Beware of Pyramid Schemes
Pyramid schemes like Speakasia,Saradha, Questnet, Qnet etc running into thousands crores have duped investors of their hard earned savings.Such schemes are sometimes disguised as direct selling or multilevel marketing scheme (MLM) in which investors are sold cheap products at inflated rates.Individuals are attracted to these schemes with hope of starting their own business and/or earning handsome returns on their investment.Some invest their hard earned savings or take personal loan to invest in such schemes.When they realise that they have been scammed, it is too late till then. Individuals either forgo their investment or try to influence their friends/relatives to invest in the scheme to retrieve some of their investment in form of commission.
Scammers are caught and their sites are blocked, but they relaunch their schemes with new name and products to dupe unsuspecting investors.
What is Pyramid Scheme ?
Pyramid scheme is a scam in which one invests a specific amount and then individual earns commission by recruiting other individuals to invest in the scheme.
Pyramid scheme can also pose as multilevel marketing scheme(MLM). In MLM scam one buys products to invest in the scheme and then earns commission by recruiting others to buy the products from company. The products are not salable hence individuals are encouraged to search for new recruits to invest in scheme rather than focusing on product sales.
How does Pyramid Scheme work ?
Level 1 : Let us consider you are the first member of the scheme.
Level 2: You recruit two members.Total members in scheme will be 3.
Level 3: Your two members will recruits in two members each which increase strength of scheme to 7.
Level 4: There will 14 members below you at these level.
Level 15: 32767 members
Level 25: 3.3 crore members
Thus scheme continues to grow like a chain.Any members you recruit are added to chain below you.You will earn commission not only on members you recruit but also on members added by your recruits.
This looks good on paper assuming that you will earn lot of commission.But what if you join not at the top but at the bottom or middle. e For example some one joins at level 14 then there will more than 8,000 members below the originator .Now these 8,000 members will have to recruit 16,000 members to start earning commission.
As you move to lower levels of pyramid the market gets saturated as people are already part of the scheme or are aware of the scam.Finding new recruits now become difficult and growth of chain stops or slows down.Thus if you enter at higher level then recruiting new members might be easier as compared to person joining at lower level
People at top of pyramid make maximum profit while at bottom of pyramid will make maximum loss.Thus majority of people make a loss in such scheme.If anyone makes a profit it will be at expense of duping one's own friends and relatives.
How to identify Pyramid from legitimate business ?
Only way to avoid getting trapped in pyramid scheme is to do some due diligence before investing.Below checks might help you to identify a pyramid scheme
Business model: If they avoid discussing their business model and only harp about their success stories then it is tell-tale sign of a scam. If business model of the scheme is to make money from commission generated by adding new recruits rather than products sales.
Your initial contribution to business: If you are required to make large contribution to become a distributor .
Promise of high returns: If they promise unrealistic returns in short period of time with little efforts from your end.
Product : If products being offered for sale are not worth their price, they are not salable and there is no option where company will buyback unsold items.
Limited membership Ploy : If your recruiter tells you that there are limited seats and compels you to become a member in haste. This ploy is used to prevent you from doing due diligence before investing.
How do Pyramid scammers trap investors ?
Step 1: First contact
First you will be called by your friend/relative, whom we will addresses hence forth as contact. Your contact will inform you that he has started a new business which has potential to generate handsome returns.When you ask about business details, your contact will not divulge any specific details.
You may also notice your contact sharing on social media photos of their foreign trip, motivational quotes on how to get rich, photos of expensive cars etc.
Step 2: Brainwash your mind and convince you to invest.
Your contact will call you again and remind you of the conversation regarding the new business opportunity he has invested in.Contact will then invite you to a cafe or hotel to discuss his business plan.
At the meeting point you will informed that you are going to be joined by your contacts senior who is a very busy person and is sparing time exclusively for you.
Contacts senior will try to impress you about how successful he has been in the business .He will then try to brainwash you with words like
9 to 5 job will not make you rich.
You will not save anything if you continue with your current job.
If you join our business then you will become entrepreneur and earn Rs 3 to 5 crore within next four years.
Investment is totally risk free.
You will have to work only 15 hours/week etc
All this while you're contact will tag along with his senior.
They will enquire about your finances and then ask you to invest in their scheme.If they realise that you do not have enough funds then they will ask you to borrow from friends/relatives or take a personal loan.
When you enquire about the products or business model, they will avoid the question and start discussing about how rich you can become by investing in the scheme.They will suggest you that you go for maximum amount for faster gains.
In case you tell them that you need time to think before investing, they will inform you that there are limited positions and you need to transfer money immediately to book your place..Your contact will assure you that it is safe investment and his reaped profits from it.In haste you may invest in the scheme, so that you do not lose on this golden opportunity.
Step 3: Train you to fool others
Now that you are a partner of their so called business, they will call you to some training program.In the training program you will be trained how to fool others to join the program.
You will be asked to make a list of relatives and friends and call them to join the scheme.To earn any commission you will have to get minimum two more members.
Now we are back to step 1 , you are now contact and your friend/relative is a scapegoat.
Now you know how it pyramid scheme works, you can increase awareness about the same to avoid your friends/relatives from falling prey to such frauds.