# 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.

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.

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”.

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 –

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.

# MLM has too many middlemen?

One of the claims of critics of the multi-level marketing model is that due to having paying the independent distributors, there’s too many “middlemen” to be able to distribute products efficiently, thus it forces the prices of MLM products to be too high. Well, if you’ve been paying attention to European news in the past week, there’s been a great example showing how MLM critics aren’t just ignorant of the MLM model – they’re ignorant of business models in general.

What’s happened is that it was discovered that some pre-packaged food products, such as lasagne, being sold in supermarkets around Europe contained horse meat instead of the advertised beef. Following the trail of blame shows just how many middlemen there are involved in “traditional” supply and distribution –

1. The customers are upset at
2. The supermarkets who are upset at
3. Findus (brand) who blames their supplier

4. Comigel (manufacturer) who blames their supplier

5. Spanghero (meat processer) who blames their

6. agent in Cyprus who blames their

7. agent in the Netherlands who blames

8. abattoirs in Romania who bought

9. the horse meat off local farmers

So to get the product (meat) to the customers, there are at least 8 different middlemen, including at least 3 in the distribution chainIndeed there’s almost certainly more, such as transport companies, local wharehouses. advertising companies, legal and accounting firms and more. All of these get paid out the final price of the product as paid by the consumer.

How does it work in Amway? Well, back in the 1970s when the FTC investigated (and cleared) Amway, they found –

43. Currently about half of all Amway distributors were sponsored by a Direct Distributor or by a distributor sponsored by a Direct Distributor. More than 70% were within three positions of a Direct Distributor and 99% were within seven positions. (RX 423)

So for half of all distributors, it went –

1. distributor
2. direct distributor
3. Amway (manufacturer)

So just 3 levels of “middlemen” for half of all transactions in the distribution chain, and only two when you consider the distributor as customer, which is a common scenario. That compares to 3+ levels in the distribution channel for the Findus product – and then you have 5 levels in the supply chain. How long is the supply chain for Nutrilite, Amway’s largest brand? Amway is the supplier, they own their own farms which supply their core ingredients. Yes there’ll be some suppliers for other ingredients, but it’s nowhere near the total of 8 levels in the supply and distribution chain for the lasagne.

MLM critics – not just ignorant about Amway and the MLM model.

# Debunking the critics. Claim: the one who does the work receives the smallest compensation

In recent weeks I’ve done a couple of posts where I’ve highlighted some of Amway’s online critics and their hypocrisy and sometimes downright fraudulent behaviour. But what about the claims they make about Amway? Do they make legitimate points? Occasionally they do. But not often. Here’s a recent example:

Over the weekend Joecool aka Steve Nakamura did a blog post that claimed –

One of the issues I have with the Amway plan is that the newest IBO, possibly the one who does the most “Work”, receives the smallest compensation. Amway pays about 32% of their income back in the form of bonuses. An IBO who does 100 PV receives a 3% bonus and somewhere, uplines and sponsors receive the rest.

Later he says –

Here’s a challenge for IBOs and/or prospects who are being recruited into the Amway business. 100 PV will cost around \$300 a month and dedication to the tools system will cost you around \$200 a month on average. Would you not be better off simply writing a check to your upline for \$100 and not even joining?

Let’s examine these two claims. Joecool points out that Amway pays back around 32% of their income, and the IBO doing 100PV (points volume) will receive 3% volume rebate, or a little less than 10% of this. It sounds like the “upline” makes more, right?

No.

There are several ways to generate income in the Amway business. Joecool dishonestly only includes one of them, the volume rebate. The first income source for IBOs is retail margin, which on Amway products ranges from 20 to 30%.

Let’s take an example. Say an IBO sells 2 x Perfect Packs and a 1 x Farmers Market Vibrant Health Combo and 1 x Kid’s Chewable Multivitamin. IBO cost is \$244.19.

 Product PV BV Profit Perfect Pack 41.95PV 121.66 52.73 Perfect Pack 41.95PV 121.66 52.73 Health Combo 15.75PV 45.67 19.78 Kids Chewable 4.97PV 14.40 6.22 Total 104.62 303.39 131.46

First of all you’ll note that the IBO cost for *more* than 100PV is only \$244.19. Joecool, who was an IBO for less than a year in the mid 1990’s,  claims 100PV will cost the IBO \$300. He is still stuck in the mid 1990’s and completely ignores the fact that Amway increased the PV/BV ratios for their major brands several years ago.

