How a pyramid/ponzi scheme works

How nice the repeated offers sound that e-mail users occasionally receive in their inboxes without any action on their part. There is talk of almost unbelievable sums of money up to the five-digit range, and supposedly you don’t have to do much to get them. ln this context, it is widely referred to as a so-called snowball system.

How does a pyramid scheme work?

The basic principle of a pyramid scheme is simple: Person A pays an entry fee and then recruits Person B, who does the same. Half of the entry fee paid by person B is paid out to person A again.

This leads to a chain reaction and, depending on how many additional customers are recruited by person A, person A’s earnings increase each time. With two recruited members, one has already recovered one’s own investment. In most cases, however, the recruited new customers pay for a product or service that in reality either has no value or does not exist at all. Therefore, operating such a system is illegal in most countries.

Heart and gift circles

ln relation to the generic term snowball system, a distinction is made between heart and gift circle models and multi-level marketing (MLM for short). In the so-called “gift circle”, new customers invest their money in the form of a membership fee, which is automatically awarded to customers who have already been in the system for a long time. The aim of the whole thing is the hope that through this procedure it will be their turn at some point and they will also be “given” a gift.

Multi-level marketing

Multi-level marketing is a separate form of direct sales of products, goods and services. This distribution is carried out through several levels and groups of people and is aimed at saving advertising costs as well as the dynamic growth of the sales organization. This system relies heavily on word-of-mouth, and the handler’s earnings are based on the constant resale of goods. However, this system becomes illegal when handlers are paid in the form of a bounty for recruiting new customers (buyers).

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