MYTH: It’s a pyramid if most products are bought by IBOs

Many critics like to claim that Amway and other MLMs are a “product based illegal pyramid scheme”. The claim is that they are illegal pyramid schemes because the majority of products are consumed by “members of the scheme” and not retail customers. It’s quite common for them to also claim that in the FTC vs Amway, the FTC declared Amway not an illegal pyramid scheme because of these retail customers.

Even ignoring the fact there are many retail customers – I believe Amway North America alone has over 200,000 registered member/clients – these claims are not true. Amway was found not to be an illegal pyramid because payment is not made for recruiting – the sine qua non of an illegal pyramid scheme.

Self-described “MLM experts” (but in reality just anti-mlm zealots) such as Robert FitzPatrick of so-called “Pyramid Scheme Alert” repeat the “no retail sales” myth over and over. In recent times, FitzPatrick helped write a report on USANA by the so-called “Fraud Discovery Institute” which attacked USANA on the same basis. Len Clements of MarketWave Inc does a brilliant job of debunking that myth here and here. FitzPatrick even claims that in the definitive FTC vs Amway case in the 1970’s the court ruled that “At least 70% of product must be sold at retail to consumers who are not also Amway distributors.”(source). Eric Janssen of QuixtarBlog gives the same claim a “sticky” post on his site, and “lawdawg” of the now defunct “lawblawg” also repeated it – yet another Amway myth doing the rounds of the Internet Echo Chamber. The problem is, this is a complete fabrication on the part of critics – the court never said any such thing, something I addressed in MYTH: 70% Retail Sales Rule.

In early 2007, some supposedly high-powered lawyers in California fell for the same fabrication, filing a class action lawsuit against Quixtar and some associated IBO organizations which included the following “evidence” that Quixtar was a pyramid –

Few Quixtar products are sold to consumers; instead, most are purchased by Quixtar distributors for their own use.

Ummm … so Quixtar distributors using products are not consuming them? Did they even read what they wrote?

It’s become apparent to me that neither FitzPatrick, nor Janssen, nor “lawdawg”, nor the lawyers involved with this class action lawsuit actually even know what a “retail sale” is. Though I can’t blame them, since in my experience folk at Amway and Quixtar don’t always seem clear on it either.

So – what exactly is a “retail sale”? First stop, Dictionary.com

re·tail
n.
The sale of goods or commodities in small quantities directly to consumers.

adj.
Of, relating to, or engaged in the sale of goods or commodities at retail.

adv.
In retail quantities.
At a retail price.

v. re·tailed, re·tail·ing, re·tails
v. tr.
To sell in small quantities directly to consumers.
(also r-tl) To tell or repeat (gossip or stories, for example) to others.

v. intr.
To sell at retail.

That’s interesting. A retail sale is one made to a consumer. So if the IBO is the consumer, doesn’t that mean when he or she buys something for themselves it’s a retail sale?

This deserves further study …

On wordreference.com

retail
A noun
1 retail

the selling of goods to consumers; usually in small quantities and not for resale

Interesting indeed. A retail sale is a sale made to a consumer, where the person you are selling to is not planning to resell it. Wouldn’t that mean that an IBO buying things from his own Amway business or from his upline, if he’s not running a business, is participating in a retail sale?

So you say “Well, ok, maybe that’s in the dictionary, but that’s not a legal definition like the government would use is it?” Good question.

Here’s the definition from the California Retail Sales Act, the very state where the class action was lodged –

“retail sale” means

(a) a sale of tangible personal property to a purchaser for the purposes of consumption and not for resale as tangible personal property, and

(b) a sale of a taxable service to a purchaser for the purposes of consumption and not for resale as a taxable service or for sale as part of another taxable service or for improving or maintaining the state, quality, or condition of tangible personal property for sale;

And the Missouri Retail Sales Act

(1) “Sale at retail” means any transfer made by any person engaged in business as defined herein of the ownership of, or title to, tangible personal property to the purchaser, for use or consumption and not for resale in any form as tangible personal property, for a valuable consideration;

and when they were considering a Federal Sales Tax in the United States –

D. DEFINITION OF RETAIL SALE

1. This definition is of primary importance, since the nature of the definition determines whether or not sales of producers’ goods are taxable. In making the decision in regard to this problem, it is considered necessary to regard the Federal retail sales tax as a temporary war measure. Accordingly considerations of revenue and administration must take precedence over other economic considerations which should play a more significant part were the tax to be regarded as a permanent measure. On this basis it would be recommended that retail sales be defined to include all sales other than those made for resale, including sales of second hand goods.

