Pyramid Scheme Definition

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Define Pyramid Scheme

A pyramid scheme is an illegal hierarchical business model encouraging investors to recruit new members to the business model by requiring them to invest massive sums of money and then using the money from those new members to pay earlier investors. The base of the pyramid scheme consist of all the new members who provide the majority of the funds which are then given to the earlier investors who are above them, thus you have the pyramid scheme definition.

Herbalife Investigation

In March 2014, Herbalife, a Los Angeles-based nutritional supplement company, became the newest likely pyramid scheme to be exposed when an official investigation by the United States FTC (Federal Trade Commission) was launched. The investigation was began when billionaire hedge fund manager Bill Ackman accused Herbalife of misleading the distributors, selling commodity products at excessively overinflated prices and a huge misrepresentation of sales figures.

Sources indicate that the government will most likely will not shut down Herbalife, but instead sanction them with fines up to $50 million dollars for false claims of excessive income to their new investors while refusing to provide documentation to support their claims, unethical lead generations, and false product claims. If nothing else, Herbalife will most likely have to pay for their sins of the past. The FTC is not the only agency that is investigating Herbalife for operating under a pyramid scheme. The Federal Bureau Investigation (FBI) is also investigating Herbalife as well as other entities.

Herbalife scam
Herbalife: A Pyramid Scheme according to Bill Ackman

The Scheme

As the name implies, the pyramid scheme begins with one person at the top of the apex of the pyramid who recruits people into his scheme requiring them to invest a large sum of money and they in turn have to recruit additional people who also have to invest an excessive amount of money. Then, in order to try and keep earlier investors pacified and convinced of the program’s value, funds from the new investors are given to those earlier investors.

Collapse of the Pyramid Scheme

Eventually the pyramid scheme will collapse because eventually you will run out of people who will invest. Once that happens, the pyramid will cease to exist.

Similar to Ponzi Scheme

A pyramid scheme is similar to a ponzi scheme. Named after the crook Charles Ponzi, a ponzi scheme is different from a pyramid scheme in that a ponzi scheme is not hierarchical. Instead, with a ponzi scheme a single person collects investments from others and does not necessarily tell them how revenue will be generated.

Looking for a Legitimate Opportunity to Make Money?

If you are interested in discovering a legitimate online opportunity, check out my number one recommendation, Wealthy Affiliate.  Wealthy Affiliate is an open education project with a free starter membership, giving you the option to upgrade to premium if and when you are ready.  Plus, the premium membership is one of the lowest membership rates out there for website design and affiliate marketing learning platform.  Wealthy Affiliate is not a get-rich-quick scam.  I am an Ambassador at Wealthy Affiliate and I can attest it is a honest and trust-worthy place to learn the opportunities for making a full-time or part-time living online.

Steph Hill

Greetings! It is a pleasure to meet you. My name is Stephanie and the aim of this website is to help newcomers to the field of internet marketing by providing free easy-to-follow tutorials, product reviews and resources. I hope you find the information useful and down-to-earth. My background is in librarianship, technical writing, special education, software training and web design. Please leave a comment with your questions and I will be happy to answer them.

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38 thoughts on “Pyramid Scheme Definition

  1. Great article. I’ve never been a big fan of MLM as I believe they are all pyramid screens. I like to make it on my own. No downline needed here. Typically you’ll spend so much time recruiting and training your downline that there’s no time to sell anything yourself. But I do like your article.

    1. Hi Doug:

      I completely agree about MLM companies. You do spend so much time recruiting your downline, that it becomes more work than you see. It does work for some people, but like you said, so many of them are pyramid scheme which is why I wanted to write this article, so to help my readers be aware.

      If you are looking for a way to make money online and own your business, I recommend taking a look at my #1 Recommendation, because I think you will be happy with that choice. You can work at your own pace. You do not have to answer to anyone including some sort of upline. You control when and where and how you work. Affiliate Marketing is growing and becoming a very popular way for people to earn a living.

      Have a wonderful day! Please let me know if I can help further.



