This was something that was bygone. But when i recently heard about a similar scheme from my friend in Bangalore, with a initial investment of Rs. 30,000+ [During my engineering days, it was Rs. 5,000/-], i knew a post was long overdue.
"A pyramid scheme (also known as "Pyramid Scam") is a non-sustainable business model that involves the exchange of money primarily for enrolling other people into the scheme, usually without any product or service being delivered. " - From Wikipedia
For every pair of identical colour nodes joining under Person No - 1, he collects a thousand. You get a thousand rupees even when an identical pair is joined at the thousandth level. So if u were able to join a few members underneath you, then their efforts would ensure that u get a pay check ever week. It looks simple and easy but the trouble starts when u find that others are not as willing as you to join this scheme.
How is it financed?
If you look at the diagram, the business works in a very simple logic. New members always pay for the profits of the old members. So the good part about these schemes is that at least a few members i.e. early joiners in the regions walk out with huge profits.
Why is it a scam?
- Great majority of participants lose money. You could have easily understood from the diagram that the schemes replicate a binary tree. One interesting property of binary trees is that the number of nodes with two children is always less than half the total number of nodes. So, no matter how many people join, more than half of them will lose money. In practice, in these organizations it’s not enough to have only two other people beneath you – to make a profit, you need more. So the number of people profiting is actually far fewer than half.
But the worst part of this business is that, it makes you look at your friends, colleagues and relatives as potential sales targets rather than as people you love and respect. Another sad thing is that the yearly inflow of new graduates from various parts of India to the software cities - Bangalore, Chennai, etc. provides these companies potential fresh targets year after year.
P.S: If you want more details regarding these Pyramid schemes, Peter Jayaraj has a few posts on his blog - Digital observation - Label(Questnet).