Pyramid scheme.
In plain English
A pyramid scheme is a fraud where you make money mainly by recruiting other people to pay in, not by selling a real product, so it collapses once recruiting stops. Each new recruit pays money that flows up to the people who recruited them, and they are told to recruit even more people to earn back their stake. Because there are only so many people to recruit, the math guarantees that most people at the bottom lose money. Some pyramid schemes hide behind a product or a business opportunity, but if the real income comes from signing up new members, it is a pyramid.
01Why it matters
The people who join a pyramid scheme last, which is most people, almost always lose the money they paid to get in, because the supply of new recruits always runs out.
02The math, step by step
Say it costs $500 to join and you are told you will earn $500 for each person you recruit. To break even you need one recruit, to profit you need more, and each of them needs their own recruits. After only a handful of layers, you would need more people than live in a whole city. Most people never recruit enough to recover their $500.
03What this is NOT
A pyramid scheme is not a legitimate business, even when it looks like one. A real multi-level marketing company makes most of its money selling actual products to customers. A pyramid scheme makes its money from recruitment fees. It also differs from a Ponzi scheme, where one operator secretly shuffles investors' money rather than having members openly recruit each other.
04Receipts
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Plain-English answers from our glossary. Receipts included. Never advice.
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