  2. Many network marketing companies have come under fire for being accused as being a pyramid scheme. None of them have had the obvious signal of a pyramid scheme, like Herbalife, but many people think companies like Mary Kay and Scentsy might actually be pyramid schemes in disguise. I have known a few people who have made some really good money doing multi-level marketing, but they worked hard at it. People don’t realize the amount of time that goes into it. You can’t just have one party and walk away with six figures. You end up working it full time just to make a full time pay. Which can be a scheme in of itself, but if it is something you want, and they pay you, then it is okay.

    1. Hi Jessica:

      Thank you for stopping by today and leaving a comment. I appreciate you taking the time to read my article. It is true that many companies are indeed a pyramid scheme. Herbalife has been under a great deal of controversy. You are right in that many people think Mary Kay is a pyramid. Some experts refer to it as the “Pink Pyramid Scheme.”

      I personally recommend staying away from multi-level marketing schemes, because all too often you do not make any money from them. My number one recommendation for working at home is to join Wealthy Affiliate. You will receive the training and skills you need to build a successful legitimate online opportunity.


  3. It gets harder and harder to separate the pyramid schemes from mlm companies. Most pyramid schemes are very smart to legalize their operation.

    Most of them will create “products” such as low quality e-books in order to be legal. Some of them will even promote the products from other companies in order to make money.

    1. Hi Viljoen:

      You are absolutely correct. Pyramid schemes are very sneaky and will think of different ways to try and make themselves legal. I appreciate you stopping by today and reading my article. Have a terrific day!


  4. Pyramid Schemes….OMG the life and money sucking ventures. These are my biggest bug bear and I almost got sucked into one myself not so long ago….MOBE……got drawn in with the $49 price tag to start building an empire…..LOL…….then came the upsells and the “You need to spend an extra $2000 to be eligible for the mentioned commission structure”…..NO THANKS. Always and only the people at the top of these things are really only going to be the people that make money. Thank heavens for sites like this steering others in the right direction.

    Cheers, Carl

    1. Hi Carl:

      Thank you for your kind compliments. Pyramid Schemes are definitely something everyone should be on the look out for. If you are interested in earning an HONEST passive income, check out My #1 Recommendation.

      Please come back and visit again soon.

  5. hello there,

    For a long time I was about to fall on these pyramid schemes I attended a presentation and I was about to purchase a product with a very high value which not worth all of this money nd what I have to do to find another guys to get fooled and buy this product and then I get small commission, very bad idea and the first one who is the richest and the others are serving him.

    1. I hope you did not actually fall for that pyramid scheme. They are so many of them out there. My #1 recommendation for making money online is sound proof and is certainly not a scheme. I hope you are able to check them out.

  6. A so called friend invited me to a meeting not so long ago, with a few other people. We were told that that this was going to be a great opportunity for all of us, but weren’t told what it involved until we were at the meeting! My face must have fell when I realized it was a presentation on Herbalife! Fortunately, I was aware of Herbalife and the fact that people don’t tend to make a great deal doing it.

    One major factor that people don’t realize when they get involved in these things is how you can very quickly lose even the closest of friends when you get involved because companies like Herbalife try to encourage you to push it onto your friends and family first.

    1. Hi Andrew:

      That is typical for Herbalife and how many companies like them operate. They do not reveal to you until you are there. And yes, I am certain many people have lost their friends and lost the trust of many family members, because they want you to recruit those people. This is common practice for many MLM companies and many of them are operating under an illegal pyramid scheme.

      Thank you for sharing your horrible experience about Herbalife. I wish you much luck down the road.


  7. I remember when I first learned of pyramid schemes. I almost got myself into a couple being stupid when i first starting trying to find ways to make money online.

    1. Hi Kyle:

      Do not feel stupid or ashamed. That is the whole concept behind pyramid schemes is that they are wanting to trick you into investing with the false promise of high return rates. You were one of the lucky ones who got out before it was too late.


  8. Hi Steph
    Nice post on pyramid schemes! I actually thought that ponzi schemes and pyramid schemes were one and the same. So nice of you to explain the difference. And I am with Sean that if a company needs to specify that they are not a pyramid scheme then chances are they are one! I feel there are so many schemes out there, if not a pyramid scheme, very close to being one. Where only the people on top make money out of the newest recruits. Nice that you are bringing attention to it.

