Monday, July 24, 2006

Amway Exposed, Part One: The Profitability of Amway

Amway is a scam. Participants put something in (usually time, money for motivational materials, travel expenses) and get nothing in exchange. While Amway is legal, there is a fine distinction between directly paying into the system (illegal) and being coerced into paying for the motivational “tools” that participants are told are required for success. Amway does not provide an opportunity for its distributors, and there is nothing ethical about their business model.

From a buddy that's in the business, here's the basic premise behind Amway: Each distributor gets a percentage cut from every Amway product that they sell, which is their profit. As they start to recruit other distributors, the original distributor gets their own bonus from selling things themselves, plus a cut of the profits from all of the distributors “under” them. As the new distributors in the original IBO's “downline” recruit their own distributors under them, the original distributor gets a cut of the profit from the products sold by everyone involved.

The actual numbers get complicated, but the basic idea advanced by Amway is that their Independent Business Owners, or IBOs, will eventually make so much money from their downlines that they won't need to work themselves. Since the means to making a lot of money with no work is by getting other people in your downline, the biggest incentive for distributors is to recruit others, not to actually sell products themselves. This dynamic has had a significant impact on the way that Amway and its top distributors have made a profit, as well as the profitability for the average Amway distributor.

Let's take a look at some of the statements about the profitability of Amway told to potential distributors, and see how they contrast with reality:

From the 2004 Dateline investigation on Amway:

Greg Fredericks: “If you're somewhat serious, all I mean by somewhat serious -- if you invest maybe, say, 10 to 15 hours a week in your business. This is your own business -- you could generate in the next 12 to 18 months, an extra quarter of a million.”

Tim Sandler [Dateline producer]: “I'm sorry. How much?”

Fredericks: “A quarter million.”

Sandler: “You're making more than $250,000 -- quarter of a million?”

Fredericks: “Umm hmm.”

In another case, Amway recruiters have told potential members in Hungary that the minimum income for participants is $9,000 a month.

If reading about it isn't enough, listen to a clip of a speaker from a motivational tape telling prospective Amway distributors that they can reach an income of $50,000 a year in one year.

Unfortunately, all of these claims are less than accurate. Doing the math, “if 'the pitch' at an Amway meeting were even moderately accurate, in something like 18 months Amway would be larger than the GNP of the entire United States (source).” In fact, the Federal Trade Commission “requires Amway to label its products with the message that 54% of Amway recruits make nothing and the rest earn on average $65 a month (source).”

Interestingly enough, Amway itself has acknowledged that distributors may not make any profit for the first few years of operation:
From 1996 SA-4400: Gross Income: The amount received from retail sales of products, minus the cost of goods sold, plus the amount of Performance Bonus retained. This does not include deductions for business expenses that, of course, will vary according to the manner in which each individual distributor operates his or her own business. There may be significant business expenses, mostly discretionary, that may be greater in relation to income in the first years of operation (source).

Not great odds, especially when you consider that most Amway distributors sell primarily to themselves and have other costs not counted for in these calculations. According to a 1991 Forbes report, the typical Amway distributor sold only 19% of their products to non-Amway consumers. In other words, Amway distributors as a collective only make money from one out of every five of their sales.

Quixtar, or Amway over the Internet, isn't much better. According to a 2001 Forbes article, “By joining organizations like Quixtar, you're more likely to fill your shelves with bottles of shampoo than to fill your bank account with cash (Forbes).”

This statement seems to be corroborated by the evidence available to the public. As we will see, one of the ways that participants are hooked into the Amway/Quixtar system is through stories about the lives of Quixtar “Diamonds” that gain financial independence from their downlines. However, the math from Quixtar's own statistics show that there are only 57 Diamond-level distributors out of hundreds of thousands of participants (LawBlawg).

The “two to five year” promise to becoming a Diamond level Amway distributor is completely unsubstantiated. Even after putting an incredible amount of time and effort into the Amway system, most distributors don't even come close to reaching Diamond. Furthermore, members that qualify as Diamond often don't make kind of money that is promised by Quixtar. After years of hard work, one Quixtar member qualified for the coveted Diamond classification by making little over $35,000 a year from direct Amway profits (source). There's no real money in the Amway distribution system, even for the supposed cream of the crop of distributors.

Does this sound familiar at all? It should – the Amway system preys on the weak, promising them the answer to all of their problems (money). As we will see, the only people that benefit are the people at the top of the pyramid. This is not unlike the promises from Dick DeVos in this gubernatorial race. He tells people what they want to believe (that he will bring jobs and economic growth), but there are no practical specifics behind his rhetoric. The Amway promise has proven to be false, and it is clear that people are going to be disappointed with the DeVos promise as well.

-Nirmal

P.S. Look for part two, on the “tools” business and the real money makers of Amway tomorrow.

Examinations of the lives Amway has ruined, the favors Amway has traded with prominent Republicans such as George Bush and Mike Cox, Amway's attempts to suppress the free speech rights of its critics, the behavioral control methods used to manipulate Amway distributors, the rest of the Amway family, the potential for an MLM-styled GOTV effort, Amway's similarities to cults and the mafia, Amway's legal troubles, and other unethical Amway behavior are coming soon.

(cross-posted on Michigan Liberal)

EDIT: Front paged! Also, thanks to Pohlitics for the plug.

5 Comments:

At 9:21 PM, Anonymous Anonymous said...

We need part two! We need part two! The very well-being of our state depends on it! Lamrin give us more!!!

 
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