# 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.

# 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

# Critiquing the Critics

Bloomberg Business Week has today published an article about the direct selling industry that appears to be little more than a propaganda piece straight from the pen of MLM critic Robert FitzPatrick. It astounds me that supposed journalists do so little research on these self-declared “experts” and even less on the claims they’re making. So I’m going to do their job for them and write a series of articles on some well known MLM (and Amway) critics, who they are, and how their claims stand up to the facts.  My current list –

General MLM Critics
Jon M. Taylor (Consumer Awareness Institute)
Dr Stephen Barrett (MLMWatch)
Bob Carroll (The Skeptics Dictionary)
Rick Ross (The Ross Institute)
Tracy Coenen (Sequence Inc)
Steven Hassan (Freedom of Mind Institute)
Dean Van Druff (What’s wrong with multi-level marketing?)
Peter Bowditch (ratbags)

More Amway-specific Critics
Russell Glasser (The Perils of Amway)
Scott Larsen (Amquix)
Steve Nakamura (JoeCool, various blogs)
David Touretzky ( Amway/Alticor/Quixtar Sucks!)
David Brear (various blogs)
Shyam Sundar  (Corporate Frauds Watch, India)

If there’s others you’d like me to address, please drop me a note in the comments below!

Update:

New post on Steve Nakamura aka JoeCool –  Who is Amway critic Joecool? And does he owe me \$50000?

# Len Clements launches a podcast

One of my favourite commentators on the Network Marketing industry is Len Clements of MarketWave Inc. Len has been very much at the forefront of defending the industry against anti-mlm zealots like Robert FitzPatrick and Jon Taylor. He unfortunately has had a tendency to repeat some of the unfair generalizations about Amway that are based on the behaviours of some Amway affiliated groups, but his work in promoting a professional view of Network Marketing and debunking myths is in my opinion without peer.

This week Len has launched a podcast, an online radio show, where you can hear Len talk about various industry issues. In this first episode he talks about some controversies surrounding NWM companies Zrii and YTB Travel and the “bias” against NWM that companies like Verizon, PayPal, and eBay have in their terms of service. His segment on the challenges currently being faced by YTB Travel is an excellent coverage of the legal status of multi-level marketing and what makes something a potential pyramid or not. Len is of the the opinion that YTB Travel setup may cross the line, and I’m afraid I have to agree with him.

I heartily recommend you give his Inside Network Marketing podcast a listen. It’s about 1h15m long, but that’s the great thing about a podcast – you can pause it and continue listening whenever you want!

# Amway Success – What are your odds?

A common cry of the anti-Amway zealots is that the “odds” or “chance” of an individual being successful in Amway are low. They’ll typically look at some of Amway’s published statistics, such as the fact that in 2005, .0120% of “Direct Fulfillment IBOs of Record” qualifed at the Diamond level, and claim that your “odds” of going Diamond are 1 in 8333, so you’d be better off at Vegas, where your “odds” of winning on a single number in say, roulette are 1 in 29.

Oft-quoted anti-MLM zealot Jon M. Taylor, Ph.D., President, Consumer Awareness Institute, and Director, Pyramid Scheme Alert, for example, claims that –

The odds of winning from a single spin of the wheel in a game of roulette in Las Vegas is 286 times as great as the odds of profiting after enrolling as an Amway/Quixtar “distributor”

A quick bit of math shows that Dr Taylor thus claims the “odds” of profiting in Amway are 1 in 8294. He calculates these “odds” based on numerous assumptions (for which I might add, he has next to no data to support), including what peoples expenses are. Now, for the purposes of this post I’m going to ignore these type of assumptions, but if they are correct (they’re not) then his “odds” might be a reasonable statistic to consider, except for one thing – unlike roulette, Amway is not a game of chance. Continue reading Amway Success – What are your odds?

# Pokorny and Blenn vs Quixtar et.al update – Arbitration denied

In a California case two former IBOs, Jeff Porkony and Larry Blenn, are attempting a class action lawsuit against Quixtar, Britt WorldWide, World Wide DreamBuilders and associated parties, alleging Quixtar is an illegal pyramid scheme in violation of the Racketeer Influenced and Corrupt Organizations Act (RICO).