    1. Hi Emily:

      Thank you for reading my post on Pyramid Schemes. Yes, there is a difference between the two – pyramid and ponzi schemes, but there is some overlap too. I agree with you when you say that if a company is working really hard to convince you that they are not a pyramid scheme, like Herbalife is, there may be a a good chance that they are. And yes, there are many schemes out there and you have to be very cautious. Far too many crooks out there ready to take advantage of you.


  9. Excellent article Steph. I hate pyramid scheme companies and that hate comes from being a member of Empower Network.

    They don’t work, they are fraudulent, and it cost tons of money to go “all in”. If their product or service was really that valuable, they wouldn’t have to charge that much because they would have more people coming to join that would see the value.

    On top of it all, you don’t have anything, such as a website to call your own after you pay all that money. It’s stupid to be honest.


    1. Hi Josh:

      I am glad you enjoyed my article on Pyramid Schemes. I can appreciate your negative feelings on pyramid schemes. I have heard of Empower Network and from what I have heard, they are indeed a scam. I agree with you when you say if a program was that valuable, they would not have to charge an arm and a leg. They could sell the program for much less and more and more people would join due to its reputation.

      Thank you for sharing your experience. Have a great day!


  10. Hi Steph,

    Great article as always. I did not know that about Herbalife. I do not sit well with pyramid schemes. I have tried several of them and made nothing.

    I think this article is great and teaches people to stay away from pyramid schemes. I especially love that you recommend WA. Wealthy Affiliate has been a blessing to me since day one. Thank you for sharing!

    1. Hi Tanya:

      I am glad you enjoyed my article. Herbalife is indeed under investigation by multiple governmental agencies for operating under a pyramid scheme. I was delighted to bring this investigation to the the attention of my readers, because I want everyone to find a legitimate and honest way to earn a living.

      Wealthy Affiliate has been a blessing for many people. Although it will not happen overnight and will require much work, it can happen for you. Thank you for reading my article. Please come back again.


  11. Nice article Steph. i am also a victim of pyramiding before wherein there came a point that I was not able to get the commissions that my upline promised me. And the company just collapsed. I wasnt able to get back my investments and I learned from that experience. You’re right, there are a lot of legitimate online career opportunities out there like Wealthy Affiliate, which can truly give you the chance to earn money. Great read

    1. Hi Karl:

      I am sorry to hear about your experience with a pyramid scheme and how you were victimized. As is the case with all pyramid schemes, there will come a time where the will eventually collapse just like with any pyramid that loses its foundation.

      You are right about Wealthy Affiliate opening the doors for those who want to legitimately learn to make money online. It is free to join and you only upgrade if and when you are ready.

      I am glad you enjoyed my article. Please come back and visit soon.


  12. Thanks for this post explaining the definition of a pyramid scheme!
    I was a bit surprised when you said Herbalife was being investigated and exposed as a pyramid scheme. Here in Australia you see it being advertised around the place quite frequently.
    I guess just about all network or multi-level marketing companies are running a very fine line in respect to being pyramid schemes.
    I am glad that I have stayed away from them and choose to spend my time on affiliate marketing!
    Thanks for this post Steph 🙂

    1. Hi John:

      I am glad you found this article and did not sign up with Herbalife. I am not sure how it is handled in Australia, but pyramid schemes are illegal in the USA. So, if they are being investigated in one country, it is best to stay away from them no matter what country you live in. I am not sure if I would say that all multi-level marketing companies are pyramid schemes, but I think that a great deal many of them are. I will be writing some more about popular pyramid schemes in articles to come, so please check back in the future.


  13. Interesting Steph, I didn’t know there is such a funny type of business model. So what happens to the last people, the ones at the bottom of the pyramid? I think they’re are cheated and they definitely have to work their but out recruiting some other people who have to save them.
    And also, do they explain to you clearly of how the investments and payments are done..?
    Interestingly funny, I wouldn’t have learned this kind of business until I visited your website.
    Thanks Steph for the great work.

