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Pyramid schemes come in many variations. The earliest schemes involved a chain letter distributed with a list of 5-10 names and addresses on it. The recipient was told to send a specified small sum of money (typically $1 to $5) to the first person of the list. The recipient was then to remove this first person from the list, move all of the remaining names up one place, and to add his own name and maybe more other names to the bottom of the list. Then he was to copy the letter with new name list to the individuals listed. And hopefully this procedure was to be repeated and pass on and then he would be moved to the top of the list and receive money from the others.
Success in such ventures rested solely on the exponential growth of new members. Hence the name "pyramid", indicating the increasing population at each successive layer. Unfortunately, simple analysis will reveal that within a few iterations the entire global population would need to subscribe in order for all of the members to earn any income. This is impossible, and the vast majority of people who participate in these schemes simply lose their money.
Very large scale pyramid schemes were initiated in post-Soviet states, where people had little familiarity with stock market and were led to believe that returns in excess of 1000% are feasible. Particularly notorious were MMM (pyramid) in Russia and pyramid schemes in Albania (in the latter case they nearly caused a popular uprising).
Although pyramid schemes have been declared illegal, they still persist in many forms. While schemes simply involving the blatant exchange of money have generally disappeared, many schemes persist that purportedly "sell" a product to mask the primary intention of simply enrolling new members. One debatable example is Quixtar, a reincarnation of Amway, though the Federal Trade Commission determined in 1979 that Amway was not an illegal pyramid scheme because it had, and enforced, rules requiring its distributors to resell most of the products to actual customers. Quixtar is structured very similarly to Amway. However, critics charge that Quixtar does not meaningfully enforce any of the retail sales rules that prevented the FTC from closing down Amway. As a result, most of the products are sold to the distributors for their own use and the real money is then in recruiting more distributors rather than selling the products. In addition, critics charge that most of the money touted by high "pins" in Amway and Quixtar doesn't come from the Amway/Quixtar products at all, but from the sale of "business support materials" (motivational materials such as cassette tapes, videos, books and rallies and functions) to the rank and file recruits.
The distinguishing feature of these schemes is the fact that the product being sold has little to no intrinsic value of its own or is sold at a price out of line with its fair market value. Examples include "products" such as brochures, cassette tapes or systems which merely explain to the purchaser how to enroll new members, or the purchasing of name and address lists of future prospects. The costs for these "products" can range up into the hundreds or thousands of dollars. A common Internet version involves the sale of documents entitled "How to make $1 Million on the Internet" and the like. Another example is a product sold at higher than ordinary retail price for the same or similar products elsewhere. The result is that only a person enrolled in the scheme would buy it and the only way to make money is to recruit more and more people below that person also paying more than they should. This extra amount payed for the product is then used to fund the pyramid scheme. In effect, the scheme ends up paying for new recruits through their overpriced purchases rather than an initial "signup" fee.
The key identifiers of a pyramid scheme are:
The key distinction between these schemes and "legitimate" MLM businesses is that in the latter cases a meaningful income can be earned solely from the sales of the associated product or service to customers who are not themselves enrolled in the scheme. While some of these MLM businesses also offer commissions from recruiting new members, this is not essential to successful operation of the business by any individual member. Nor does the absence of payment for recruting mean that an MLM is not a cover for a pyramid scheme. The distinguihsing characteristic is whether the money in the scheme comes primarily from the participants themselves (pyramid scheme) or from sales of products or services to customers who aren't participants in the scheme (legitimate MLM).