Is Amway A Scam?

[marplots]

Bottom line. Amway is operated as a scam. Nearly everyone knows it.

This thread is clear evidence of that.

Either we are all wrong or Icerat is wrong. I believe it to be the latter.

I actually think Icerat has some right mixed in and there is room for different opinions, even though, if pressed, I still vote "scam."

 

[Joecool]

We've seen ridiculous claims like there's no complaints because people are embarrassed, or it's only legal because of lobbying or it's "not completely illegal"

Is that anymore ridiculous than most people signing up and paying for a business and then doing nothing or signing up as an independent business owner just to buy products?

And clearly critical thinking goes out the window when it comes to MLM! As a critical thinker myself, it's really quite sad to see. I can present as much fact or logic as you like. Peer reviewed sources, official data, court decisions, expertly reviewed books - you name it. It doesn't matter - when people are misinformed, giving them facts to correct those errors only makes them cling to their beliefs more tenaciously.

And those facts and articles would be about Amway but not about the "independent business owners" and those groups than sell tools to the independent business owners.

Think about all the known facts about Amway. Just the data.

Like the near 100% failure rate or the very low average income of active IBO's?

Or it's a legitimate business that some people misunderstand.

Occam's razor. What's the simplest explanation?

That in itself is a problem. Why is such a simple business so complex and difficult to understand for the rank and file?

It's like people gambling and playing games they are not familiar with. The overwhelmingly likely result is failure. But Amway, where it is not a game of chance, why is the results so dismal that it can compare to a game of chance?

 

[brian ronald]

I think the corporation itself is a scam for using the flawed MLM distribution model.

MLM companies cannot achieve a competitive advantage in price and/or sales compensation due to having multiple and unnecessary pyramid distribution levels, no limit on the number of distributors, few actual customers that aren't also distributors and almost a 100% failure rate in the long run.

When the FTC was investigating Amway in the 70's, they were allowed to continue provided they had a minimum of 70% external sales, however, Amway's CEO stated in a WSJ interview that external sales were only around 50%, although it's estimated to be significantly lower.

They also use brainwashing techniques and are considered a cult by many. Amway has billions in revenue from a variety of revenue streams including product sales of overpriced products, distributor fees, and tools and conferences.

I like how guys like Randi use their expertise to show why physics are fraudulent, I'm a business adviser and trying to do the same with quasi-legal pyramid schemes.

 

[icerat]

MLM companies cannot achieve a competitive advantage in price and/or sales compensation due to having multiple and unnecessary pyramid distribution levels

You cite the FTC decision below, but apparently have it read it. This was one of the allegations made and it was dismissed as wrong. The distribution model has similar or fewer "levels" than traditional distribution.

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

Even fewer of these levels actually involve costs.

When the FTC was investigating Amway in the 70's, they were allowed to continue provided they had a minimum of 70% external sales

This is false, this was not stated anywhere in the FTC decision. You have been misled. This is a myth promoted by anti-mlm zealots.

They also use brainwashing techniques and are considered a cult by many. Amway has billions in revenue from a variety of revenue streams including product sales of overpriced products, distributor fees, and tools and conferences.

Fees, while a source of revenue, are not a profit source, and in many countries there are no fees at all. Even if every Amway distributor in the world paid them (the vast majority, in Asia, do not), it can not even account for 25% of revenues.

Amway does not sell "tools and conferences", they are not a revenue source.

Almost every product I have ever price compared falls within the bounds of pricing of competitor products. Pricing and value is often subjective, but the products win awards all around the world.

I like how guys like Randi use their expertise to show why physics are fraudulent, I'm a business adviser and trying to do the same with quasi-legal pyramid schemes.

It's unfortunate then that you are so misinformed.

You are incorrect regarding the "multiple layers". You are incorrect regarding the 70% rule. You are incorrect regarding revenue streams.

May I ask where you are getting your information? Academic and business sources cover most of these topics quite well. I'm surprised that as a professional advisor you don't appear to have read them?

