🧠 3 Ways To Spot A Pyramid Scheme -So You Can Stay Far Away

It’s a question I hear (and many of you do as well) more than you’d expect - and it deserves an honest, informed answer.

“That sounds like one of those pyramid things…”

Sometimes, that concern is valid. Yes - there are real pyramid schemes out there. They’re illegal. Deceptive. Designed to enrich a few people at the top while leaving the majority with broken promises and lost money.

But not everything involving commissions, recruiting, or multi-level income is a pyramid scheme. Structure alone doesn’t define legality or ethics. It’s all about how value is created and exchanged.

🚫 What Is a Pyramid Scheme?

A pyramid scheme is a fraudulent business model that relies on recruiting new members to make money, rather than selling legitimate products or services. It becomes unsustainable because it requires an ever-growing number of new recruits to fund payouts to the top—until it collapses.

🚫 No real product or service

🚫 No long-term customer base

🚫 Money flows up, not value

That’s what makes it both unethical and illegal.

✅ What’s Not a Pyramid Scheme?

Here are just a few (sample) legitimate businesses people mistakenly group in with scams:

• Keller Williams (real estate) – Agents build their own real estate businesses and may participate in profit sharing, but income is tied to home sales.
• Farmers & State Farm (insurance companies) – Licensed insurance agents earn commissions on policies sold and renewed.
• Cutco (or other network marketing companies) – Reps sell high-quality knives and home goods directly to customers, earning per sale.
• Enterprise Rent-A-Car – Promotions and bonuses are based on branch profitability and team metrics.
• Pfizer, Merck, AstraZeneca, Johnson & Johnson – Pharmaceutical reps earn compensation based on product education, market share, and doctor engagement.
• Salesforce, HubSpot, Oracle – Corporate sales teams get commissions; sales managers and regional leaders often earn overrides or bonuses tied to their teams' success.

Many direct sales and direct marketing companies follow a similar model—offering real products, real customers, and compensation tied to sales.

👥 Let’s Be Honest About Multiple Levels of Compensation

Here’s where the confusion deepens:

• If you recruit someone and get paid on the people they bring in or the sales they make, it doesn’t mean it’s a pyramid scheme.
• If you get paid on your team’s performance (or their team's performance), it doesn’t mean it’s a pyramid scheme.
• If you get a bonus for reaching a new level of product sales (either by you or your team), still not a pyramid scheme.
• Even if multiple people earn income from a single sale, that’s still not a pyramid scheme.

Consider this:

A salesperson at Verizon makes a sale.

👉 Their manager gets a performance bonus

👉 The regional director benefits from hitting regional targets

👉 The VP gets a compensation boost if the entire division grows

Multiple levels earn on one transaction. That’s not illegal—it’s strategic. It creates layers of support, mentorship, and growth within companies. So let’s stop assuming that “multi-level” equals “scam.”

💰 Performance-Based Pay Isn’t a Red Flag

It’s not for everyone, but that doesn’t make it unethical.

To succeed in performance-based income, you have to:

• Show up
• Create value
• Make sales
• Serve your customers
• Ask for the next step

That’s true whether you’re an entrepreneur, coach, sales rep, or sales executive.

And yes—it can feel scary.

But so can any job where you’re expected to deliver results. If you had a corporate job with a job description and didn’t fulfill the tasks, you wouldn’t get to keep that job (hopefully).

It’s not about fear. It’s about fit.

🧑🏫 And What About Coaching?

Many coaches start as solopreneurs. As they grow, they bring on associate coaches to serve more clients. Those coaches:

• Find and serve clients
• Earn income
• And often contribute a portion of revenue back to the lead coach or brand owner

That’s not a scheme. That’s an agency model. It’s common in legal firms, real estate brokerages, and creative services.

The structure isn’t the issue. The question is: Is real value being delivered? If the answer is yes, then it isn't a pyramid scheme. It's a business model - and you can agree or disagree with it. If you disagree, it doesn't mean it is wrong or illegal like a pyramid scheme.

