How To Identify A Pyramid Scheme (Complete Guide)

Identify Pyramid Scheme

Nothing has tainted the credibility of network marketing more than pyramid schemes. Much has been made of pyramid schemes and their ill effects, however, this deceptive practice is still rampant in MLM space. 

Adding insult to injury, people still fall for these deceitful schemes and lose their precious money. Why? Because most, if not all people are still not aware of how these scams function or how to identify a pyramid scheme. 

So, in this post, we will pull back the curtains around pyramid schemes and help you avoid their web deception. We will equip you with the knowledge to spot pyramid schemes from miles away and save yourself from getting conned. So, let’s dive in!

Understanding Pyramid Schemes

Pyramid Scheme

You might have heard the famous saying, Knowing is half the battle.That applies to the pyramid scheme perfectly.

A Pyramid Scheme is a fraudulent activity, where the company promises unrealistic riches to recruit more members into the scheme.

You can picture a pyramid scheme like this – there’s a small bunch of people at the top, let’s call them the top managers. They promise exceptional profits if you join their club. All you have to do is bring more members to the fold and you are on your way to unprecedented riches.

Well, that’s what a pyramid scheme looks like on the surface.

So, here’s how it works – top managers recruit a bunch of people, let’s call it level 1 and these folks recruit other people, let’s say level 2, and so on. Each level recruits new members creating a pyramid-like structure and entry is only via payment of some sort of fee.

And here is the kicker – the cut members receive is only coming from the recruitment of new members. There’s no revenue backing from product sales or other activities. Soon the pyramid becomes unsustainable and crumbles, but the top dogs have made big money and they will most likely vanish.

Pyramid Scheme vs. Legitimate MLM – Understand the difference

Legitimate MLM is a promising way to create a sustainable business. However, it doesn’t take much effort to skid under the shade of misleading activities. So, it’s critical to know how to differentiate between pyramid schemes and legitimate MLM;

  • Unlike pyramid schemes, legitimate MLM doesn’t ask for a high upfront joining fee.
  • Recruitment is a part of MLM. But legitimate MLM businesses emphasize sales over recruitment
  • In genuine MLM, commissions aren’t limited to recruitment only. Instead, members earn handsome rewards for every sale they make.
  • Legit MLM introduces real, high quality and problem-solving products in the market.
  • The MLM company operating on ethical grounds will follow all the regulatory compliances.
  • Apart from commissions, best-performing members also receive bonuses, incentives, and rewards.

Warning Signs of Pyramid Schemes

Now the real part, how to sniff a pyramid scheme from miles away?

Look for these red flags;

The Shape of the Network

MLM follows a hierarchical structure, very similar to the pyramid scheme. But pyramid schemes are too concentrated on recruitment. If things are expanding too quickly without a quality product in sight, it’s a pyramid scheme.

All About Recruitment

Pyramid schemes are all about building a pyramid with an extra-large base. The reason is the flow of money to the top via recruitment. If a business doesn’t ask you to sell any product but only recruit, it’s a big fat pyramid scheme.

The ‘Pay to Play Model

Pyramid schemes follow the pay-to-play trap. It means you can only be a part of the team when you pay a hefty upfront cost. If an MLM company asks for a big joining fee or expensive product purchase, it’s a red flag.

Sky High Promises

When you are charging a hefty upfront fee, how can you convince people to join? Of course with unrealistic income claims. It’s like chasing a mirage that will never become a reality. If an MLM company claims sky-high promises, it’s most likely a pyramid scheme.

Additional Pointers to Save Yourself From a Pyramid Scheme

Besides the red flags, some due diligence on your part could save you from pyramid schemes.

Researching the Company

A thorough research before joining an MLM company can save you from a lot of trouble.

Understand it like this – what do you do before buying a gadget? You will read reviews, check out the specs, etc. to ensure it’s an actual deal and not a shiny paperweight. Right?

The same goes for MLM companies too. You don’t jump straight into it. Do your homework first, search for the company on Google checkout company’s website.

Here are some points to look for;

  • The company has made available all the organization details.
  • The official website provides every detail about the product.
  • The joining fee or joining kit comes at a low cost.
  • Check out the policy and terms and conditions page to understand the company’s policy.
  • Search whether the company has any lawsuits (big red flag).
  • Check out reviews or reach out to former members.

In a nutshell, thorough company research can help you steer clear of those sneaky pyramid schemes.

Consult Experts and Authorities

OK, you have done your detective work, and the MLM offer seems legitimate. However, there’s always a chance that you might have missed some critical points, loopholes, or warning signs.

It’s prudent to consult the wise one – experts or authorities in the MLM domain. Seeks independent MLM consultants; these guys have an in-depth understanding of network marketing and pyramid schemes.

Besides, independent MLM consultants have to stake in the game so they can provide real insights into the MLM offers.


That’s everything about pyramid schemes and the methods to identify when you stumble upon one. Keep in mind that scammers utilize a legitimate business model and exploit its loopholes to con unsuspecting people. Only with the right knowledge can you save yourself from such deceiving practices. So, stay vigilant and research thoroughly before onboarding an MLM offer. It’s the only way to save yourself for pyramid schemes. 

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