Unless you have access to some sort of stealth or cloaking technology (in which case I want blueprints), you’ve undoubtedly been accosted by an Amway distributor at some point in your life. It doesn’t have to be Amway; it could be any one of those other multi-level marketing (MLM) schemes too, such as Primerica, or perhaps it was Quixtar (Amway’s online variant). Or perhaps you received some scam via E-mail, promising untold wealth without any work.
If you’re like most people, you simply shook your head, dismissed it as a scam, and moved on. But a surprisingly large number of people get taken in by it, and the last time someone tried to sell me on the idea, I told him I would take a good look at the business model to see if it made any sense. I did, and it doesn’t.
How does Amway work?
The Amway “hook” is simple enough. You become a “distributor” for a low, low entry fee. This makes you a retail franchise. You sell Amway products for a profit, or you buy them for yourself. But if you want to make real money, you sign up other “distributors”. They’ll be your “downline”, and when they sell anything, you get paid a commission (they call it a “bonus”). Note that you can get commission on sales of both products and so-called “sales tools”, ie- the motivational books, videos, and audio tapes that constantly stream out of Amway and many of its top distributors.
Small problem: you don’t want to poison your relationships with friends and family members by trying to sell them products at a profit. “But that’s no problem at all”, say the distributors (aka IBOs, or “Independent Business Operators”), because you don’t have to sell them anything. Just buy $200 worth of household supplies for yourself every month, and you’ll have enough sales volumes to qualify for bonuses. Then, get everybody you know to do the same thing, and everybody wins! You’ll get huge bonuses from your growing downline, and they all win too, because they get to buy things at wholesale prices! In reality, you’re doing them a favour by signing them up. Right?
Wrong. For one thing, anything which sounds too good to be true usually is. For another, Amway products are not sold at true wholesale prices. In fact, when I got the chance to inspect an Amway catalogue, I made note of several key prices and later compared them to those found at discount retailers. What did I find? You don’t save money by buying Amway. In fact, once you add shipping and service charges to your order, you’ll find that you usually lose money by buying Amway (gee- Amway is out to make a profit at your expense? What a shock!). In fact, for big-ticket items, the prices can be grossly out of line: I saw electronic items such as stereo systems in the Amway catalogue for hundreds of dollars more than they were at local discount stores. Worse yet, I would have had to place an order and wait for it to arrive with Amway, whereas I could have simply gone to a local electronics store, seen the product up close, listened to it, and then bought it on the spot, all for less money.
But Amway cuts out the middleman, right?
Amway defenders would claim that they cut out the middleman, because Amway is “direct sales”. But this is simply not true. In reality, Amway adds middlemen. Let us compare Amway to Wal-Mart:
|Buys direct from manufacturer
|Buys direct from manufacturer
|Adds markup for operating overhead such as exployee salaries, building maintenance costs, etc.
|Adds markup for operating overhead such as employee salaries, building maintenance costs, etc.
|Adds distributor’s commission
|Sells to you
|Adds distributor’s “upline” commission
|Sells to you
Do you still think that Amway cuts out the middleman? When you consider that Wal-Mart has many times Amway’s annual sales, you will see that the situation is even worse than it looks, because Wal-Mart has enough muscle to squeeze its suppliers for much lower prices than Amway could ever hope to negotiate. Amway makes some grossly exaggerated claims about the markups in traditional retail, but if you honestly believe that Wal-Mart has to go through a manufacturer’s representative, a jobber, and a wholesaler in order to get to their suppliers, you need to give your head a shake.
Of course, Amway also makes some of its own products (mostly things like household cleaners and bathroom products), which it can sell “directly” (if you disregard the multiple layers of commissions paid into the multi-level marketing system). But the only way to go through $200 a month of those kinds of products is to pay enormously inflated prices for them … the way you would through Amway. When people try to sell you on the plan, they don’t show those crappy little bathroom products. They show you brand-name electronics, and cars, and all the glamorous items in the catalogue … all of which would cost less if you bought them elsewhere.