    1. Hi Emunot:

      Thank you for your checking out my website and for reading my article on pyramid schemes. As far as your question on what happens to the last people, the ones at the bottom of the pyramid scheme — you correctly guessed it. They are indeed cheated and they will have to work hard to recruit other people, be it their families or friends or relatives, or anyone else they can con in order to save themselves from financial ruin. Your next question on do they explain clearly how the investments and payments are done and the answer is “no” — explanations are never given.

      When I was approached to take part in Herbalife, I asked questions like that and they did not give me good answers. When I asked the gentleman, Jim, you initially recruited me, he said he would “need to check with his upline” and in the next phone conversation, he has his upline on the phone and she did not answer any questions either, only beat around the bush and continually trying to change the subject. I knew then that is was a pyramid scheme. Herbalife is now under criminal investigation from the FBI. FTC and SEC for operating under a pyramid scheme.

      Thank you for visiting and I hope you return soon.


  14. Pyramid scheme type of business is one of the worst business models if only it can be called a business at all. A business that is built upon lie is not a business. All these pyramid schemes are designed to make rich those who are at the top while the rest people are destined to lose. You expose pyramid scheme very well and give an excellent alternative such as Wealthy Affiliate and I support you in that. As a member of this program I can say only good things because it’s a safe and friendly environment to build your online business.

    1. Hi Rufat:

      I could not have said it better myself – a pyramid scheme is not even a business really, because a business that is built on a lie is not a business at all. It is a scam for sure. And yes, Wealthy Affiliate is an excellent alternative that is a legitimate online opportunity in which you will learn to build an honest business that you can be proud of.


  15. Hi Steph,

    Great post you have written. I almost went head with Herbalife through a friend – I was pretty desperate for make extra cash online. My ‘friend’ at the time was making money and seemed very enthusiastic. Though it burned out after a few months so I decided to do my own research. There are a lot of articles out there that back up Herbalife NOT being a pyramid scheme, but I think you have demonstrated very clearly exactly why it does fall under a pyramid scheme! I guess it all depends what people want when it comes to earning money online – I am glad that you mentioned Wealthy Affiliate! By far it is the most genuine way to make money long term, no silly schemes!

    All the best 🙂

    1. Hi Shuk:

      I am glad you did not go with Herbalife based on the recommendation of your so-called friend. I think you hit on it pretty well when you said you were desperate for some extra cash. I believe that is what pyramid schemes do – they prey on people who are desperate. That is exactly how Herbalife got me.

      It was 20011 and I laid off from my position as a librarian for an accommodation school and receiving unemployment and I needed to make the house payment, my car payment, food, etc. and when I job surfing on the internet, I came across something that was worded in a clever way, but did not identify exactly what they were. I did sign up and sent them they initial sign up fee.

      Then all of a sudden, I received a packet in the mail with Herbalife all over it. I was immediately skeptical rightfully so. The barrage of phone calls and upsells began. I did lose about $400 US dollars which was a lot when you are unemployed and needing to put food on the table to feed your hungry children. Herbalife is no doubt a pyramid scheme where only the very top people actually make money.

      About four months ago, I did some research about working online, because I have an aging recently widowed mother who needs me to be home full time for the emotional support right now, but soon to be for more of the physical support. She suffers from severe depression following the loss of my father six months ago, as they married 46 years.

      I found a company called Excel Cash Flow which was making promises of easy and fast income (a get rich quick scheme) and I did sign up giving them my initial $97, but within minutes, there was one upsell after another and I immediately became suspicious. I did extensive research and found out it was a scam. While working to get my money back from Excel Cash Flow, which I did manage to do, minus about $20.00 which they claimed was the non-refundable portion, I came across a website what was mentioning Wealthy Affiliate and after doing some more research, I found out it was FREE to join. So I joined and that was about four months ago. Like you said, is a genuine way to make money online. The community is caring and extremely helpful and the training is easy to follow.

      Plus. you receive training from not just the owners of Wealthy Affiliate, but from individuals who have been there longer, so you are exposed to additional teaching styles which is good, because not everyone learns the same way. I myself have created a number of different training modules which are FREE to access using your FREE membership.

