Heres how I recon it works...
People involved:
Company
You
Friends
You sign up and pay £6.99 or whatever the price for a teeth whitening kit, or sign up for ebay and ebay pay the Company some money, etc.
You then tell 5 friends about this, who in turn each have to tell 5 friends, we have a:
5x5 = 25
= 25x5 = 125
= 125x5 = 625
Etc.
This very soon gets around to a huge amount of people, and as you say, most will not complete the steps, but will be initially drawn in by the "free ipod"
Very clever if you ask me.