Tag Archives: Myth

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.

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. Continue reading

Amway/Quixtar MYTH: No growth in IBOs in 30 years

This myth seems to have been started in 2004 by the infamous lawdawg on his MLMlaw blog, with a post Zero Population Growth (update: the site has since been removed). Lawdawg takes a quote from a press release stating that Quixtar has a sales force of about 340,000 IBOs -

Though it’s young, Quixtar already has a sizable sales force: about 340,000 distributors — Independent Business Owners, or IBOs, as Quixtar calls them

He then takes some figures from the FTC v Amway case in 1979-

1. The number of active distributors since 1972 has remained relatively constant, fluctuating around 300,000, climbing in 1977 to about 360,000.

And “confirms” his 2003 figure by quoting a 2003 Tax court case Guadagno v. Commissioner, where it states -

Amway has about 360, 000 independent distributors.

On the face of it, this lookings pretty damning doesn’t it? Nearly 30 years and no growth in IBO numbers! A little common sense though makes one think. It certainly made me think when I read lawdawg’s page, and here is what I found ….

Ponder this

From FTC v Amway -

183. Amway’s United States sales have grown from $4.3 million in 1963 to $169.1 million in 1976. Worldwide sales of Amway products in 1976 amounted to about $205 million. (RX 431, RX 448) [71]

and the same press release lawdawg quotes -

Quixtar, which sells in the United States and Canada, hit the $1 billion sales level for the first time last year, and has set monthly records since then.

Hmm ….

1976 Amway Sales – $169,100,000
2003 Quixtar Sales – $1,035,000,000

What’s more, prior to 2000, Amway reported estimated retail sales, ie sales as if IBOs had sold them at recommended retail price. Since 2000 they have reported actual sales. The FTC reported the markup in 1976 was on average 03%, so comparing actual sales (a little over a billion in 2003) we have -

1976 Amway Sales – $130,076,923
2003 Quixtar Sales – $1,035,000,000

Lawdawg would have us believe, that without any change in the number of IBOs, the sales for the corporation have increased nearly 700%!

Even adjusting for inflation, and converting to year 2003 dollars, sales in 1976 would only be equivalent to approx $425,061,704. From 1976 to 2003 there has been a more than doubling in sales volume, or inflation adjusted, growth of 143%.

1976 Amway Sales – $425,061,704 (inflation adjusted)
2003 Quixtar Sales – $1,035,000,000

Have IBOs really become so much more efficient, and profitable? What’s going on?

What’s going on is that the two numbers lawdawg compares aren’t measuring the same thing. In the FTC v Amway case, the numbers reported were “active distributors”. How was “active” defined in FTC v Amway?

At the end of the calendar year the files are cleared of the names of distributors who elected not to continue. The number of distributors at the beginning of the year therefore is close to the number of active distributors.

In other words, it’s the number of IBOs that actually renewed. How is “active” defined by Quixtar today? From thisbiznow.com -

**Based on an independent survey during 21. “Active” means an IBO attempted to make a retail sale, or presented the Independent Business Ownership Plan, or received bonus money, or attended a company or IBO meeting in the year 2001.

Two completely different measurements of “active”. You can’t compare them.

So what’s the truth? Fortunately, with a little straightforward math, we can do a comparison of like with like.

Fun With Numbers!

So, actual sales in 1976 were $169,100,000. FTC v Amway also reports -

In 1973-­74 the average BV for each distributor was about $33 a month.

BV stands for Business Volume and at that time was equivalent to the value of the products less the retail markup – ie the actual price sold to IBOs. I’ve already accounted for the retail markup, so to obtain the total number of IBOs in 1976, it’s a simple matter of dividing the sales figure by the sales per IBO for the year -

Total IBOs in 1976 = $169,100,000/($33*12) = 427,020

Now, it’s possible that the BV per IBO changed between 1974 and 1976, however the FTC reports it increased from $20 to $33 between 69/70 and 73/74. This means any adjustment in the number of IBOs would likely be a decrease. We’ll take the higher number.

What about for Quixtar in 2003/2004? Well, Quixtar Platinums have access to something called “The Platinum Index”, which provides the very statistics we need. A copy of the 2004 index, providing statistics for 2003, is on QuixtarBlog. From this we have the following information -

Quixtar actual sales 23: $1,035,000,000
Average Monthly PV per IBO: 38.46
Average amount of PV for each $1 spent: 0.37

Now, this time the calculation is fractionally more complicated, since we have to account for “PV” and convert to BV.

Average Monthly BV per IBO = PV per IBO/PV for each $1 spent = 38.46/0.37 =14BV

Total IBOs in 2003 = $1,035,000,000/($14*12) = 829,327

In other words, a 94% increase in the number of IBOs – Reasonably consistent with the inflation adjusted 143% increase in sales and the increase in BV per IBO.

These calculations required no guesswork, no estimates. “Critics” will tell you that Amway and Quixtar has “saturated”, that it hasn’t grown in 30 years.

They’re wrong.

Sales have more than doubled, and matching this, the number of IBOs has almost doubled. No guesswork. No estimates. Just pure math.

Myth BUSTED.

UPDATE 060803: I found an error in my original calculations where I mistakenly used the inflation adjusted figures to calculate the number of IBOs in 1976 instead of the actual sales data. Corrected.

MYTH: 70% Retail Sales Rule

Is it dishonesty or just ignorance? If you search around the posts of critics of Amway and Quixtar on the internet, something you’ll see regularly is reference to something like “The 70% Retail Sales Rule”.

Here for example, on Pyramid Scheme Alert, the claim is made -

A 70% retail requirement level has been applied in various agreements between state Attorneys General offices and multi-level marketing companies charged with violating pyramid scheme statutes.

and

At least 70% of product must be sold at retail to consumers who are not also Amway distributors.

Continue reading