So, the IBO profits \$131.46 in retail margin, then gets a 3% volume rebate (on 303.39 BV) which is an additional \$9.10.

Total gross profit for the IBO “doing the work”= \$140.56

What does the upline get? In the US the volume rebate scale goes up to 25%, then there’s an additional 4% leadership bonus, plus various other Emerald, Diamond, Depth etc etc bonuses. I believe it averages roughly 32%, so less the 3% given to the original IBO, that’s 29% of the BV (business volume) or \$87.98.

• The new IBO doing the work gets \$140.56
• The upline IBOs who helped share in \$87.98.

So for the total profit available, the IBO gets 61.5% and the upline share in 38.5%.

Joecool’s claim is false.

Joecool gets to this point because he completely ignores retail profit and is most likely assuming an IBO is only “buying for themselves”. Of course, if that’s all they do, then they’re not even operating a business and they have done no work. They’ve merely shopped! If they bought the above for their family (say 2 adults, a teenager, and a younger child), then they’ve saved \$131.46 by shopping at the wholesale price and got an additional \$9.10 discount.

But Joecool isn’t talking about a shopper, because in the next statement I cite from him he says this person is spending \$200/mth on “tools” . If they’re building then they’re trying to recruit customers for the products, and other IBOs to market them. As such that IBO must have at least 50PV in customer sales in order to receive a bonus on downline sales. Where does he account for that? He doesn’t. What about increased volume from their work recruiting others? He ignores that too. As he does an increased bonus thanks to that extra volume.

Even more ridiculous, he seems to think that the money spent to obtain 100PV is 1) a business expense and 2) you receive nothing in exchange for the money!

Both are absurd. Firstly of course, you receive products in return. Products that are some of the best in their categories and have won awards around the world.

As for it being a business expense, have you run that past the IRS, Joecool? Can a business owner who withdraws stock for personal use, or accounts for it as a sale to themselves, claim that as a business expense?

It’s absurd, and sadly Joecool isn’t the only MLM critic who asserts this.

If anything, a \$300 product purchase for personal use is an income for their Amway business, from a sale to a customer (themselves). There’s no profit since it matches the \$300 expense for the IBOs business to purchase the stock from Amway.

Was this how Joecool ran his Amway business? Spending money not for products he wanted and thought were good value, but merely to try and qualify for a bonus? That’s not only stupid, it’s also potentially defrauding his upline of commissions they should have received.

Unfortunately, we already know Joecool has no problem committing fraud.

# Are you recruiting your competitors?

A supposed “criticism” of Amway, and indeed of multilevel marketing, that I’ve seen turn up regularly is the idea that it’s inherently flawed because “you are recruiting competitors”. For example, Robert T. Carroll, in his “Skeptic’s Dictionary” says –

Why, you might wonder would you recruit people to compete with you? For, isn’t that what you are doing when you recruit people to sell the same products you are selling? MLM magic will convince you that it is reasonable to recruit competitors because they won’t really be competitors since you will get a cut of their profits.

Australian MLM critic Peter Bowditch (ratbags.com.au) says for example regarding his own business compared with MLM –

I am a certified consultant and an authorised reseller for several software and hardware products. I can open a retail shop to sell these things, I can sell them on eBay, I can walk door-to-door around the neighbourhood, I can ask retailers to stock them and computer builders to include them as packages with their machines …I am not expected to find and recruit competitors for my business

Anti-Amway obsessive JoeCool comments on one of his (many) blogs –

you are very strongly encouraged to RECRUIT YOUR OWN COMPETITION. If Amway were a business where the goal was to make money selling products, it is a suicidal business plan

So, what are they on about?

Well, the claim has some truth to it because when you sponsor someone in to your business, that person is indeed now a potential competitor for a retail customer. For any given customer, you’ll make more money if you sell to them personally than if your downline does.

One flaw in this “complaint” is that the same thing applies in traditional business as well. If you owned a small clothing store, every time you sell something, you get to keep all the profit. But what if you employ someone? In the clearest example, if you simply paid them on a commission basis, then they are a direct competitor to you on each retail sale. They get that commission instead of you. The same really applies even if they’re a salaried employee. The money your paying them could have stayed in your pocket if you hadn’t employed them and sold it yourself!

