Pyramid schemes make money by recruiting people rather than by selling actual products or services, even if the scheme includes the selling of a product. These schemes work by asking new participants to make a payment, known as a ‘participant payment’, in order to join. New members are promised payments for recruiting other investors or new participants.
Pyramid schemes are closely related to referral selling schemes. The main difference between the two is that the revenue from pyramid selling schemes is based on recovering a portion of the participant payment, while referral selling usually involves the sale or resale of products or services with the promise of a commission for subsequent sales to other parties.
Example: A scheme or game based on an imaginary airliner has four levels of players comprising the pilot, two co-pilots, four crew and eight passengers. New players enter as passengers and pay a fee directly into a trust account. When all seats are filled the plane ‘takes off’, the pilot leaves with the winnings, the flight splits into two games, and everyone left is ‘promoted’.
The reality of pyramid selling is that it tends to heavily reward the very top of the pyramid at the expense of everyone below. The vast majority who join the scheme later are led to believe that they will also benefit financially, when this is often not the case.
Legislation: Australian Consumer Law Part 3-1 Division 3