From The Desk Of:

Justus Meyer,
Port Elizabeth, South Africa

Avoiding Scams

"How to spot a scam
and avoid embarrassment."

Pyramid schemes

So, what is a pyramid scheme? In order to find out, we first have to define what a "scheme" is.

Where I am from, the word "scheme" has some positive and some negative connotations. For me, the words "pyramid scheme" or "investment scheme" generally conjure up some images of fast-talking sales-types, trying to con their way into my bank account. On the other hand, the words "medical scheme" or "insurance scheme," sound perfectly legit.

The word "scheme," straight out of the Oxford dictionary, actually means one of the following:

  • a systematic plan or arrangement for achieving a particular object or effect,
  • a secret or underhand plan - a plot,
  • or a particular ordered system or pattern: a classical rhyme scheme.

So, as it applies to our topic, it can be either of the following: a systematic plan to achieve something good, or a systematic plan to achieve something bad.

The point is that the word "scheme" is neutral and can be used for something good or for something bad. Technically, a trip to Egypt could also be called a "pyramid scheme..." Unfortunately, the phrase "pyramid scheme" has been popularised as something that is to be avoided at all costs. However, the following might surprise you: most illegal scams have nothing to do with "pyramids!"

Please do not misunderstand: I am not advocating unethical and illegal business practises, at all! What I am saying, is that the phrase "pyramid scheme" is very misleading - people tend to look for the "pyramid" as the telling-characteristic of a scam and thus open themselves up to falling for a scam that isn't shaped like one.

The pyramid

Any hierarchical network of people can be illustrated in a number of ways, including a pyramid-like structure. The problem is that if that was the only way to identify a scam, every organisation and business in the world would be in trouble. Take a look at the structure of a typical small business:

The hierarchical structure of a typical company.

The boss recruited his managers, who in turn manage his workers for him. There is absolutely nothing wrong with recruitment into a hierarchy - some people will always fall "under" others in their different networks. As human beings, we are social creatures: with little exception, we all form a part of some kind of network - whether that is your local government, some kind of sports team, a charity organisation or your religious affiliation.

The problem is not with the structure or the recruitment of people into a scheme - the problem lies with the intention of the people that put the scheme together, which often reflects in the scheme itself.

How to spot a scam

To spot a scam is to ask yourself the following:

"If I get involved, what product or service do I get in return for my money?"

There always has to be a fair exchange: if there is no product or service involved, it could very well be an illegal scam.

Chain letters are a very good example of this type of scam: you send money to a few people and to the person that sent you the letter, who in turn do the same and so on. This is the only "pyramid scheme" that actually forms a hierarchical structure, but as we have already established, is not a tell-tale characteristic.

In a chain letter there is no exchange of value - everyone pay each other, just to to pay each other. As soon as somebody at the "bottom" of the scheme stops sending out letters, the money stops flowing up the "chain" and the people "above" them start to feel as if they are at the "bottom" and losing out - they paid these people to pay them, after all...

Since people cannot always be made to do what you expect them to do, the scenario above is inevitable. Motivating a team takes time, leadership and commitment - things that a chain letter does not give room for. At some point the letters will stop going out at the "bottom" and the the guys at the "top" will dissapear with the cash.

Ironically a chain letter is the least dangerous of all the scams - usually the scammers ask you to send small amounts back to them, in comparison with other scams. Interestingly, more people lose money playing the lottery, investing in the stock market and gambling each year than through chain letters - and even other scams...

Something else to look out for is an absurdly high ROI (return-on-investment). This does not necesarily mean that the investment you are looking at is an illegal scam, but you should approach with caution - it could be a Ponzi scheme. Do your research and make sure that the person approaching you is aligned with a reputable brokerage that has a proven track-record in the market. For more information on the history and how to avoid Ponzi schemes, feel free to click here.

Is Network Marketing a scam?

The answer is: no. So, why exactly does Network Marketing have the stigma of "scam?" I believe I have covered most the answer on two other pages on this site, namely "What is Network Marketing?" and "Why Network Marketing?." However, there are two points I did not cover:

Feel free to click here for more information on the second one, or read further for more information on the first...

Network Marketing scams

If someone breaks a window with a brick: would you blame the person, the window or the brick? Network Marketing is simply another way of getting paid. The problem is not with the system, but with some of the people involved in the system. It doesn't mean you have to judge all people that work with bricks... The brick was simply the tool the person used to accomplish their goal - good or bad.

Network Marketing is a tool. Some people using the tool use it ethically and some not-so-ethically...

There are, however, scams that masquerade as Network Marketing companies. Just because a company claims they are a Network Marketing company, it doesn't mean that they are! Again the way to tell if they are legitimate is to see what product or service they have to offer. If they provide a service or product that provides value to their customers and their credentials check out, there is probably nothing to worry about.

Also try to find out who the company affiliates with. For instance, when someone asks me whether the company I represent is a "pyramid scheme," I usually just have to point out the big service providers that we have been affiliated with to put them at ease, until I can teach them the differences

Related resources

To find out more on evaluating a Network Marketing opportunity and recognising a scam, I suggest you have a look at "Brilliant Compensation," a video by an industry expert named Tim Sales. I also strongly recommend his web-site, called "First Class MLM," for some much more detailed information.

Also, have a look at this page for more information on the question: "Does Network Marketing work?."

Share this page:

Financial Freedom | Contact Justus
Feel free to use this page to contact me with any questions and/or comments you may have... I look forward to hearing from you.
Financial Freedom | About Justus and This Site
Find out more about me and why this site exists. So many sites are impersonal - this is my attempt to change that. Warning: its not glamorous... :)
Financial Freedom | Blog
Click here to read the blog.
Financial Freedom | Network Marketing > Lead Generation
Lead generation is one of the most important skills you can learn - if you could find clients on demand, why would you ever need to work for anyone, again? Click here to find out more.
Financial Freedom | Network Marketing > What Is Network Marketing?
What is Network Marketing (also known as 'Multi-level-marketing' or 'MLM') and how does it work?
Financial Freedom | Network Marketing > Avoiding Scams
Is network marketing legal? What is a pyramid scheme and how can you avoid it? Find out by clicking here...
Financial Freedom | Network Marketing > Training
Find out more about the trainers and gurus in the Network Marketing industry, as well as the tools they have available to help you to grow your business...
Financial Freedom | Network Marketing > Is It Worth It?
What does Network marketing offer and should you even be involved? The answer might surprise you...
Financial Freedom | Money Management > Managing Debt
Financial freedom means that you are debt-free as well - find more ideas on how to achieve that, here.

Do you have any useful information to add to this page? Would you like to increase your own site's traffic?

Feel free to click here to submit an article.