      Thank for visiting. Have a wonderful day!


  16. Hi Steph,

    Thanks for a great intro to pyramid schemes. I really like how you showed an example of one up front – Herbalife. I think that there are several more very well known schemes out there too that you had not mentioned.

    I think that it is funny that all of the pyramid schemes I have run across have at some point uttered the phrase “this is not a pyramid scheme.” If you hear that, you pretty much know to run away. Isn’t that what Herbalife is now claiming? You see everywhere on the internet that the executives of Herbalife are screaming, “this is not a pyramid scheme” — but we all know if they are having to work so hard to try and convince everyone they are not, chances are that they are in fact a pyramid scheme.

    1. Hi Sean:

      You are correct. There are many more very well known pyramid schemes out there that I did not mention in my article. There are so many, that there is no way I could possibly mention all of them. I do, however, plan on continuing to expand out this website to include other pyramid schemes that people should avoid and link them to this article. This article is only the first of what will be many articles exposing pyramid schemes and many of the MLM (multi-level marketing) schemes that are actually pyramid schemes in disguise.

      I chuckled when you said if they are trying so hard to convince you that they are not a pyramid scheme, as Herbalife is doing, chances are they are indeed a pyramid scheme. Other types of schemes you should avoid are Ponzi schemes which are very similar to pyramid schemes.

      Thank you for visiting and I hope to see you again.


  17. Hey, Steph!

    I always had an idea of what the schemes were, but never knew the exact definition between the two scheme types.

    I’ll be honest, I’ve been interested in a lot of “work from home” opportunities, but none of them ever panned out without some horrible startup cost. For what?

    When I found Wealthy Affiliate, I was quite scared it’d be like the others–get my hopes up, and then there’d be some catch. Nope! I loved that you get the “try it before you buy it” experience, and the support has been wonderful.

    Thanks for exposing these horrible people. You can never be too safe anymore.

    1. Hi Brooke:

      There are so many scams out there and they seem to be multiplying by the day. I seriously do not know how some people live with themselves when they are knowingly preying on people. Like you, I have been victimized by a number of scams to include Herbalife and Excel Cash Flow, which is why I have made a mission to help protect others from making the same mistakes as I did, and thus, the reason for my website.

      I agree Wealthy Affiliate is a great way to learn how to build a legitimate online opportunity. The “try it before you buy it” feature is unique and one that you probably will not find anywhere else. Thank you again and have a terrific day!


    1. Hi Lorraine:

      Great seeing you visit my site today. I am glad you liked the article on pyramid scheme defined. And yes, I think you are right about Herbalife operating under an illegal pyramid scheme. It is definitely one to avoid. They suckered me into it without disclosing you they were at first. Very deceptive and very unethical.


  18. Hi Steph!
    Great post! I for myself has been curious about pyramid scheme and what is the pyramid scheme definition. Thanks for enlightening my mind on what this schemes are.

    I have joined several pyramiding business and I tell you only few are real. Most of them are just getting your money for their own benefit. But I am not generalizing all of them. There are still some that is legit and truly makes money.

    However it takes so much money in order fro you to join the business. I’m am thankful that I bumped into Wealthy Affiliate. It is just my one month now, and everything seems going into place. By the way, what actions should I take in order for me to be successful in Wealthy Affiliate?

    1. Hi John:

      Thank you for visiting my website today. I am glad to be able to enlighten you to what is the pyramid scheme definition. Many people have heard the term before, but do not know exactly what it is. As far as “pyramid schemes” being legit, there is no such thing. Every pyramid scheme is illegal and a fraudulent business model. You might be confusing pyramid schemes with MLM (multi-level marketing) schemes and yes, you are right, there may be a few legitimate MLM companies, but many of them are indeed a pyramid scheme.

      As far as Wealthy Affiliate, I am glad to hear you are thankful for your experience so far. Being that you are only a month in, I am sure you have become familiar with the friendliness and helpfulness of the community at Wealth Affiliate. They have a pay it forward philosophy and I am one of the many who actively participate in helping others and paying it forward. You cannot achieve success without helping others. If you are passionate about helping others succeed, check out Wealthy Affiliate.


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