Tag Archives: income

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”. 

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.

Amway UK & ROI continues to grow

Amway United Kingdom & the Republic of Ireland went through a tough time a few years ago with an investigation by the UK government (ultimately dismissed) . The company halted all sponsoring during the investigation, yet millions of pounds of Amway products continued to be bought and sold, and leaders all the way up to Diamond continued to qualify. Sponsoring renewed several years ago, along with a slightly modified business model that requires, amongst another things, Amway Business owners to have a certain amount of registered customer sales before they’re allowed to sponsor and to earn bonuses and rebates. The latest income disclosure indicates the model appears to be working well. This years figures (for October 2011 to September 2012) are below, along with the same data for the previous two years.

Retail Consultants can purchase and sell Amway products, but are not yet allowed to sponsor

Certified Retail Consultants are Retail Consultants that have developed at least 5 customers and €125 in sales, completed an online course, and are now able to sponsor.

Business Consultants have reached the top of bonus scale. If their business also has a structure that reaches minimum income level requirements, they qualify as Platinums.

CVR is Customer Volume Rebate. It includes the standard Amway volume rebate plus retail margin, which (unlike in most other Amway markets) is collected by Amway and then rebated to those who qualify.

Amway UK & ROI Income disclosure data
      2010       2011      2012
# of Retail Consultants  13,270  16,287  28,696
# earning CVR  5,522  6,582  9,161
average monthly CVR  €49  €47  €52
highest monthly CVR  €1,131  €642  €1,870
lowest monthly CVR  €16  €23  €23
# of Certified RC  7,640  10,043  12,544
# earning CVR/bonus  6,211  7,585  8,742
average monthly CVR/bonus  €132  €126  €139
highest monthly earnings  €4,865  €3,720  €5,644
lowest monthly earnings  €6  €7  €5
# of Business Consultants  50  62  76
# of new BC  12  13  21
average monthly CVR/bonus  €2,664  €2,584  €2,405
# of Platinums  45  58  71
# of Emeralds  3  3  4
# of Diamonds  1  1  1

That’s a more than doubling of registered consultants in just two years, and based on the # earning bonuses and the averages somewhere near a 50% increase in sales. One of the most vocal European critics of Amway and multilevel marketing is a man by the name of David Brear. His entire argument is based on his opinion that Amway’s products are “unsellable”. If we look at the figures above, each of those Certified Retail Consultants had to have a minimum of 5 clients in order to earn a CVR in any given month, which means they alone represent, at a bare minimum, over 43000 Amway customers and €10-15 million in retail customer sales in the UK & ROI. Many of the retail consultants will of course also be developing customers and making retail sales, as are the Business Consultants. It’s also interesting to note that at least one Retail Consultant earned straight retail sales commissions for a month of nearly €1900 (over US$2500)

As is usually the case, the beliefs of Amway’s critics just doesn’t stand up to the facts.

Amway IBOs get all their products free plus extra cash!

Amway critics just love to quote various government mandated statistics that Amway publishes. For example, for some years now Amway in North America has published the statistic, based on a 2005 survey, that the average “active” IBO makes $115/mth. $115/mth doesn’t exactly sound like it will lead you to the land of your dreams does it?

So, of course, Amway critics cite that as “proof” that it’s a bad business opportunity and most people make little or no money. Indeed they’ll often go on to mention “expenses” and claim it means most IBOs lose money.

Well, there’s a saying you’ve probably heard – lies, damn lies, and statistics. Continue reading

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