Pyramid Selling Schemes

This Topic Includes:
Multi-level marketing
Checking out a possible pyramid scheme
Report it

The main characteristic of a pyramid selling scheme is that earning money and gaining promotion within the scheme depends primarily on recruiting new people to the scheme, and those new people recruiting more people into the scheme, and these new people recruiting more people, and so on...

Pyramid schemes are unfair trade practices because they are likely to be unfair to most participants in the scheme, the rewards for those at the top come from those below, and because eventually it will become impossible to recruit the number of people needed to produce reasonable financial rewards to participants. 

Example 

In this example the scheme depends on each participant recruiting 6 new members into the scheme. The figure below shows how many people will need to have joined the scheme at each level, in order for those above to be paid. 

1 6
2 36
3 216
4 1,296
5 7,776
6 46,656
7 279,936
8 1,679,616
9 10,077,696
10 60,466,176 
11 362,797,056 
12 2,176,782,336
13 13,060,694,016 

The total population of the world is approximately 6.2 billion so after only 13 levels there's not enough people on the planet to keep the scheme going.

Schemes also include those that involve participants using an agent, provided by the scheme operators, to recruit others on their behalf, instead of having to recruit new participants themselves.

Pyramid selling schemes prohibited

Pyramid selling schemes are prohibited under the Fair Trading Act. The Act is enforced by the Commerce Commission. If you have been approached to join a scheme, which you suspect may be pyramid selling, we suggest you inform the Commerce Commission. 

Individuals and corporations can be fined up to $200,000 for promoting, or operating a pyramid scheme. Offenders can also be required to pay an extra penalty based on the amount they have gained commercially from their involvement in the scheme. 

Multi-level marketing v pyramid selling

Multi-level marketing usually involves commercially viable products (eg, clothing, jewellery, cosmetics, health products, cookware) which present genuine business and income-earning opportunities through repeat sales to clients.

Pyramid selling schemes often involve "gimmick" products (eg, certificates) or grossly overpriced products or services that have little or no resale value (eg, personal development programmes, magazine subscriptions).

Checking out a possible pyramid scheme

The following guide may help you check the nature and legitimacy of a multi-level marketing scheme.

Is there a joining fee?

Pyramid selling schemes often have start-up fees which are not for purchasing commercially viable goods or services since most earnings come from introducing others to the scheme.

Does the promotional literature indicate unrealistic earnings (eg "make $100,000 a month legally")?

Promoters who make unrealistic claims risk breaking the law.

If you answer yes to (1) and (2) then regardless of whether the scheme is pyramid selling or not, you should seek financial advice before entering.

Do participants earn commissions primarily from selling products or services, or are financial rewards largely dependent on recruiting others into the scheme?

Pyramid selling schemes are based on recruiting others into the scheme.

Are the products commercially viable?

A legitimate scheme has as its main feature products which consumers want to buy.

Are the products sold to genuine customers?

Legitimate multi-level marketing depends on selling to customers and establishing an ongoing market.

Is the number of products required to be purchased or ordered by the participants reasonable?

Legitimate businesses require participants to buy or order only as much stock as they can realistically expect to sell.

Does the promotional literature offer benefits such as "a life of happiness and prosperity", or "it’s easy to sign up new distributors"?

Such statements need to be read carefully as they may make unrealistic promises which conceal the amount of hard work necessary to actually achieve such goals.

Does the promotional literature contain testimonials from people who are not easily available for possible checking (eg "RS of Auckland writes ..")?

People giving testimonials may not want to be identified for reasons of privacy. This may raise suspicions about whether the testimonials are genuine. Even if they are, there is generally no way for consumers to check. References to testimonials should be read with this caution in mind.

Does the promotional literature contain claims such as "this is not a get rich scheme" or "this scheme is legal"?

Again, statements like this need to be read with care. You need to ask yourself why such a statement is necessary. They may disguise the fact that the scheme may be illegal, or contain illegal components.

Does the information about the scheme suggest that the Ministry of Consumer Affairs, Commerce Commission or another government department or agency has endorsed or approved the scheme?

Neither the Ministry or the Commerce Commission endorse or approve any schemes. If this statement is made, it is untrue.

Does the promotional literature fail to provide a street address, so that you cannot contact a person for further details?

Legitimate schemes are unlikely to do this.

Does the scheme provide ongoing training and sales support?

Legitimate multi-level marketing businesses have a vested interest in ensuring that participants are well trained and supported.

Report It!

Scamwatch does not receive reports on this type of scam.  If you have been approached by a betting scheme which you think is a scam you can report it to the New Zealand Commerce Commission.