In the end, the proof is in the pudding. Quixtar reported year 2000 sales of $518 million, out of which they paid $143 million in commissions. You don’t have to be a mathematics genius to see what this means: when you buy from Amway, 28% of the price is pure commission! Worse yet, this is strictly the distributor’s markup, and it doesn’t yet include Amway’s own markup! “No middleman” indeed …
Compare Amway catalogue prices (including shipping and service fees) to the price tags down at Wal-Mart or Costco, and you’ll see that all the marketing in the world can’t change reality. Amway is not cheaper than a “traditional retailer” such as Wal-Mart (or even Sears, in most cases). You will not save money by buying home items from Amway, and neither will any of your friends and family. You will also not make money by selling these products, since people can be stupid, but not that stupid. Even if you can sucker somebody into buying your overpriced products, all it takes is for that person to wander through Wal-Mart or Costco once, and you’ll never see him again.
So why do people join Amway?
Why do people buy lottery tickets? When dreams crash head-on into reality, a lot of people let the dreams win. You know the sales pitch: “it costs you nothing, and the potential is limitless!” However, both claims are fraudulent:
- “It costs you nothing”– Wrong. In fact, an Amway “business” has just as much overhead as, say, an insurance agent. You need to have sales materials. You need to burn gasoline to go prospecting. You need to pay extra car maintenance for all that added travel. You may need to pay long-distance phone bills. You’ll start burning a lot of cell-phone hours, just like any insurance agent. And you’ll need to consume vast amounts of time, arguably the most precious resource of all.
- “The potential is limitless”– Wrong, unless you’re willing to screw a lot of people for a lot of money. You see, despite Amway’s protestations that it’s not a pyramid scheme, it is only through the pyramid commissions structure that anyone can ever hope to reach their “limitless” earning potential. On a typical sale, there is a pyramid of distributors (diamond, emerald, platinum) who will take commissions, and your objective is to be at the top of that pyramid. Why? Because everybody at the bottom of the pyramid is losing money, and that lost money is being funneled to the top.
Amway distributors will sell you on the idea of compounding. You buy $200 a month of Amway products for yourself, upon which you get a few dollars back. But if you can sign up 10 people, and they sign up 10 people apiece (and so on, and so on), eventually you’ll have 7,000 people, which will qualify you for the “diamond” distributor category. And if each of those people buys $200 a month of Amway products, you will generate nearly $17 million in yearly sales! Now you can sit back, relax, and just rake in the profits! Easy, right?
Wrong. The model usually collapses long before that, because quite frankly, most people aren’t gullible enough to go for it. They can talk about compounding all they like, but according to the FTC, some 75% of Amway distributors drop out, and according to Amway’s own figures, nearly 60% of those left are “inactive”. Is it truly realistic to imagine that you can build up a stable network of 7,000 active distributors?
But you can do it in your spare time, right? So what’s the harm?
Hmmm, let’s think about that, shall we? Let’s say that 1 in 4 prospecting attempts is successful (a very optimistic figure). Now let’s factor in the FTC’s estimate that 75% of Amway/Quixtar distributors drop out within a year, as well as Amway’s own figure that nearly 60% of distributors are “inactive”. And finally, let’s remember that it takes at least 2-3 hours to sit down and try to sell a prospect on the idea (based on the time someone tried to prospect me).
Let’s do the math. Most of an evening (say, 2-3 hours) is required for a single prospecting session. 4 sessions to get 1 recruit. 1 of 4 recruits stays in for the long haul. 2 of 5 survivors is active. So what does it all mean? Crunch the numbers: 4 x 4 x 2.5 = 40 evenings per active, long-term distributor. But you want 10 of them, so now you’re talking about four hundred evenings. Are you starting to get the picture? That’s four evenings a week, every single week for two years! And that’s not even including all of the silly pep talk rallies and inspirational meetings that you’re supposed to attend!
So after you’ve done all this, what do you have? A measly 10 people under you, each of whom has to do the same thing, and so on down three levels if you plan on making serious money. And since you’ve been doing all of this in addition to your day job (one of the great “benefits” of the Amway business model) you haven’t seen your family in two years. Feeling good yet?
But if you can do it, the payoff is huge, right?
Let’s suppose you’re a stubborn sunuvabitch, and you’re confident that you can do it. You’re willing to sacrifice most of your family life for two years or more, in order to collect 10 distributors who will be active, and who will stay on for the long haul. So are you sitting pretty?