🛒 “But I Don’t Like the Prices…”

That doesn’t make it a scam either.

You might not agree with the cost of a direct-sold product... And, you also may not like the price of a (even more) marked-up price of a similar product at Target, Walmart, CVS, or Costco (etc).

And guess what? You’re not even buying straight from the manufacturer—you’re buying from third-party distributors. Those companies mark up products to cover their logistics, marketing, and staffing. It’s normal business.

Disagreeing with price ≠ fraud. It just means it’s not your brand or budget. If you don't like the prices being offered, make the choice NOT to purchase those products or services.

🏷️ “But It Requires a Membership—Isn’t That a Red Flag?”

Not at all.

Just because a company charges a membership fee doesn’t mean it’s a pyramid scheme. In fact, membership models are incredibly common—and widely accepted—as part of smart, recurring business strategies.

Consider these examples:

• Costco and Sam’s Club – You can’t shop there without a membership, and millions of people do it happily every year. Why? Because the value outweighs the cost for those who choose it.
• Amazon Prime – It’s a paid membership for faster shipping, streaming perks, and discounts—and yet nobody calls it a scam.
• Many local service businesses like HVAC, plumbing, or electrical companies offer annual service plans or “VIP memberships” that include things like faster service, more discounts, weekend service or delivery, reduced prices, etc.

It’s a smart business model that adds convenience, builds loyalty, and offers consistent value.

So, no — a membership fee doesn’t make something a pyramid scheme. It simply means the company is offering additional benefits to enhance a specific customer experience.

What does make something suspicious?

👉 If you can’t explain what the customer is actually buying

👉 If the only real benefit is “the opportunity” to recruit others

👉 If the product itself is secondary or irrelevant

In contrast, legitimate membership-based models are everywhere—from gyms to subscription services to well-known retail giants.

🎯 Final Thought

Not every opportunity will be a fit for everyone. And that’s perfectly fine. That's just life and the world - and we need people in all walks of life to make the world go around.

But let’s stop using the term “pyramid scheme” every time we’re uncomfortable with a business model - or every time someone earns more than we do. Or we haven't taken the time to understand how that compensation plan really works. Or we may be uncomfortable performing the tasks required to succeed in that business model.

We are adults who make decisions and who are responsible (and accountable) for those decisions. It's ok to choose not to participate in any business model, company, or industry if we don't want to. No excuse or reason is necessary.

Let’s ask better questions:

✅ Is there a real, valuable product or service?

✅ Is income earned through actual work (providing a real product or service to an actual client) - not just recruitment?

✅ Is there transparency to everyone?

If the answer to those key questions is yes… Then it’s not a scam. It’s a real business. (And if you genuinely suspect fraud, you’re right to take action—report it to the FTC or Better Business Bureau.)

Now, if performance-based income makes you uneasy, that’s completely valid. It’s not for everyone. And if that model doesn’t fit your personality, lifestyle, or risk tolerance, there’s absolutely no shame in pursuing a stable W-2 position instead.

Just be mindful:

• Even traditional jobs come with risks
• Layoffs happen
• Job security is not guaranteed
• It’s wise to have 6–12 months of living expenses saved, regardless of your income model

The key is alignment and self-awareness.

For your own peace of mind - and long-term success - be honest with yourself about:

• What kind of structure you thrive in
• What level of risk and reward you’re comfortable with
• What you are (or are not) willing to do to earn, grow, and live better

There’s no one-size-fits-all path. But there is power in choosing yours with clarity.

Want to explore smarter?

I created a free guide: “5 Critical Questions to Ask About Every Side Hustle Before You Commit.” No hype. No pressure. Just clarity.

📲 KnowYourSideHustle.com

Because what you say yes to matters. And how you earn should make sense—for you.

Let's continue the conversation below. What stood out to you in this article?