Do 99% of Amway distributors lose money? Part 1

It’s a common claim among critics of multilevel marketing and Amway that “most people lose money”, some even go so far as to give specific figures. Jon Taylor of Consumer Awareness Institute claims loss rates exceeding 99.9%. Robert FitzPatrick of Pyramid Scheme Alert essentially just repeats Taylor’s analysis and claims the “loss rate” exceeds 99%. Former Amway Emerald Eric Scheibeler claimed that a UK court case (BERR vs Amway UK) found a 99.7% “loss rate for investors” and this was reported in a news article and is currently included in the wikipedia article on Multilevel Marketing. The truth is that no such finding was made. Prolific Amway critics like Joecool, Shyam Sundar, and David Brear repeat these myths, and unfortunately so do members of the media.

Is there any truth to these accusations?

An example of a Jon Taylor & Robert FitzPatrick analysis

Robert FitzPatrick and Jon Taylor come up with their figure by analyzing various companies Income Disclosure Statements. Using the averages and number of distributors qualifying at a particular level (a frequency distribution), they work out the total income each level earned and use this to calculate the average income of the “bottom 1%”. Taking their Nu Skin example, using 1998 average income data, they calculated that –

The mean average payment to the bottom 99% of Nuskin distributors was $7.43 per week

and go on to add “before expenses and taxes are deducted – resulting in a significant loss.”

Mathematically their calculations are roughly correct (though averaging from a frequency distribution doesn’t give the exact mean). Statistically however, their analysis is completely bogus. Why?

There’s several flaws. First, when calculating statistics like “mean” or “average”, a measure of central tendency, you need to consider differences between groups included in your sample. For example, when statisticians calculate and present average heights, it’s typically broken down by age and sex. It simply makes no sense to average the heights of, say, 5 year old girls and 30 year old men together. You can do it and get a figure, but what does it tell you? Pretty much the only thing it tells you is you need a better statistician! This however is  exactly what Taylor and FitzPatrick do. They pile together people who have been registered for a few months and mix them together with people who have been actively building a business for 30 years and more! They include people working 30 hours a week and people working one hour a week. They include people with a goal to generate a full time income with people whose goal is to buy some products cheaply. It simply makes no sense. The only thing it tells you is need a better statistician!

Still, that’s possibly not the worst thing they do. Jon Taylor claims to have a PhD in Applied Psychology. I too have qualifications in Psychology (and postgrad in Sociology) and I can assure readers that you do not get these qualification without quite extensive training in statistics. Here’s one of the things you’ll typically be taught about statistics like “mean” or “average” –

The important disadvantage of mean is that it is sensitive to extreme values/outliers, especially when the sample size is small. Therefore, it is not an appropriate measure of central tendency for skewed distributions.

What is a skewed distribution? It’s helpful first to look at what’s called a “normal distribution”. Here’s a graph of a sample of men’s heights.

NormalDistribution
source: www.cuclasses.com/stat1001

You’ll note how the graph peaks in the middle and tails off to either side in roughly symmetrical fashion. The more symmetrical it is in this “bell curve”, the more useful a statistic like “mean” is in describing the population or sample you’re interested in.

Now let’s take a look at another distribution.

NuSkin1998 income distribution

You’ll note this distribution is very heavily skewed to the left, then a bump, then a tail to the right.

Remember what I said above about “skewed distributions” and “mean”? It is not an appropriate measure.

But that’s exactly what Taylor and FitzPatrick have done. The second graph above is a graph of the actual data they used to calculate that “The mean average payment to the bottom 99% of Nuskin distributors was $7.43 per week”.Â

So what is that big group on the left? It’s Nu Skin distributors that earned no bonus at all. According to the 1998 Nu Skin income disclosure statement, fully 86% of distributors earned no bonuses at all. That’s no surprise. This is what it says on Nu Skins’ 2004 income disclosure (I was unable to find a copy of the 1998 one Taylor & FitzPatrick quote) –

As with any other sales opportunity, the compensation earned by distributors varies significantly. The cost to become a distributor is very low. People become distributors for various reasons. Many people become distributors simply to enjoy the Company’s products at wholesale prices. Some join the business to improve their skills or to experience the management of their own business. Others become distributors but for various reasons never purchase products from the Company. Consequently, many distributors never qualify to receive commissions.