As per most previous litigation, Quixtar’s first step was to claim the whole thing should be sent through Quixtar’s arbitration and dispute resolution procedures. To summarize the courts view –

“The Quixtar arbitration agreement is simply too tainted to be saved through minor adjustments. Therefore, though mindful of the strong state and federal policies favoring arbitration, the Court holds that the entire Quixtar ADR scheme is unconscionable and unenforceable.”

In essence, the court found the whole arbitration procedure unfair for IBOs. It highlighted the fact that IBOs below platinum did not even have the opportunity to vote for representation on the IBOAI board which “negotiated” the agreement, and then Quixtar itself can ignore it if it choses. Interestingly, in this case the court was reviewing the new “updated” dispute resolution procedure, which had been modified following concerns raised in earlier cases. Furthermore, the court also struck down the BSMAA provisions, which should have governed the part of this dispute between IBOs.

I’ve said this before, but I’ll say it again anyway – I agree with the court, Quixtar’s arbitration provisions are unfair. The only proviso I’d add to that is that I’m not sure whether a “rank and file” IBO going up against a multi-national, multi-billion dollar corporate would have a particularly “fair” chance in the normal legal system either. If anyone has some suggestions for a better system, I’m open to hearing it. Having read the original Porkony & Blenn complaint, I suspect they’d be saved much embarassment behind closed doors, it really is a poorly formulated case.

There is one interesting aside in the court documents, and that is that the court struck out the declarations of two “purported experts” on behalf of the plaintiffs. The phrasing implies the court found these “experts”, Stephen Hayford and Robert FitzPatrick, were anything but. Stephen Hayford appears to be a JAMs arbitrator, and I’m guessing his testimony related to the arbitration procedure.

Robert FitzPatrick is a well known anti-mlm zealot who has unilaterally decided all MLMs are illegal pyramids, and then rants against the evils of MLMs, when in fact he’s ranting against the evils of illegal pyramids. Just recently I listened to him in an interview where he attacks Amway and brings up this case as well as the recent TEAM class action case in California claiming Quixtar is an illegal pyramid. To give you an idea of his level of “independence” as an expert – he completely fails to mention the TEAM case had been thrown out!

Update: Many of the court documents are now available at Amway Wiki – Pokorny & Blenn vs Quixtar, Inc. et.al.

# Great News for all Network Marketers

As many North American readers would know, in 2006 the US Federal Trade Commission (FTC) proposed a new Business Opportunity Rule which, as written, would require multi-level marketing opportunity promoters to provide prospects with a whole range of new information, such as names of other local participants, lawsuits, etc etc etc. It also imposed a mandatory 7-day waiting period before a person could join.

The MLM and Direct Selling Industry argued that the requirements were not only unduly burdensome on legitimate companies, they would in fact have little effect on illegitimate companies. The FTC has agreed, and MLMs are effectively exempt from the proposed new rule.

There is some very interesting information in the full FTC discussion paper. One area of discussion was the problem of declaring average incomes, when many people join purely for the purpose of receiving “wholesale pricing”. Shaklee for example, revealed that 85% of folk who join that company do so for that reason.

The FTC included summaries of the claims of the bogus “consumer advocates” Pyramid Scheme Alert (Robert FitzPatrick) and Consumer Awareness Institute (Jon Taylor) but appeared unswayed by their arguments that MLM are effectively all illegal pyramids. One particular line from the Jon Taylor’s CAI which always makes me laugh –

“[i]t is extremely rare for MLM victims to recognize the fraud in an MLM program without intensive de-programming by a knowledgeable consumer advocate”

Good grief, get a life Jon.

Folk have argued that the UK BERR and the FTC have recently been in regular contact regarding MLMs. In particular a number of critics have claimed the BERR case has put MLM, and in particular, Amway, under strong FTC scrutiny. If this paper is any reflection of what the FTC and BERR have discussed, then it augurs well for that case.