 

[brian ronald]

I'm going to double check my facts about the FTC ruling again, but just looking at the business model, it's clearly mathematically unsustainable for the distributors. Expensive products, few actual customers, high distributor failure rate, recruitment focus, billions in revenue, yet most distributors hardly make anything, now that's a scam.

 

[brian ronald]

Here's what Harvard University said about Multi-Level Marketing in a WSJ interview:

Of particular concern these days is the increasing number of claims that the business school endorses multilevel marketing, in which distributors earn commissions on products that they or their recruits sell. “If the registrar’s office had a dollar for every call we’ve had over the years over whether Harvard Business School teaches multilevel marketing or has studies on it, we could throw a very nice Christmas party,” reads one internal business-school memo. “This claim is harder to kill than a dandelion.

“What was once a nuisance now looks like grounds for potential defamation or libel lawsuits, says Frank J. Connors, a Harvard lawyer. Some handouts, for example, now claim — falsely — that Harvard has conducted “extensive research in the network marketing industry,” and that the business school calls multilevel marketing “a once-in-a-lifetime opportunity.”

Many of the current myths about Harvard and multilevel marketing stem from a 1984 article widely used to recruit distributors, multilevel experts say. The article, by multilevel consultant Beverly Nadler, states without attribution that Harvard teaches multilevel marketing.

Harvard Business School marketing Prof. Robert J. Dolan worries that people may join multilevel marketing companies because they mistakenly believe Harvard condones the practice. “You hate to see your name used in a way that you haven’t approved,” he says. “Then you think of all the people who are being led down a path to some financial distress.”

 

[Joecool]

I'm going to double check my facts about the FTC ruling again, but just looking at the business model, it's clearly mathematically unsustainable for the distributors. Expensive products, few actual customers, high distributor failure rate, recruitment focus, billions in revenue, yet most distributors hardly make anything, now that's a scam.

Icerat is wrong. The problem is that the FTC did not clearly define "end user" of products. Thus an Amway shill like Icerat will justify the scam by saying that the Amway distributors are the end users. Amway defines customers and people who are not Amway distributors and the FTC also says a red flag of a pyramid scheme is when there are little sales to those outside of the system. But because in the 1979 ruling, end user was not clearly defined, we have this issue.

I believe if you do not count the sales to the Amway distributors, Amway would almost have to shut their doors.

People don't mind paying Amway's ridiculous prices when they think they will retire in 2-5 years, collecting residual income and walking the beaches of the world. Once the dream fades and reality sets in, then these same distributors generally stop buying Amway products and go back to Walmart.

 

[brian ronald]

Icerat is wrong. The problem is that the FTC did not clearly define "end user" of products. Thus an Amway shill like Icerat will justify the scam by saying that the Amway distributors are the end users. Amway defines customers and people who are not Amway distributors and the FTC also says a red flag of a pyramid scheme is when there are little sales to those outside of the system. But because in the 1979 ruling, end user was not clearly defined, we have this issue.

I believe if you do not count the sales to the Amway distributors, Amway would almost have to shut their doors.

People don't mind paying Amway's ridiculous prices when they think they will retire in 2-5 years, collecting residual income and walking the beaches of the world. Once the dream fades and reality sets in, then these same distributors generally stop buying Amway products and go back to Walmart.

Thanks for the clarification, you're exactly right. Great blog by the way.

 

[Wowbagger]

Well, since this thread isn't dead, yet, I might as well toss another small log onto it for a little while:

Here's another, perhaps more concise way, to express my hypothesis and concerns. And I would like some feedback on it:

Amway preys on the Planning Fallacy.

Here's a Wikipedia Article explaining it: http://en.wikipedia.org/wiki/Planning_fallacy

This fresh, new video from Julia Galef reminded me of it:
It's only 2 minutes long. She does NOT mention Amway, but I hope you see the connection. Just in case you don't, I will elaborate:

I am sure almost everyone who becomes an IBO believes that they will succeed at it, despite statistics showing otherwise.