The FTC, in their Business Opportunity Rule – Revised Notice For Proposed Rulemaking note comments from, for example Shaklee –

85% of individuals who sign up with Shaklee do so as “wholesale buyers” rather than distributors

Primerica, Quixtar, Melaleuca and others all reported similar statistics to the FTC. Quite simply these people are not operating a business, and their predictable lack of income from not operating a business should obviously not be used in determining whether it’s possible to earn an income through the business. It’s as absurd as judging whether a particular medicine works by including all the people who didn’t take the medicine! It might tell you something, like the pill is too big so people don’t want to take it, but it won’t tell you whether the medicine itself worked or not.

The obsession that anti-mlm zealots have with the low income of people who don’t actually try to make money makes you wonder if their disappointment with MLM comes from the fact it’s not some kind of “get rich quick scheme” and requires work to succeed, just like any other business. It seems they wanted fast riches and were disappointed.

FitzPatrick & Taylor don’t stop with their bogus analyses there though. In part 2 I’ll look at the other side of the profit equation – expenses.

What Howard Megdal didn’t want his readers to know

I mentioned a couple of days ago that I had tried to reply to Howard Megdal on the three articles he wrote disparaging Amway and the Mets over the new Amway Business Center at Citi Field in New York. Despite initial denials from Megdal, one of his co-editors, Emma Span, admitted she was deleting my comments and had banned me for posting “spam”. Well I just discovered I’d stored a copy of one of the comments I was trying to post that was rejected. This is apparently what some “journalists” apparently consider “spam” these days –

Howard,I’ve been researching and writing about multilevel marketing companies like Amway for over a decade, and unfortunately your article is full of inaccuracies. This isn’t surprising considering you quote Robert FitzPatrick, who has spent a better part of his life spreading myths about multilevel marketing.(1) You say “the most basic requirement is that participants sell a reasonable percentage of the products to outsiders”. This is false, and the FTC has explicitly stated as much in response to allegations by the likes of FitzPatrick. What’s important is that people are purchasing products out of legitimate demand and not out of some belief doing so will some how make them rich. It makes no difference if they are registered as distributors or are full retail paying customers. It’s this same falsehood that Bill Ackman is promoting in his failing attempt to short Herbalife. Having said all of that, Amway requires all it’s active distributors in the United States to have a minimum level of sales to retail customers.

(2) You’ve mixed up two different lawsuits. One involved a large group of distributors that Amway terminated from the company because of alleged unethical practices. Amway fought and won that lawsuit, including a version in California that alleged it was an illegal pyramid. The other involved a separate couple of California distributors. Amway elected to settle that lawsuit, and an analysis of the settlement shows why – the settlement is costing them significantly less money than going to court would have. Interestingly, despite having contacted 97% of all Amway distributors and former distributors in the US over the past decade, the class settlement administrators have been unable to get rid of the money! There’s apparently simply not enough people who feel “scammed”. Indeed only 0.7% of distributors submitted a claim for reimbursement of losses. An independent consultant for that case found that at most only 18% of all distributors had even $100 of expenses over the entire lifespan of their time as a distributor. On the other hand, government mandated statistics published by Amway show that “active” distributors (46% of those registered) earn on average nearly $2500/yr in monthly commissions alone, not counting retail profit margin and not counting yearly bonuses which can be as high as several million dollars. Despite this hard data critics claims 99% lose money, which is virtually a mathematical impossibility.

(3) You quote FitzPatrick as saying regarding MLM companies – “Not one would have passed the [Federal Trade Commission legal] test. Obviously not Amway. It did not pass that test.” This contradicts the fact that the FTC investigated Amway more than 30 years ago and cleared the company of allegations it was an illegal pyramid.

(4) You cite the decision of a Belgian court regarding allegations Herbalife is an illegal pyramid, and state it is “a company operating using Amway’s business model”. How can you make that claim when the Belgian court explicitly stated one of the reasons behind their decision was that Herbalife *did not* follow the Amway model? (As an aside, the Belgian court decision seems contrary to EU law on this type of model, so I’d be surprised if it’s not overturned on appeal).

Amway has an excellent reputation in much of the world, even winning “most admired company” awards in several countries. Unfortunately in the US it’s reputation was tarnished by a number of distributor groups operating in less than ethical ways. Those kind of issues were cleaned up by Amway some years ago, and it’s been primarily the likes of anti-MLM zealots such as Robert FitzPatrick who have actively been misleading people that has maintained the myths about the company and industry.

Please don’t support their efforts by repeating these myths uncritically.

Unfortunately this kind of censorship isn’t uncommon among Amway critics. Here’s a list of anti-MLM bloggers who I know won’t post comments from me –

  • Shyam Sundar, Corporate Fraud Watch
  • David Brear, MLM The American Dream Made Nightmare
  • Cheryl Rhodes (Anna Banana), Married to an Ambot
  • Jon Taylor, Consumer Awareness Institute
  • Robert FitzPatrick, Pyramid Scheme Alert
  • Tracy Coenen, The Fraud Files

It seems some people just can’t handle The Truth!

