Us bloggers have each other’s backs. Nathan, our business guru, sent me an email suggesting a topic to write about. He knows how helpful it can be to get some advice and was watching my back. Through researching his suggestion, I can see that not every business has that same support. (I apologize for the cheesy segue)

Pyramid Schemes

Pyramid Schemes are businesses that provide individuals with monetary compensation based on recruiting others to participate in the business, according to the RCMP’s website. “The money is made through recruitment only, while the product or service has no real value,” reads the site.

Most importantly, they are prohibited under Canada’s Competition Act and monitored by Canada’s Competition Bureau.

They are enticing because they offer income, not only based on what product you sell, but also based on the product sold by those you recruited, any product sold by those they recruit and so on. Every member is required to pay a start-up fee that can be quite substantial.

They are attractive to students because they promise easy money.

And don’t think that students can’t be tricked. One of my friends at the University of Ottawa told me about one of her friends joining a travel-related pyramid-style business. Nathan, who goes to school in Toronto, told me that more than one of his friends have jumped at the opportunity to participate in a pyramid-style business. Nathan says he was even approached in High School.
Over at secret2makingmoney.com, there is a great article that outlines the downfalls in pyramid schemes:

Say you were to start by recruiting 3 people in the first week. They, in turn succeed in recruiting 3 people each the next week, and your plan continues perfectly week after week. In 16 weeks your recruits would have exceeded Malaysia’s population. After 21 weeks, you would have to go to another planet to look for recruits as your down liners would now exceed the world’s population.

Multi-Level Marketing (MLM)

MLM is a pyramid-style business that is not illegal in Canada. It operates much like a pyramid-style business, but emphasis is placed on the distribution of product.

You earn money based on what you sell and the only financial gain in recruiting people is that you have the potential to earn more should they sell more. The focus is on product distribution. There should be no fee to join.

Telling the Two Apart

There are several things you can look out for should someone offering an opportunity that looks like a pyramid scheme approach you:

1. The business requires a large investment from you at the start-up
2. Offer return on you recruiting others
3. Products are often more expensive than similar products in the main market
4. Products are not really products at all, but rather brochures or tapes that explain further services

About.com has a series of questions to ask yourself before joining something you may suspect is a pyramid scheme.
Finally, I want to thank my fellow blogger for his suggestion. Now, Nathan, please tell three friends to check out my post this week and get them to tell three others and get those three…