Pyramid Scheme

A successful pyramid scheme combines a fake yet seemingly credible business with a simple-to-understand yet sophisticated-sounding money-making formula The essential idea is that the mark, Mr. X, makes only one payment. To start earning, Mr. X has to recruit others like him who will also make one payment each. Mr. X gets paid out of receipts from those new recruits. They then go on to recruit others. As each new recruit makes a payment, Mr. X gets a cut. He is thus promised exponential benefits as the ''business'' expands.

Such ''businesses'' seldom involve sales of real products or services to which a money value might be easily attached. However, sometimes the ''payment'' itself may be a non-cash valuable. To enhance credibility, most such scams are well equipped with fake referrals, testimonials, and information. Clearly, the flaw is that there is no end benefit. The money simply travels up the chain. Only the originator (sometimes called the "pharaoh") and a very few at the top levels of the pyramid make significant amounts of money. The amounts dwindle steeply down the pyramid slopes. Of course, the worst off are at the bottom of the pyramid: those who subscribed to the plan, but were not able to recruit any followers themselves.

Some network or multi-level marketing businesses, which sell real products and rely on the price differentials between the manufacturer's dispatch ramp and the retail counter, may verge on the borderline between ''smart'' and ''scam''. When a pyramid does involve a real product, such as Holiday Magic cosmetics in the United States in the 1970s, new "dealers" who've paid enrolling fees are encouraged, in addition to selling their products, to become "managers" and recruit more new "dealers" who will also pay enrolling fees. As the number of layers of the pyramid increases, new recruits find it harder and harder to sell the product because there are so many competing salespeople. Those near or at the top of the pyramid make a lot of money on their percentage of the enrolling fees and on commissions for the supplied products, but those at the bottom are left with inventories of products they can't sell. However, most multi-level marketing businesses are not pyramid schemes.^{[citation needed]}

Pyramid schemes are not to be confused with Ponzi schemes, named after Charles Ponzi. In a Ponzi scheme, all new money is paid to "Mr. Ponzi" for investment in his incredibly profitable business and he distributes a portion of it to other members as "interest" or "investment income" whereas in a pyramid, money is paid to the next level upward in the pyramid.