In contrast, guys like multiple NFL MVP Kurt Warner, who has won awards for his outstanding personal character, make great videos like this to promote the company. Not to mention the ridiculous number of awards Amway, it’s people, and it’s products have won around the world

Great video from Nutrilite and Kurt Warner!

You may know that Kurt Warner is two time winner of the NFL Most Valuable Player award, and also winner of a Superbowl MVP award. What you might not know is that in 2010 he won the Bart Starr Award for “outstanding character and leadership in the home, on the field and in the community”. While people like Howard Megdal may be clueless about Amway (see my post a couple of days ago!), people like Kurt Warner are not, which is why he’s a spokesperson for Amway’s Nutrilite brand.

He’s also got a great sense of theatre!


The disgusting censorship of Howard Megdal, Emma Span, Sports on Earth and Capital New York

Amway recently opened a business center at Citi Field in New York, home to the New York Mets baseball team. There was nothing secret it about, I published a story about it more than two months ago. The opening of the business center apparently came as a shock to some New York journalists, and in particular one by the name of Howard Megdal, who wrote two disparaging and ridiculously inaccurate articles about the Amway/Mets deal for the website Capital New York. According to Bridgett blogged appropriately about the response – America’s National Pastimes: Amway-Bashing & Baseball.

I wrote a reply to Howard in the comments on one of the Capital New York articles, pointing out some of the errors. The site said I needed to register, so I did, upon which I received an email saying my account needed approval before the comment would be posted. I waited. No post. No approval. Other comments appeared. I tried registering a new account, separate from the article, using my full name and email address. I received an email saying my account needed approval. No approval was ever forth coming. Attempts to log in said the accounts were blocked.

I posted a comment on twitter, tagging both Howard Megdal and Capital New York to protest. Megdal replied they weren’t deleting anything. I still couldn’t post.

HowardMegdalCensorship

I tried again, I still couldn’t post a comment. In the meantime, Amway showed nothing but class and reached out to Megdal and invited him to tour the facility.

His response was a third article on the website Sports On Earth, a join venture between Major League Baseball and USA Today. The article was again full of tired cliches and outright falsehoods about Amway and multilevel marketing. I posted a reply there. Sports On Earth uses the Disqus commenting system, so I could see my comment in my My Disqus control panel. It said it was awaiting moderator approval.

Then it disappeared.

I wrote a very short comment on the same article asking Howard why he was deleting my comments. It appeared immediately. Megdal replied that he wasn’t deleting comments, and couldn’t. I pointed out that if it wasn’t him, then his moderators certainly were. Another commentator said they’d like to see my responses for some balance. So I wrote several responses addressing the many inaccuracies in his article. A moderator, another “journalist” on the site,Emma Span, said she had deleted the original comment, accusing me of spamming “Amway PR”, and said if I posted again she would delete all my comments. She was true to her word, for when I protested she deleted my responses and the comment from other readers saying they wanted to read my responses.

Not surprisingly, I can no longer comment there.

This kind of censorship from ostensibly professional media outlets is nothing less than disgusting. I was not offensive in my comments, I did not in any way violate the terms and conditions for commenting on these websites. I simply pointed out the many inaccuracies in the article, with appropriate citations to back up what I was saying.

Those responsible simply didn’t want people to read what I had to say.

Interestingly, I researched Howard Megdal a little further as I wrote this article, and it seems I may have misread his motives a little bit. I thought he was unfairly attacking Amway. It seems though his target isn’t Amway at all, it’s the Mets and their owner, Fred Wilpon. In 2010 he wrote a whole book lobbying to become the Mets General Manager. Apparently it didn’t work, and in 2011 he wrote another book attacking them – Wilpon’s Folly: The Story of a Man, His Fortune, and the New York Mets.

The Mets challenged many of the assertions Megdal made in the book, removed his media credentials, and wrote in response –

The author’s desperate self-promotional campaign for relevance has led to perpetuating baseless speculation and complete inaccuracies.

Now, I haven’t read any of Megdal’s books and neither am I an expert on the Mets. I do however consider myself to have some expertise on the subjects of Amway and Multilevel Marketing. If Megdal’s reporting on other topics is as wildly inaccurate and misleading as his reporting on Amway and MLM, and if he condones the active censorship of those who challenge that reporting – well, I’d suggest trusting very little of what he writes.