Closed Systems, a.k.a. Pyramid Schemes

You might have come across examples of blogging about blogging, writing about writing, online marketing about online marketing, and businesses about businesses.

When someone like Stephen King writes a book about writing, I read it. When Gary Vaynerchuk talks about online marketing, I listen. When Jack Welch writes about business, I read. But when someone builds a business around teaching people how to run a business, and that is the only business they have ever built, I become suspicious. Moreover, if they promise me that I can make money joining their system and promoting it to my family and friends, my alarm bells go off. This is the perfect definition of a pyramid scheme in my book. Sure, there are people who make some money and have a decent lifestyle as a result. However, as we all know, 99% of the people who join such schemes lose their money at the end.

Active vs. Passive Pyramid Schemes

There are two types of pyramid schemes, active pyramid schemes and passive pyramid schemes. Passive pyramid schemes are the ones that involve investing your money in a fund. They invest your money for you and you receive the profits. What they are doing behind the scene is to channel the newcomers’ money to the old members’ account, so that people have the impression that the system is actually producing value. They keep this cycle running until they run out of newcomers and the whole system collapses.

The active pyramid schemes are more difficult to be identified for being the schemes they are. That’s because they also require some work on the participant’s side. If the participant doesn’t succeed, this is assumed to be the participant’s fault and not the organizer’s fault. That way some active pyramid schemes can survive much longer than the passive pyramid schemes, which are doomed to fail at some point.

Active pyramid schemes always involve a well-defined business model. Someone has already figured out the business model for you. All you have to do is to purchase their training or course and follow the business model. Most of the time, these schemes involve some kind of network marketing, promoting the business to other people.

There are always a minority of participants, who actually make money with active pyramid schemes, which attracts naive people paying for these schemes. At the end of the day, the whole business boils down to promoting the same scheme to others. No one, but the organizers and a few participants benefit from the system. The system doesn’t produce any value outside itself and most of the people who invest their money in such systems actually lose their investment.

Active pyramid schemes used to be operated before the Internet, but with the Internet and online marketing they have been taken to a whole new level. Now, there are courses about online marketing and online business systems, provided by people whose only track record is to produce and sell these courses. And of course, they have the network marketing component, a.k.a. affiliate marketing, which involves the participant to buy the starter’s kit or whatever they call it.

When you come across a “business opportunity” offline or online, ask yourself a few simple questions. Who is going to benefit from this business? Is there any value produced outside of this system? Are there any customers who will benefit from what we have to offer? What is the track record of the people offering this “business opportunity?” If a certificate or diploma is offered, what is the market value of that certificate or diploma?

When you do your homework, you will realize that a lot of the “business or investment opportunities” that you come across are actually active or passive pyramid schemes.


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