Each time a level rises to the top, a new level must be added to the bottom, each one twice as large as the one before. If enough new participants join, you and the other 15 players in your level may make it to the top. However, in order for you to collect your payoffs, 512 people would have to be recruited, half of them losing $1,000 each.
Of course, the pyramid may collapse long before you reach the top. In order for everyone in a pyramid scheme to profit, there would have to be a never-ending supply of new participants.
In reality, however, the supply of participants is limited, and each new level of participants has less chance of recruiting others and a greater chance of losing money.
Multilevel Marketing – Legitimate income opportunities
Multilevel marketing is a popular way of retailing in which consumer products are sold, not in stores by sales clerks, but by independent businessmen and women (distributors), usually in customers’ homes. As a distributor you can set your own hours and earn money by selling consumer products supplied by an established company.
In a multilevel structure you can also build and manage your own salesforce by recruiting, motivating, supplying and training others to sell those products. Your compensation then includes a percentage of the sales of your entire sales group as well as earnings on your own sales to retail customers. This opportunity has made multilevel marketing an attractive way of starting a business with comparatively little money.
How to tell the difference between a legitimate business and a disguised pyramid scheme
Pyramid schemes seek to make money from you (and quickly). Multilevel marketing companies seek to make money with you as you build your business (and theirs) selling consumer products. Before you sign up with a company, investigate carefully. A good way to begin is to ask yourself these three questions:
1. How much are you required to pay to become a distributor?
2. Will the company buy back unsold inventory?
3. Are the company’s products sold to consumers?
1. Start Up Cost? IF THE COST IS SUBSTANTIAL, BE CAREFUL! The start-up fee in multilevel companies is generally small (usually for a sales kit sold at or below company cost). These companies want to make it easy and inexpensive for you to start selling.
Pyramid schemes, on the other hand, make nearly all of their profit on signing up new recruits. Therefore, the cost to become a distributor is usually high. CAUTION: PYRAMIDS OFTEN DISGUISE ENTRY FEES AS PART OF THE PRICE CHARGED FOR REQUIRED PURCHASES OF TRAINING, COMPUTER SERVICES, PRODUCT INVENTORY, etc. These purchases may not even be expensive or “required,” but there will be considerable pressure to “take full advantage of the opportunity.”
2. Buy-Back of Inventory? IF YOU COULD BE STUCK WITH UNSOLD INVENTORY, BEWARE!Legitimate companies which require inventory purchases will usually “buy back” unsold products if you decide to quit the business. Some state laws and the USA DSA Code of Ethics require buy-backs for at least 90% of your original cost.
3. Sales to Consumers? IF THE ANSWER IS NO (OR NOT MANY), STAY AWAY! This is a key element. Multilevel marketing (like other methods of retailing) depends on selling to consumers and establishing a market. This requires quality products, competitively priced. Pyramid schemes, on the other hand, are not concerned with sales to end users of the product. Profits are made on volume sales to new recruits, who buy the products, not because they are useful or attractively priced, but because they must buy them to participate. Inventory purchases should never be more than you can realistically expect to sell.