Go check your own state or countries laws. It’s the same everywhere I’ve looked.

Purchases an IBO makes for their own consumption are by definition retail sales.

Still don’t believe me? Here’s a quote from Peter Vander Nat, an economist withe US Federal Trade Commission, the body that determines what to prosecute as an illegal pyramid, made in the March 15, 2007 edition of the Wall Street Journal

“Deciding what a retail sale is can be tricky,” Peter Vander Nat, the FTC economist who co-wrote a 2002 paper on the subject, says it depends on intent.

“If people are buying because they want to use a company’s products, those sales can count as “retail.”

Note, he does go on to say –

If they are buying to stay in the game for future commissions, those sales wouldn’t qualify, he said.

However, it is clear – Amway and Quixtar IBOs, and other network marketers, who are legitimately buying products for their own consumption are partaking in a retail sale. The dictionary says it. The law says it. The FTC says it. Still don’t believe me? Still think an MLM legally requires a certain percentage of “outside customers” to avoid being an illegal pyramid? Here’s what James A Kohm FTC letter to DSA in 2004 in response to an inquiry by the Direct Selling Association

Much has been made of the personal, or internal, consumption issue in recent years. In fact, the amount of internal consumption in any multi-level compensation business does not determine whether or not the FTC will consider the plan a pyramid scheme. The critical question for the FTC is whether the revenues that primarily support the commissions paid to all participants are generated from purchases of goods and services that are not simply incidental to the purchase of the right to participate in a money-making venture.

So – who do you think is correct, Robert FitzPatrick, Eric Janssen and their colleagues, including former Quixtar IBO Eric Scheibeler, who now works with FitzPatrick’s Pyramid Scheme Alert, or the dictionary, the FTC, and the law? You can believe whoever you want. I know which sources have the most credibility with me.

One question that arises though is who is it a retail sale for? It’s my opinion that, ultimately, if an IBO is not actively operating as a business, then it should be counted as a retail sale for their sponsor. If they are actively operating as a business, then it is a retail sale for their IBOship. With direct fulfillment this becomes less clear, and another possible position, apparently taken officially by the Mary Kay company with their distributors, is that it is retail sale for the company itself.

Either way, all those products being consumed by IBOs and distributors – they’re retail sales.

NOTE: This post does not address Amway’s requirements regarding sales to customers. Different markets have different rules. Quixtar in North America for example has a “member/client volume rule” which requires retail sales to members or clients – ie non-IBOs.

Post a comment below or Discuss this post on Amway Talk

11 thoughts on “MYTH: It’s a pyramid if most products are bought by IBOs”

  1. It looks like much of this information is outdated. Here’s clarification from the FTC:

    http://business.ftc.gov/documents/inv08-bottom-line-about-multi-level-marketing-plans

    “Not all multilevel marketing plans are legitimate. Some are pyramid schemes. It’s best not to get involved in plans where the money you make is based primarily on the number of distributors you recruit and your sales to them, rather than on your sales to people outside the plan who intend to use the products.”

    If you go back to 1997, there’s a similar thing mentioned by the FTC in deal with JewelWay:

    “Legitimate multi-level marketing plans are a way of making retail sales of products or services to consumers through a network of representatives. However, in an illegal pyramid scheme the main focus is not on sales, but on recruiting new representatives into the program. Typically, each new representative must buy a certain amount of products and must recruit a specified number of new participants in order to earn money in the program. In a pyramid scheme there is almost no emphasis on making retail sales of products to persons who are not participants in the program.”

    http://www.ftc.gov/opa/1997/11/jewel-2.shtm

    The last sentence in that one is key. It is clear that the sales to people outside the program (i.e. not sales to IBOs) is a key factor in determining if it is a pyramid scheme.

