Pyramid Scheme

Posted in Marketing and Strategy Terms, Total Reads: 428
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Definition: Pyramid Scheme

It is an unsustainable business model where participants are promised payments or some services if they enroll other people into the scheme, rather than providing any real investment or any sale of products or service to the people. Pyramid schemes are illegal in many countries including India.


In this scheme, a company asks for payment from people and compels them to join in exchange promises the new members a share of money taken from every new person that they recruit. The directors of the organization are the ones who are at the top of the pyramid and also receive some share of the payments. Such a scheme is potentially lucrative for these directors because even if it works or not, the organization's membership continues to recruit and keeps on funneling money to the people at the top of the pyramid.


Such organizations rarely include sales of products or services with real investment. The pyramid scheme can generate revenue by either recruiting more members or by asking more money from current members without any creation of goods and services. Eventually, it is not possible to recruit any more thus, leading to inability to profit from the scheme.


Multilevel marketing plans can be classified as pyramid schemes. It is a marketing strategy where the sales force is given compensation not only for the sales they generate but also for the sales that other salespeople that they recruit do. They are expected to sell products directly to consumers through relationship referrals and word of mouth marketing.

 


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