I know the term but I’ve never actually been able to understand what it is and what happens in one
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Answer: The original pyramid schemes were investment schemes. You invest $100, then you are required to recruit 6 friends who invest $100 each. The person who recruited you gets the $100 from your recruits. You get the $100 from the people who are recruited by the people you recruited. Theoretically you get $3,600. Except for this thing to get 10 levels deep you need 1.5m people. To get 13 levels deep you need 13bn. That’s more than there are people on earth.
However, the term pyramid scheme isn’t just used for this. Various scams that, at their core, are similar to this are also called pyramid schemes.
The key elements are: participants make money by recruiting people, and those people recruiting other people; little/no money comes into the scheme from people who are not participants; and it is mathematically impossible for everyone participating to get the kind of return/income they expect to achieve without endless recruiting that simply cannot occur due to running out of people.
The most common type seen today is multi level marketing. This is where you disguise the scheme in a business that is supposedly “direct selling”. Participants sell products and can make money doing so. However, almost no-one can make a decent income selling products to end customers. The real money is made by recruiting, and selling products to those recruits who are aiming to sell the product on, not to use it as a customer.
In many countries, including the US and UK, multi level marketing is legal. The schemes do everything they can to stay on the right side of the law and make a lot of money for their founders and some lucky early participants.
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