I suspect the sales pitches used to recruit IBOs greatly downplay just how much time, effort, money, etc. would be needed to succeed in the endeavor. And, they play up on everyone's hopes and dreams, and the examples of success they can find. These, in turn, only exacerbate the Planning Fallacy in people's minds, making them more prone to want to buy in. And, less likely to admit defeat when things do not pan out so well.

This is different from most businesses where salespeople are evaluated and filtered. The business would only bring in those they feel have the best chance to succeed, despite the candidates' own opinions of their chances.


What does everyone think of that approach to arguing against Amway's business model?

 

[icerat]

I'm going to double check my facts about the FTC ruling again, but just looking at the business model, it's clearly mathematically unsustainable for the distributors. Expensive products, few actual customers, high distributor failure rate, recruitment focus, billions in revenue, yet most distributors hardly make anything, now that's a scam.

I'm going to double check my facts about the FTC ruling again, but just looking at the business model, it's clearly mathematically unsustainable for the distributors.

Sorry, not clear at all to me, apart from the same theoretical saturation issues that apply to any business.

Expensive products

Which usually means higher profit margins. That's a good thing, isn't it?

few actual customers

On what basis do you make this claim?

high distributor failure rate

This has been covered ad nauseum on this thread.

recruitment focus, billions in revenue, yet most distributors hardly make anything, now that's a scam.

And this I have a problem with - People thinking it's a scam because you only make money if you work hard and get results.

Here's what Harvard University said about Multi-Level Marketing in a WSJ interview:

No, that's not what they said about MLM. It's what they said about people claiming Harvard teaches MLM. It says nothing about MLM per se, just that people who claimed Harvard teaches it are wrong. Or at least were. I note that quote is nearly 20 years old. It's arguable whether it's "network marketing" per se is taught today, but they most certainly cover network marketing companies as legitimate enterprises, eg the following Harvard Case Studies, which, according to their website are "are ideal for MBA, undergraduate, and Executive Education courses."

• Rodan + Fields Dermatologists
• Designs by Kate: The Power of Direct Sales
• Mary Kay Cosmetics: Sales Force Incentives
• Amway Japan Limited
• Miracle Life, Inc.
• Shaklee Corporation: Corporate Social Responsibility

Hmm, and here's an actual powerpoint slide on Sales Force Management from a 1999 Harvard Course where Mary Kay is talked about and the class is clearly given an exercise to calculate a reps compensation, including from downline volume (slide 17).

So pretty clearly, multilevel marketing has indeed been getting taught at Harvard.

Speaking of Harvard, back in the FTC case, a Harvard Professor testified in support of Amway -

Professor Cady, a marketing specialist from the Harvard Graduate School of Business Administration, testified that (Tr. 5823): "What this means overall is that consumers are obviously well served by the products that Amway supplies them with"

Which contradicts somewhat your narrative of the value of the products.

 

[icerat]

Thanks for the clarification, you're exactly right. Great blog by the way.

Joecool is on my ignore list, but I see it if others quote him. The FTC didnt' define "end users" because they didn't need to. For anyone but mlm critics it's pretty much self evident what an end user is. The issue of "internal consumption" per se has never been considered a problem by legal authorities. It's mentioned as an aside in FTC vs Amway that many people by products for personal use. Many US states and the EU explicitly consider personal consumption in their laws, excluding it as an issue.

It's the mlm critics that have created the confusion over this.

 

[icerat]

What does everyone think of that approach to arguing against Amway's business model?

It seems to me like an argument for Amway's business model, which unlike other business models includes lots of safeguards to protect people from loss, such as low cost of entry, the buyback rule, satisfaction guarantees, and the extensive trial period.

ps the thread will never die. Joecool will periodically come in and post something, just to keep it on the active forums thread. Part of what he does ..... :/

 

[Joecool]

Joecool is on my ignore list, but I see it if others quote him. The FTC didnt' define "end users" because they didn't need to. For anyone but mlm critics it's pretty much self evident what an end user is. The issue of "internal consumption" per se has never been considered a problem by legal authorities. It's mentioned as an aside in FTC vs Amway that many people by products for personal use. Many US states and the EU explicitly consider personal consumption in their laws, excluding it as an issue.

