Pyramid Schemes

Overview

Named for their pyramid-like structure, pyramid schemes are businesses whose primary revenue stream comes from recruitment fees that new members pay to join, rather than sales from the business's product or service.

Pyramid schemes often sell products or services directly to consumers. Because recruiting new sellers theoretically increases the total number of sales, pyramid schemes incentivize senior members to recruit new participants, who pay a registration fee. Some of that fee covers the initial business costs, like inventory, but the majority is divided and sent up to senior members (called uplines).

As more people join, the company becomes more layered, and the payments at the top keep rising. While pyramid schemes often sell products like energy drinks or supplements, they can also be donation chains, or even structured as a game.

Pyramid schemes are illegal in the US, but pyramid-shaped multilevel marketing companies (such as Mary Kay, Amway, LuLaRoe, and Herbalife) are legal. A company is considered an MLM rather than a pyramid scheme if the primary source of its revenue is product sales rather than registration fees, and most products are sold to customers outside the company. An estimated 99% of people who join MLMs never make any money.

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