There are a myriad of fundamental problems related to the pyramid scheme. However, I will choose to focus on a few that are quite easy to spot and understand, as well as a look from an ethical point.
The first, and oft-cited problem is purely mathematical. In a pyramid, the monies rise from the bottom to the top, part of which is to pay off people on the next lower tiers. For each tier to be paid off, new "investors" have to be continually recruited (who in turn have to recruit more people into the "plan"). The plan eventually collapses mathematically, either because everybody on the planet will have been entered into the plan, or when plan participants simply can no longer find new "investors." Either way, those in the bottom (and often the middle) tiers end up at net losses.
This method in turn leads to a second problem, which is that there is no real mechanism to control the rate of saturation into a market and thus enable all of the plan's participants to (potentially) profit. Nor is there a way to determine if and when a given geographical area is saturated. Most other models DO have a way to control this (e.g. franchise agreements, limited placement of public-facing outlets such as retail stores, branch offices, and dealerships) and strictly maintain geographical limits. Unlike those other models though, both the legal multi-level marketing plans and the illegal pyramid schemes eventually and inevitably have to face the fact that there is no control to moderate saturation.
In other words, the plan's owners (be it an individual or a company) is openly and always "hiring" sales associates, and they almost always over-hire for any given area precisely because of the lack of saturation control.
Third, there always exists a pressure to sell and up-sell products and services. A result of this pressure is that often friends and family are repeatedly hearing sales pitches even though they may have told the plan participant that they aren't interested. At varying points, people tend to view individuals making such aggressive attempts at sales as being rude and/or pushy. Friction develops, which can strain or destroy familial relations and/or friendships and result in the participant's relative alienation from his or her "usual" social circle.
Fourth is that there often is little or no oversight to ensure that participants are following the plan company's policies and ethical guidelines. If participants are having difficulty selling, they may decide to resort to unethical or illegal practices in a desperate effort to be successful and make money.
Fifth is the issue of the plan itself. Anyone who's sat through a middle-school business or economics class can tell you that for a business to be successful and grow it needs to have a product (be it a tangible good or a service) that is in demand by at least a segment of the public, and that such a product needs to be priced and made available in a way that will draw in the most potential customers. As we've noted above, there are plenty of business plans used by various industries and companies around the world that are at least tolerated (if not respected) by most of the general public such as franchises, dealerships, partnerships with larger and respective companies, and the old-fashioned "grow it one store at a time."
Simply put, if having to resort to multi-level marketing methods is seen as the most viable means of putting a given good or service out to market, what does that really say about the product idea itself?
Go back to the Background Section
Go to the Ethics In Brief