    Seems like Robert FitzPatrick and those other people were right all along. The FTC would not highlight sales to people who are not distributors unless it was important.

    1. “Concerned Person”, the FTC was very clear in the clarification of this in the staff advisory letter I link to in the article, please read it. Furthermore, with Amway

      (a) there is no requirement to “buy a certain amount of products” or
      (b) “recruit a specified number of new participants”
      in order to make money with Amway.

      Amway also places a significant emphasis on retail sales of products to people who are not IBOs. Indeed, in the US if you don’t have a certain amount of customer sales every month, you won’t get paid your bonuses.

      Sales to “outside participants” *is* important, but, as the FTC made clear in the staff advisory opinion, it’s not a determinate of whether something is a pyramid or not.

  2. I am excited about the business opportunity where undereducated or over educated persons can own their own business for a start up of under $200.00 US Dollars.

    They can be connected with an $8 Billion US Dollar business, and have 180 days to say not for me and receive their money back?

    What is the problem??? I say GO FOR IT. I am and I am using over half of all the profits to support GODs Mission that is, in March 2010, providing a FREE dental clinic to the children in Santo Domingo, Dominican Republic.
    David

  3. I don’t want to come off as being nasty or disrespectfull. I would like to read any comments to what I have to say based off my experience with Quixstar however. I was approached by a well respected Air Force pilot in 2004, back when I was in the service, who over heard me say I would like to make some extra money. He invited me out to lunch and explained the whole “Quixstar thing” to me. He used all the recruiting tools, talked about quiting the service, easy money, retirement, etc…, just like every Amway critic say they’ll use. I later went to one of the meetings/motivation speeches with him (Team OC!!). Just my thoughts, but it came across like a cult gathering with all the chanting and cheering. Again, just my thoughts, but it had pyramid scheme written all over this “business”. The speaker (Platnum??) even drew a pyramid on the board and talked how easy it should be to recruit all these people. “If you can get one more, they’ll get one….”). Needless to say, I felt like a fool for even going and I ran from this well respected fighter pilot, and avoided him like the pleg at work.

    1. I admit, I haven’t done much research, but I take it IBOs get paid to recruit more people? Isn’t this like a pyramid?

    2. What’s stopping me from buying an Amway Global packet on me own and taking advantage of the “great” whole sale prices?

    3. The prices just from buying direct whole sale on everything seemed extremely high, how could I try to sell any of these products? And what would stop a company or whoever to just register with Amway, and order the products for themselves, if they’re that good? Why would they contract through me and pay more?

    4. Last. You also talked about stats in one of your blogs and had a very simplistic outlook on how easy it is to make a profit. Again, I thought the products where extremely over priced, I could get them at supermarkets for a lot less, and I would feel ashamed if I approached any organization or business, trying to win a contract. How can anyone possibly make a profit? I see Amway is also big on pushing all their books, tapes, and expensive functions as well. I may just have a different outlook than you, but I think when people join, they expect to make a little bit of money. That’s what they tried to convince me of. Not just buy products for me. What would this do? They are expensive. Does this benefit my business?

    There were a lot more concerns and issues I had, but those are just some of my thoughts and questions I have, and it would be intresting to hear any thoughts. Thanks