In a word, no. The truly amazing thing about the Amway business model is the enormous sales volume required in order to make any money. A 1985 issue of Forbes magazine gave the example of Robert Crisp of Tulsa, Oklahoma. This man’s network of distributors generated $120 million (yes, one hundred and twenty million dollars) in sales for Amway, from which he earned $200,000. Just think about those numbers, people! His profit is less than 0.2% of the sales volume going through his “business!” If you had an independent business and you were making less than 0.2% profit on sales volume, would you be happy?
Let’s put it this way: Hollywood grosses roughly $5 billion annually. If Hollywood executives earned profits the way Amway’s “Independent Business Operators” did, the entire industry would have profits of less than $10 million per year! This wouldn’t be enough to produce the opening credits on a James Cameron movie, so if Hollywood’s business model were as good as the business plan of a typical Amway distributor, it would have gone out of business long ago.
Worse yet, these feeble figures are from a top producer, whose bonuses are nearly ten times as high as the bonuses a new distributor would get. Small wonder then, that the vast majority of Amway/Quixtar distributors lose money.
But what about those testimonials from happy distributors?
What about them? Oh, I’m sure they’re very compelling. After all, every get-rich-quick scheme in the world has pretty much the same stories: “I used to work nine hours a day, just barely getting ahead. But now, with
Testimonials are an incredibly stupid form of “proof”, for the obvious reason that they only pick the good ones (“diamond distributors” or higher). If they were forced to give a random sample of their distributors’ experiences, you would discover that out of more than 2 million active distributors, there are less than a thousand people who are so successful (that’s roughly 0.05%). If you had to hear more than a thousand testimonials in order to get one that was really inspirational, would you be inspired? Suppose someone came to you and tried to sell you an investment scheme in which you have a lower than 10% chance of breaking even, never mind making big money. Would you buy in? I doubt it!
So why do so many Amway distributors fail? Is it that they aren’t trying hard enough? Is it that they don’t have enough friends? Is it that they haven’t been coached well enough? No. There’s a very good reason why most Amways distributors must lose money, and it stems from the design of the Amway business model itself.
So why doesn’t it work?
Amway’s defenders will try to confuse you with superfluous details and perhaps even business jargon, but let’s look at this scientifically, shall we? Suppose you have a completely sealed black box except for an inlet and outlet. You put 10 units of mass/energy in, and you get only 5 units of mass/energy out. Logically, there must be 5 units of mass/energy still sitting in there, right?
Well, we can do the same thing with the MLM distributor group (not Amway itself, since we’re only concerned with the profitability of the distributors). We have a black box (the MLM group, including all of its members), we have an influx of mass (new members joining) and energy (sales income), and an outflow of mass (disillusioned members quitting) and energy (expenses, payments to Amway for products). If income exceeds expenses, then you have a profit. If expenses exceed income, then you have a loss. So far, so good.
So how much mass/energy is entering, and how much is leaving? Is the box getting more full, or more empty? Doth thy cup runneth over, or doth it run dry? Let us examine the example of Quixtar in 2000. Remember that their reported revenue was $518 million and their reported commissions were $143 million. Also remember that it has been estimated that roughly 80% of Amway/Quixtar sales are “self sales”, where the distributor buys his own merchandise, so only 20% of total sales come from an outside source and can be considered true income for the group.
|Sales Income from Customers
(~20% of total sales)
|Payments to Quixtar
(100% of total sales)
|Commissions from Quixtar
|Net loss: roughly $271 million
See the problem? They sell you a business model in which you can sell your products to yourself and still make money. They assure you that it works because you pocket your own commissions. Millions of people who apparently flunked high school math seem to believe them. Is this not insane?
Perhaps the best analogy for the Amway distributor group is not a black box after all. Perhaps the best analogy is a black hole.
OK, so how did the top distributors make it?
In most cases, they were the first ones in. Pyramid schemes work if you can recruit a vast army of suckers to line your pocketbook. When the idea is new, it’s much easier to recruit suckers because they’ve never heard of it before, and their ignorance makes them easy marks. But in any market where Amway has been operating for a while, you won’t find such easy pickings. That’s why Amway success stories are so rare; you need to “open up a new market” in order to be successful.