Or how about Coca-Cola? If you buy a coke from an official coca-cola vending machine then are you’re buying it direct from Coca-Cola. Yet you could also buy it from your local corner store. Every time Coca-Cola reps try to get a store to sell their products, they’re recruiting competitors!

Or let’s take Pete Bowditch’s own software example. As he mentioned, he could sell the software directly himself, or he could ask retailers to stock them. In other words – he could recruit a competitor! By having a reseller sell to a customer, that’s a potential retail sale he is missing out on.

Why does Coca-Cola recruit competitors? Why does a  small business owner recruit salespeople? Why does Bowditch suggest recruiting retailers?

No “MLM magic” is needed to answer that. It’s because you can make more money that way! By recruiting resellers, you can hopefully get much larger total sales volumes than by trying to do all the sales yourself. Yes, you’ll make less money per sale than if you did a sale personally, but you still get a percentage on the wholesale sale to your recruit, and you should be able to get a lot more sales for the same time invested. Asmaller percentage of a larger volume can easily be worth more than a larger percentage of a smaller volume. What’s more, the larger discount you get thanks to your recruit’s volume means you get an even bigger profit margin on your own retail sales!

Unless the marketplace for your products is saturated, and there is no room for expansion, recruiting other sales people to increase your sales volume is a smart and sensible way to increase your profitability.

# A quick mythbuster … Amway is not 100% debt free

I’ve seen it claimed in numerous places over the years, including in Amway approved BSM, that Amway is “a 100% debt free company“.

I’ve always been curious if this was something that was actually true. Debt is not always a bad thing, and there can be very sensible business reasons to use properly managed debt instead of cash reserves or other methods to fund expansion or other new developments, not to mention simple day to day operations.

Well, it’s not true. In response to a tweet earlier today, Amway’s official twitter account responded

Hi, Wes, and thanks! In fact, Amway is not 100% debt free (no company of our size is) but we are proud to be so financially stable!

I think it quite possibly was true at some stage and has simply been repeated ever since. Time to stop! Stating myths as fact just gives our critics ammunition.

# Let’s Talk About Tools I

Probably the last major “unresolved” issue in the public arena with regards Amway is the “tools” or Business Support Materials (BSM), and in particular controversy over profits earned from BSM by “higher pins”. If you spend even a small amount of time on the internet researching Amway you’ll find many claims that “the real money” in the Amway business isn’t in promoting Amway products, but in promoting BSM, and some claim that Diamonds and above typically earn in excess of 90% of their income from their BSM side businesses. In the last few days, following the release of Amway’s 2008 sales data I’ve even seen quite a few comments on newspaper websites and other sites claiming the majority of Amway’s \$8.2billion in sales was not from sale of Amway products, but from the sale of “motivational materials”. Continue reading Let’s Talk About Tools I

# Amway Myth: If the products are so good, why do so few new IBOs renew?

One of the superficially reasonable questions that some Amway/Quixtar critics have espoused is “If the products are so good, then why is it that so few new IBOs renew their businesses?”

On the face of it this seems a reasonable question. According to statistics revealed in the recent disputes between Quixtar and TEAM, only 30.8% of new IBOs renew their Quixtar businesses at the end of their first year.

You would think that even if they decided that the business wasn’t for them, that they would at least renew and continue to purchase the products at IBO price and enjoy other benefits of being an IBO. Yet a very large percentage don’t.

A reasonable conclusion would be that these new IBOs have decided that the products aren’t worth buying, even at IBO price, so they don’t renew.

The facts tell another story.

Another statistic was revealed in the Quixtar/TEAM dispute – only 50% of IBOs place any order after joining! This figure is quite stunning – only half of people who register with Quixtar ever even test the website and order products!

Now, granted many of those IBOs would have received some products when they registered, but Quixtar (and Amway elsewhere) has literally thousands of products available. What this figure tells us is that IBOs are doing a very poor job of helping new IBOs they sponsor try out the various products and the website.

It also tells us something else. 50% of IBOs place an order. 30.8% of IBOs renew. I think it’s safe to assume that IBOs renewing who never placed an order a few and far between, so the renewing IBOs are those that actually tried out Quixtar and the products.

Indeed, nearly 2 out of 3 IBOs who place orders after registering renew their business.

The message from this is clear – contrary to critics claims, the majority of people who actually try what we have to offer like what they find!