MLM Amway & The Myth
By Vic on Mar 22, 2008 in Monetization
Multi-level marketing (MLM) also referred to as Network Marketing is a business distribution model that allows a parent multi-level marketing company to market their products directly to consumers by means of relationship referral and direct selling.
Independent nonsalaried salespeople of multi-level marketing referred to as distributors (associates, independent business owners, franchise owners, sales consultants, consultants, independent agents, etc.), represent the parent company and are rewarded a commission relative to the volume of product sold through each of their independent businesses (organizations). Independent distributors develop their organization by either building an active customer base, who buy direct from the parent company and / or by recruiting a down line of independent distributors who also build a customer base, expanding the overall organization. Additionally, distributors can also earn a profit by retailing products which they purchased from the parent company at wholesale price.
Distributors earn a commission based on the sales efforts of their organization, which includes their independent sale efforts as well as the leveraged sales efforts of their down line. This arrangement is similar to franchise arrangements where royalties are paid from the sales of individual franchise operations to the franchiser as well as to an area or region manager. Commissions are paid to multi-level marketing distributors according to the company’s compensation plan. There can be multiple levels of people receiving royalties from one person’s sales.
Amway
Amway is a multi-level marketing, or network marketing company founded in 1959 by Jay Van Andel and Rich DeVos. The company’s name is a contraction of “American Way.” Based in Ada, Michigan, the company and family of companies under Alticor reported sales of USD$6.4 billion for the performance year ending August 31, 2005, marking the company’s sixth straight year of growth. Its product lines include personal care products, jewelry, Nutrilite dietary supplements, water purifiers, air purifiers, insurance and cosmetics. Amway conducts business through a number of affiliated companies in more than ninety countries and territories around the world. In the United States and Canada it now operates as Quixtar.
FTC investigation
In a 1979 court ruling, the Federal Trade Commission found that Amway does not qualify as an illegal pyramid scheme since the main aim of the enterprise is the sale of product and money is paid only for business volume, personal and group. It did, however, order Amway to change several business practices and prohibited the company from misrepresenting the amount of profit, earnings or sales its distributors are likely to achieve with the business. Amway was ordered to accompany any such statements with the actual averages per distributor, pointing out that more than half of the distributors do not make any money, with the average distributor making less than $100 per month. The order was violated with a 1986 ad campaign, resulting in a $100,000 fine.
Amway and its American online incarnation, Quixtar have had allegations that these companies are pyramid schemes or cults, despite the 1979 FTC ruling that legitimized the Amway business. The case revealed that, as of 1979, most of the products sold by Amway were to the Independent Business Owners (IBOs) themselves for personal consumption rather than to retail consumers who weren’t enrolled as IBOs. Buying products or directing clients to buy from Amway or Quixtar gives IBOs points and they are paid back on the number of points that they generate from personal consumption or from client volume. An existing IBO can sponsor others to get an IBO number so that they can help others divert their buying habit from other stores to Amway or Quixtar. Thus, the business grows as a greater number of people join the group. The share of profit is based on the volume that an IBO is responsible for each month, therefore an IBO may actually make more money per month than the IBO who sponsored them into the Business.
In 1986 Amway Corp. agreed, under a consent decree filed in federal court, to pay a $100,000 civil penalty to settle Commission charges it violated a 1979 Commission order that prohibits Amway from misrepresenting the amount of profit, earnings or sales its distributors are likely to achieve. According to a complaint filed with the consent decree, Amway violated the 1979 order by advertising earnings claims without including in it clear and conspicuous disclosures of the average earnings or sales of all distributors in any recent year or the percent of distributors who actually achieved the results claimed.
Other legal cases
In 1983, Amway pleaded guilty to criminal tax evasion and customs fraud in Canada, resulting in a fine of $25 million CAD, the largest fine ever imposed in Canada at the time. The company was fined another $45 million CAD in 1989 to settle a suit brought by Canada’s trade office.
In a 1994 interview, Amway co-founder Rich DeVos stated that this incident had been his greatest “moral or spiritual challenge”, first in “soul searching as to whether they had done anything wrong” and then for pleading guilty for technical reasons, despite believing they were innocent of the charges. DeVos stated he believed that the case had been motivated by “political reasons”.
The Recording Industry Association of America (RIAA), as part of its anti-piracy efforts, sued Amway and several distributors in 1995. The RIAA alleged that copyrighted music was used on “highly profitable” training videotapes. Amway settled the case out of court for $9 million. In a related lawsuit initiated by the distributors involved, the Court established that Mahaleel Lee Luster, who had been contracted to make the videotapes, had violated copyright without the knowledge of three of the five of those distributors.
On August 14, 2007 the Supreme Court of India has ordered the Andhra state police to complete the investigation against Amway in 6 months. The public interest petition alleges that the activities of the company violated laws related to drugs, income tax and sales tax. The state high court had declared that Amway’s business scheme was an offense under the Prize Chits and Money Circulation Scheme (Banning) Act, 1978.
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I’ll have to catch the video later when I’m at...