The remainder fall into the category of the “super-salesman” personality type (you know, the guys who could sell refridgerators to Eskimos). People like that might be able to make the Amway model work, but consider the aforementioned example of Robert Crisp and his $120 million sales volume from which he made only $200k. With the kind of salesmanship and hard work you’d need in order to build up that kind of business with Amway, you could probably make far more money selling cars or even insurance (don’t laugh; there are life insurance agents out there making over $1 million per year; a truly great salesman can make a lot of money in our society, without having to line the pockets of Amway).
Pushing the Product
Their sales pitch is a textbook model for scam artists everywhere. Do they hard-sell you on their products? Do they spend two hours trying to convince you to buy some new power tools, or facial cleansers? No! Amway is not out to sell goods; they’re out to bring more members into their sucking black hole of distributorships, because the more suckers they have selling product to themselves in the hope of somehow making money on their own commissions, the more money the people at the top make. And even within the distributorship black hole, there is a pyramidal hierarchy, where some distributors make money at the expense of others (in other words, the people at the bottom of the distributorship group are really losing money). That’s why they hard-sell the business, not the products. That is a classic hallmark of an illegal pyramid scheme, and Amway escapes prosecution only because they don’t officially sanction this behaviour (even though most of their distributors do it).
In short, you have a distributorship which sends 4 times more money to its parent corporation than it receives in “outside sales”, and then heartily congratulates itself on getting a third of that back in commissions. Does this sound like a healthy business? Where’s the difference coming from? You guessed it: the distributors’ day jobs. This system doesn’t augment your regular income; it drains it.
The Amway distributor system does not generate wealth for its members; it is a net-loss proposition in which the entire group is hemorrhaging red ink like there’s no tomorrow. There’s only two winners in the system: the people who run the parent corporation, and the people who sit at the top of the pyramid (even though the whole pyramid is losing money overall, they are taking such a large share of the commissions that they make money at the expense of the rest). In effect, 90% of the people in the pyramid must lose money so that the remaining 10% can divide the profits amongst themselves (with the lion’s share going to the people at the very top).
Amway’s defenders argue that the trump card is the recruitment process; you make money not by selling product, but by pimping your friends and family. When they join, new money enters the system, and you can take a piece of it. But that is only true if the new people lose money! Imagine a poker game in which a new guy joins. In theory, there’s more money for you to win now, but only if he loses. Do you still want to go after your friends and family? How ruthless are you?
Now do you see why 90% of people in Amway lose money? Since the entire distributorship is losing money, most of them must lose a lot of money if the top earners are going to make any! And even after all of that, the top earners derive the lion’s share of their profits from the sales of seminars, books, and other “sales training aids”, because the really big winners are the people who run the parent corporation and laugh at the worker ants running around on their behalf. Small wonder that the handful of successful distributors are so enthusiastic for you to join; they need new donors. As P.T. Barnum once said, “there’s a sucker born every minute”.
More Info Elsewhere
For more on MLM, see the MLM FAQ. For an extremely thorough, in-depth discussion of Amway, see Amway: The Continuing Story. Also note that like Scientology, Amway has a history of legally harassing those who would speak out against it, which is another sure sign of a scam.
And finally, you may want to visit Amway’s home page. Update: They’ve improved it over the years, and added an on-line store to make it look more like a normal retailer and less like a MLM scam headquarters. But look at the prices: as of Oct 7, 2010, a case of 24 (16 fl oz) bottles of their “Nutrilite” Lemon-Lime sports drink costs $38.88. Meanwhile, the New York area online grocer FreshDirect sells a case of 24 (20 fl oz) bottles of Lemon-Lime Gatorade for $21.79. That’s 25% more sports drink, for 44% less money!
Amway’s website is chock full of ridiculously priced items, like a $384.50 wok or a $1,072.95 set of pots and pans (both from their in-house “iCook” brand, which is supposed to save you money). Some of their small-ticket products are closer to normal retail prices, like their $8.99 pack of 8 Fuji AA alkaline batteries (as opposed to FreshDirect’s $3.99 pack of 4 Duracell AA batteries, which is still slightly cheaper per battery), but what kind of accomplishment is that? Should we be pleased that they’re only slightly more than normal retail prices on some products? Where are those huge savings Amway talks about? Oh wait, that’s right: their real business is not that on-line store: it’s the MLM operation, and don’t let them fool you into thinking otherwise.