It's the mlm critics that have created the confusion over this.

Total BS. Amway defines a customer as someone who is not an Amway distributor. The FTC did say that an MLM could be a pyramid if there insufficient sales to people who are not participating in the business.

Maybe that's why they did not clearly define end user. Icerat's incorrect assumption is that an MLM can be perfectly legal even if only distributors use the products because they are end user.

That is wrong. If only distributors use the products, then the bonuses are generated strictly from your downline. Clearly that is a questionable venture.

People will pay the higher Amway prices when they think they will get rich, retire early, etc. Funny how that desire for Amway goods goes away once the dreams of wealth goes away.

Look at it this way, in order to qualify for a bonus, you need 100 PV (points).
To achieve 100 PV, you generally need to spend about $300 (It can differ depending on what you purchase). For 100 PV, you will earn a bonus of 3%.
3% of your $300 is roughly $9 or $10.

However, your $300 generated roughly $100 in bonus money from Amway. Your uplines get all that money. You can get more if you can sponsor people willing to spend $300 to get back $10. Basically, the new guys get ripped off.
Then you have the top Amway leaders wanting to sell you training so you can learn how this is a good deal.

You can see how the end result is losses for nearly 100% who participate and because Amway pays out roughly 1/3 of their take as IBO bonuses, you cannot compete with retailers such as Walmart.

The only thing keeping Amway legal is you get products for your $300 spent each month and you don't get a direct fee for recruiting. But there must be some reason why Amway folks emphasize recruiting.........

 

[brian ronald]

You're saying that overpriced products is a good thing because of higher margins, however, you're failing to ignore the lack of competitive advantage in the marketplace and the high level of internal sales (Amway's CEO stated this in a WSJ interview).

Hard work is irrelevant when working with a flawed and unsustainable distribution model (unsustainable for the IBO's).

Read the last quote from Harvard: “You hate to see your name used in a way that you haven’t approved,” he says. “Then you think of all the people who are being led down a path to some financial distress.”

Also, good luck trying to sell products to actual customers when so many people consider Amway to be a pyramid scheme.

 

[icerat]

You're saying that overpriced products is a good thing because of higher margins, however, you're failing to ignore the lack of competitive advantage in the marketplace and the high level of internal sales (Amway's CEO stated this in a WSJ interview).

The comment I responded to said expensive not "over-priced". There is a difference. I've price compared many Amway products. Many are cheaper than most competitors. Others are more expensive, but for various reasons may offer better value and competitive advantage in areas other than price. Some I personally consider "over priced", other people do not. I don't buy them, they do.

The company does around $12 *billion* in sales. The vast majority of the sales come from people who are not "participating in the compensation plan" and are re-orders. The products have won both consumer and independent expert awards around the world. As I cited earlier, A Harvard professor stated that consumers are "well served by them"

Hard work is irrelevant when working with a flawed and unsustainable distribution model (unsustainable for the IBO's).

You've stated this twice now, except not explained what you mean, apart from the "too many levels" argument, which was investigated and dismissed as flawed more than 30 years ago. I assume you are dismissing the FTC investigation? Could you provide some reasoning behind this?

Read the last quote from Harvard: “You hate to see your name used in a way that you haven’t approved,” he says. “Then you think of all the people who are being led down a path to some financial distress.”

Yes, and the article also says "Although many reputable companies such as Amway Corp. and Mary Kay Corp. are based on multilevel marketing, many other multilevel operations have turned out to be scams"

Also, good luck trying to sell products to actual customers when so many people consider Amway to be a pyramid scheme.

I've never had any problems selling Amway products. Clearly neither does Amway.

 

[Joecool]

The comment I responded to said expensive not "over-priced". There is a difference. I've price compared many Amway products. Many are cheaper than most competitors. Others are more expensive, but for various reasons may offer better value and competitive advantage in areas other than price. Some I personally consider "over priced", other people do not. I don't buy them, they do.

Amway products are ridiculous in price, save for a few products. Factor in shipping and you have no competitive advantage. That's why the distributors are the "end users". Noone else will buy.