Vic,
I agree selling is easy. Especially if you believe in your product. I truly believed in the Quixtar concept, that is why it was so easy to promote. But the closing was the tough part. Thank God I was able to pull out before we recruited too many people here. Quixtar is still going through a lot of litigation. Many of the top IBOs just formed there own companies and are still doing the same practice only under a new company.
The problem I see with an MLM is that you usually have to get in right at the beginning to really reap the benefits. Like with anything else a few bad apples makes the whole bushel smell rotten.
I am glad that your financial loss what not as bad as it could had been. I did want to make sure I talked about my view on sales a bit more so I made it on the new comment vlog
Hi Vic,
Good topic. I know many active network marketers who’d agree with just about everything you’ve said … especially when it comes to Amway.
You touched on something very important in the middle of your video. There MUST be movement of a viable product! One of the very first posts I wrote when I started my blog last year was on how to choose a network marketing company. I had three rules …
1. The “would I buy it” rule - for the products
2. The “would I recruit my mom” rule - for the opportunity
3. The “do I trust them” rule - for company management
Unfortunately, it often takes many of us a few tries before we find the “right” opportunity (that fits our individual style and skill set), and where we can honestly answer yes to all those questions.
I’ve been doing network marketing for several years now. I don’t make a ton of money, but it’s enough to make a decent little difference in our family’s lifestyle.
I think a lot of the techniques that apply to blogging and internet marketing also work very well with a quality network marketing program.
The upside for me, given my somewhat hectic lifestyle (can’t wait to be done with the military) is that even when there are times that I can’t actively “work” my business, I still get paid … for stuff I did about 4 years ago.
Oh yea, about that whole not being able to show our paycheck thing … I think it’s silly. But it actually comes back to Amway. If I was promoting an ebook, I could show you bank statements of how much I made to make you want to purchase (I see it all over the Internet). But because I’m a network marketer, if show you my earnings, it could be construed as “enticement”, and in the hands of the wrong state AG possibly get the entire company that I work with in hot legal water.
Do some people (who aren’t making a dime) use this to their advantage? Sure. But for the most part, just like with all the internet marketing “gurus” out there, there are definitely clues as to whether or not an mlmer is actually successful, or just “faking it til they make it”.
On a different note …
It’s good to have you back .. I’ve always learned a lot from your blog posts.
Thanks,
Todd
Hey buddy thanks I am so happy to be posting but on video just way easier. I knew that MLM might kind of be a bit touchy LMAO and actually found your comment interesting but it would had taken me for ever to write so I made my comment on the new comment vlog.
Hey Vic,
I worked for a MLM for a few years and one of my projects was to re-write the program that calculates payouts and printed the checks. The real money in MLM is when you reach break-away (or over-ride) levels where you start making commissions off other people’s sales.
I think MLM was the precursor, off-line version of “make money online” programs…lots of opportunity and it really works, for some people. And mainly the people to follow the program exactly!
I’m on board with you, MLM is not evil, but some of the people are. If you get involved in one, make sure you get good upline people who will help you…not just help you help them!
- Thom
Also some people it is easier to say MLM does not work to say I failed because I suck LMAO.
This is the first time I comment here. I’m new to your site. I followed an SU link due to the CM drama. Griz knows a little about me…
Anyway, I was never really attracted to MLM. I always thought it was time consuming. Training your downline and the hand holding?! That’s probably what attracted me to affiliate marketing (FREEfabSuff and CouponCodesPlace). (With 7 kids, I’m busy enough to not have to do that. I’ll tell you about my background another time or you can Google me.) However, a friend of mine got involved with a travel business and I did some research. Even their stocks are doing well. I decided to join to help her out. Now, I’m trying to learn some ppc advertising ASAP because she’s trying to push me into going the warm market route. I’d rather do the recruiting (the FREE business side of it) with internet marketing. Their mlm cash bonuses are very lucrative, but I’ve been through a situation like you have in the past….and I couldn’t sleep if I knew that someone spent their hard earned money to find out that they hate the biz. (Unlike some people, I have a conscience. I’ve hit rock bottom accompanied with my kids. I’ve written about it, if you want to read about it.)
I put the link to the business as my website. I’d like to know what you think. The free part of it is great because you make money everytime you (or anyone that uses your site) book a flight, car rental, hotel room, cruise or even tickets to attractions. In theory, it’s a great way to make money. The problem I’m looking at is generating the traffic. I don’t want to put a link on the social networking sites. I’ve tried Adwords before with little success. Traffic exchanges are an option, but I’m frustrated with the landing page I created. I can’t get the autoresponder form (aweber) to work right. There has to be an easier way. (I need to learn more about the automated programs you spoke about on your vlog. I’m going to read your blog and Griz’s and apply it. I already have about 22 sites (blogs, Squioo lenses and sites). I’d love to have them make the money I need to support myself and my kids….without depending on his child support. (I’m tired of the games.) My sites were penalized by Google. Most of them were pr 4 on the first page for their keyword. Since the penalties, most of them have been buried. My income has drastically decreased.
Interested in your opinion about this specific income opportunity. I know you’ll be brutally honest. I think I’m ready to hear it, well I hope I’m ready.
Thanks.