    1. Hi Walter,
      I guess we can consider this some of your research 🙂 To you points –

      (1) No, IBOs do not get paid to recruit more people. You are correct that being paid to recruit is one of the defining characteristics of an illegal pyramid. IBOs are paid a percentage of sales volume. In fact, for any given sales volume, the more people you recruit to help obtain it, the less you will earn. It’s the same as a traditional sales business, where you might pay sales staff (an expense) in the hope the increased volume overcomes the expense and makes you more profit.
      (2) You can’t buy an Amway Global “packet” from Amway, you have to be introduced by an existing member of the network.
      (3) I’m not sure who you compared the prices with? Amway prides itself on quality. The two major brands we market are Artistry and Nutrilite. Artistry cosmetics are designed to compete in the “prestige” class alongside brands like Estee Lauder and Clinique. You’ll find Artistry is cheaper than the competitors, not more expensive. Similarly with Nutrilite, though in my opinion Nutrilite is a class above any other brand in the industry.
      (4a) I’m not sure which post you read that implies “how easy it is to make a profit”? If so, I must rewrite it! While I guess “a profit” is easy to make, a significant profit is not. Like any other business it takes months and years of hard work to build a significant income.
      (4b) Please research Amway brands thoroughly and understand which market segments we aim to compete in. In general you can not find similar products at better prices in supermarkets.
      (4c) Our business model is not based on trying to get large sales contracts with organizations and businesses. While that’s possible, the model, and products, are targetted towards repeat sales to home consumers.
      (4d) Amway doesn’t hold “expensive functions” or push books and tapes. You are most likely confusing things with the myriad of third party companies that have sprung up to support Amway business owners. While I haven’t checked them all obviously, in my experience the materials and seminars they provide are cheaper than comparable services available elsewhere. It’s my guess you haven’t had much experience as a business owner having to pay for these types of things yourself? In any case, if you don’t find them of value, don’t buy them. Most Amway business owners don’t – mind you, the majority of successful ABOs do use them.

    2. Hi Walter. I’ve had “experience” with other network marketing companies which ARE (imo) MLM however from the knowledge I’ve gained being an IBO .. there is no pyramid.

      1) Whilst it is beneficial, like any business, to recruit people (in my “traditional” business there is “me” as the owner and my subbies (aka ICs) at the bottom – I recruited them yet not for Amway.. for my traditional business)… like any business it does cost time+money to recruit people.

      We are paid based on SALES VOLUME .. this is an accumulation of both IBOs as well as just “customers”. It’s no skin off my nose if you don’t want to be an IBO + are happy to just buy some of the products.

      2) There are a myriad of affiliate programs on the Internet – the whole “invitation only” aspect of being part of Amway is similar (in a way) to these programs such as Commission Junction, Clickbank, etc. You’re “introduced” to a lot of these places and the products by othe people 🙂 Amway is no different.

      3) Please reply with whom you are comparing prices. Also, you obviously weren’t explained about the 90 Day CASH BACK guarantee ? Love to see you get that guarantee at any supermarket. If you seriously don’t like a product, that’s okay. Get your money back… you’ve got 90 days from the time of purchase to do so.

      As has been explained you need to compare the products to their PROPER competitors. Artistry is to never be compared with your supermarket make-up. Never. Compare it to the top end of the market brands as this is where it is aimed not at your cheap supermarket make up.

      The same with Nutriway and a lot of other products. Compare them to their proper competitors.

      3 a) You need to think of it as like a shopping club with an affiliate program. This isn’t unheard of these days with the internet. As mentioned, you need to get your comparisons right first before you really see the bargain you’ll be receiving.

      4) You keep saying you can get our products at the supermarket for a lot less. Seriously, go for it. Buy those products. Yet DO YOUR PROPER RESEARCH ! Read the labels of each product, find out about patents, etc. If you do your proper research you’ll realise that comparing Amway products with supermarket products is doing the Amway products a disservice.

      Those supermarket products are only concerned with numbers not quality. It’s about marketing in the supermarket. They don’t really give a rats ass about your health.

      1. Oops ! Forgot to mention:

        You do realise that your fighter pilot friend has his business continue to grow even if he isn’t part of it ?

        Your upline, if they sponsor someone (even if it is a customer not an IBO), they will put that person “below” you. Even if you have never met this other person “below” you.. that person will go below you not them.

        Then if this person that only your upline has met (and not you) decides to do the business – you will benefit.

        I don’t know too many other businesses where someone I have never met in my life can help MY business grow ? I also didn’t experience this “team effort” aspect from the other networking companies.

        As I said before, I’ll repeat:

        It’s no skin off my nose if you just decide to only buy some of the products and not do the business. It’s even less skin off my nose if you don’t enroll as a shopper (not an IBO – just a shopper/consumer) … next. You may not enroll. Others will.

        Just like any other business – it has turnover. You tell me a business that doesn’t have turn-over in customers not just “staff” ? 🙂

    3. Walter – I’m going to try and be nice when I say this to you – Network Marketing (Amway or otherwise) probably isn’t for you.

      Lol.

      I would encourage you to do something else for a living 🙂

      -dave

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