The company does around $12 *billion* in sales. The vast majority of the sales come from people who are not "participating in the compensation plan[/URL]" and are re-orders. The products have won both consumer and independent expert awards around the world. As I cited earlier, A Harvard professor stated that consumers are "well served by them"

That's funny, because (at least in the US), when you register with Amway, you are registering as an "independent business owner". If you go to the Amway website, they don't have any feature about signing up to be a customer. The awards Amway has won seem somewhat dubious to me and irrelevant to the success of IBO's.

You've stated this twice now, except not explained what you mean, apart from the "too many levels" argument, which was investigated and dismissed as flawed more than 30 years ago. I assume you are dismissing the FTC investigation? Could you provide some reasoning behind this?

Simple, Amway creates middlemen and does not eliminate them like they claim in business presentations.

I've never had any problems selling Amway products. Clearly neither does Amway.

Take away sales to the distributors themselves and Amway would probably be laying off employees and shutting down some factories.

 

[brian ronald]

Harvard stated “You hate to see your name used in a way that you haven’t approved,” he says. “Then you think of all the people who are being led down a path to some financial distress.”

Harvard never said anything about Amway after that, it was the WSJ that put that part in their article, so you're wrong again.

Just as Joe Cool stated "Simple, Amway creates middlemen and does not eliminate them like they claim in business presentations." which is why I'm saying the multiple and unnecessary pyramid distribution levels and no limitation on the number of distributors effectively creates a quasi-legal pyramid scheme.

 

[icerat]

Harvard stated “You hate to see your name used in a way that you haven’t approved,” he says. “Then you think of all the people who are being led down a path to some financial distress.”

Yes, companies that were misusing the claim and are illegitimate. I entirely agree with him.

Harvard never said anything about Amway after that, it was the WSJ that put that part in their article, so you're wrong again.

Again? You haven't even pointed out me being wrong a "first" time

Just as Joe Cool stated "Simple, Amway creates middlemen and does not eliminate them like they claim in business presentations."

Straw man. The Amway business plan is about exactly what you're stating - allowing people to become the middlemen and take advantage of the money available there.

which is why I'm saying the multiple and unnecessary pyramid distribution levels and no limitation on the number of distributors effectively creates a quasi-legal pyramid scheme.

And I ask you again - where did the FTC court get it wrong? They explicitly addressed this claim in their multi-year investigation. They say you are wrong. You say they are wrong.

Rather than just keeping on rabbiting the same thing - how about you explain where they got it wrong?

Please also explain how "no limitation on the number of distributors" makes something a "quasi-legal pyramid scheme" - and explain whatever the heck that is.

 

[Joecool]

Straw man. The Amway business plan is about exactly what you're stating - allowing people to become the middlemen and take advantage of the money available there.

Amway creating more middlemen is not a strawman. Amway is often compared to a small version of a franchise business. But despite that, there are no limits on how many IBO's can register. Amway and IBO's typically don't care who signs up. They will sign up just about anyone, which also contributes to the dismal success rate of IBOs. Also, many IBO's solution to a failing business is to recruit and sign up more downline (additional franchise businesses).

In any case, Amway pays around 31-33% of their take as IBO bonuses. Because they need that markup, they cannot compete with big retailers. The little guy who moves his 100 points, get the smallest bonus while upline enjoys about 90+% of the bonus generated by the one who did the work.

You only start to get a bigger cut by sponsoring (creating more middlemen) which is why the emphasis is on recruitment.

 

[Joecool]

And I ask you again - where did the FTC court get it wrong? They explicitly addressed this claim in their multi-year investigation. They say you are wrong. You say they are wrong.

Rather than just keeping on rabbiting the same thing - how about you explain where they got it wrong?

Please also explain how "no limitation on the number of distributors" makes something a "quasi-legal pyramid scheme" - and explain whatever the heck that is.

Really? The FTC said Brian was wrong? Please share your source of this information.

More likely your inaccurate conclusion of the FTC findings is what is wrong.

It's pretty clear that unless real people who are not distributors buy the products, you are running a questionable business, possibly an illegal pyramid.