of these schemes come up with a convincing approach to net investors. For this reason, it is crucial to understand how the idea works.
How Does Pyramid Scheme Business Model Work?
As the term suggests, this model takes a pyramid form. The structure starts with the founder, who takes up the top part of the pyramid. This founder recruits other members below him/her who pay an initial investment to the recruiter. Each of the new recruits then brings other investors on board who also pay the upfront investment.
When one manages to bring 10 people on board, they get their initial investment back plus some additional profits. Also, one earns a commission from every person his recruits bring onboard. Since the profit is huge, many people become active by recruiting others to the scheme. The trend continues until a time when no new investors can join.
The result is collapsing of the scheme leaving the top occupants with huge profits while the new recruits lose their money. Pyramid schemes do not sell any products and services. So, their sole source of revenue is the upfront investments from the new entrants.
Examples of Pyramid Scheme Business Model
Pyramid schemes target people with a quick wealth creation mindset. They promise massive returns from a small investment within a short period. This aspect lures many people, particularly during a financial crisis period. For a long, pyramid schemes have come and faded for a short period.
One of the most recent examples is the Blessing Loom. This scheme promises one that they will transform $100 to $800. All one needs to do is join and pay an upfront fee of $100 and then recruit two more individuals. The scheme became popular in 2020 during the Covid-19 pandemic. However, this scheme is illegal in many US states and cities.
Wealth Pools International was another famous pyramid scheme. The scheme posed as a company marketing English and Spanish language DVDs. The selling of these products was through a global network of sales associates. New sales associates bought the DVDs for reselling them.
However, selling DVDs was just a cover-up as one earned through recruiting new associates to the marketing network. The scheme impacted over 70,000 individuals and spread across 64 countries. Other examples include Pedigree and Big Co-op Inc.
Pros and Cons of the Pyramid Scheme Business Model
Pyramid schemes are a quick approach for people seeking to make money without many hustles. For this reason, many of these schemes are fraudulent and illegal. Despite this aspect, the model has its pros and cons. Here are some of them:
Pros
Easy to start
Starting a pyramid scheme is easy. As the founder, all you need is to develop the idea that will propel the public to invest in it. The main idea that power these schemes is wealth creation.
Since everyone is in the race to acquire wealth, this scheme comes with a shortcut to achieving that dream. So, with such a concept in your mind, you can launch your pyramid scheme and get people in it.
No product development involved
Every business needs a product or service to offer to the customers for it to generate revenue. The process of developing a product is time-consuming and requires some investment. You need to research what your competitors are offering and come up with a competitive aspect.
In pyramid schemes, you do not go through the product development process. Even though some schemes offer a product, it does not make a difference. As such, all you need is an idea and start attracting investors to it.
Cons
It is unsustainable
The effectiveness of a business model lies in its sustainability. The model should enable a business to continue operating in perpetuity. The case is different for the pyramid scheme business model. This model is set to collapse at one point when the recruitment approach reaches its limits. So, founding your business on this concept means that it will only last for a short period.
It is an Illegal approach in many countries
Due to its fraudulent aspect, many countries do not allow the operation of pyramid scheme businesses. As such, it will be illegal to run such a business.
Only the founders benefit
As seen, the benefits from the pyramid schemes move from top to bottom. The founder and directors earn a lot of money while those at the bottom lose their investment. In this regard, the model does not fulfill its promise of enabling the recruits to create wealth. Instead, it makes them lose money that goes to the pockets of the few people occupying the top-tier in the pyramid.
Conclusion
In a word, the pyramid scheme business model is an unsustainable approach. The model lacks a substantial way of enabling investors to make money. Also, it relies on recruits joining the program. When there are no more recruits, the business collapses. Hence, the approach can only serve a company for a short period.
