Q&A: "Is my business idea a pyramid scheme?"

It's not often that someone calls in and says, "Am I running a pyramid scheme?" … but that's basically what we've got here. Hey, it's a safe space! Better to know up front if your idea might not pass muster.

So what exactly is our brave caller trying to do? Let's see if we can figure it out based on the information they provide.

I have an idea: I want to create a fashion review network that gives out points to people who post in an app. The points can convert to real money, and the more people use the app or refer their friends, the more points they'll receive … which of course can eventually turn into money.

My friend, however, told me that this is basically a pyramid scheme. I've always liked Egypt … but I don't want to do anything shady or unethical. So I thought I'd ask you: is this idea actually a pyramid scheme? If so, what are the characteristics that cause you to think that?

I'm not sure we have enough info in this short description to say whether we can apply that label or not. What it really depends on is the answer to this question: "What is the actual product?"

Claire mentions that it's a fashion review network that gives out points. Is there a real product or service beyond those few words?

Is the revenue model "get a bunch of people signed up" and if you couldn't keep doing that, everything would fall apart? That's what makes something a pyramid scheme.

My guess is that Claire isn't setting out to scam people or even to have a shady or questionable business model, but that she hasn't fully thought this through yet. So I'd keep thinking, and focus less on the referral engine and more on the product and use case.

It's always good to ask, "How will this business help someone?" If you don't have a clear answer, that's a good sign to spend more time working on it or just try a different approach entirely.