Multi-level marketing programs are often described as similar to pyramid schemes. These marketing companies rely on distributors to recruit more distributors under them. More distributors equal more profits for the distributors above them and this is the most beneficial for those in higher positions.
The best way to understand such a scheme is to visualize a pyramid. For example, here is small scale pyramid program: there are ten people on the top, (distributors in the "top" positions of the pyramids might be called "diamonds" or "emeralds") forty below them and below those forty, eighty more people, below those people, a hundred and sixty more and so on.
New distributors pay money to begin their business, which might be called the "start-up fee/kit." The money for the start-up kit is paid to other distributors who recruited the most people. In addition to the start up kit distributors also often purchase books, tapes, and motivational videos, which cost more money and pay entrance fees to the meetings that they are encouraged to attend.
Pyramid organizations like these are legal though, because they sell merchandise out of catalogs. They may offer many catalogs selling everything from beauty supplies to auto equipment. Without selling products, companies like Amway would be illegal.
Distributors are employed by these multi-level marketing companies to sell products they provide to either friends, networking or door to door; however, it seems that the money distributors make mostly comes from the start-up kits that the new distributors are to purchase. For example: if one recent distributor persuades a friend to become a distributor, that new distributor buys the start-up kit, and the friend who introduced him or her to the program makes money from the start-up kit purchase. That friend is now "under" the first distributor on the pyramid.
In addition, many of the products such companies sell are to new distributors, not to retail customers. "Less than one percent of all retail sales are made through multi-level marketing companies. Much of the sales volume comes from new distributors who are setting up their new business." (Kautz, 1999). With this information it is no surprise that new distributors are very frequently losing money.
Many of the products are sold in bulk form. Amway claims their prices are cheaper than retail stores; however, that is not the case. "Many of the goods still cost more than those at the corner store. Schwartz found that Amway's generic toasted-oat cereal cost $.204 per ounce, for example, while General Mills' Cheerios average $.157 per ounce - making the Amway breakfast cereal about 160 percent higher in price. Similar statistics exist for everything from motor oil (144 percent higher when purchased through Amway) to aluminum foil (189 percent) to higher-end items such as vacuum cleaners and water-filtration systems." Amway advertises, if you're not happy with your products, there is a one hundred percent money back guarantee; however, former customers disagree. They state Amway makes it next to impossible to return items. Furthermore, instead of a full refund, customers have received coupons for other Amway products. (Felps, 1998).
When prospective distributors join these marketing programs, they are usually in the dark about the high, repetitive costs of the meetings. Meetings may be mentioned, but the distributors may typically not be told about the cost of these meetings and/or their frequency.
In addition, distributors are "strongly encouraged" to listen to at least one motivational tape a day, tapes that are sold, of course, by their uplines (persons above them on the pyramid). (Felps, 1998). These tapes are usually between two to six dollars each. Amway sends two tapes to each distributor weekly and the distributors are billed for the tapes. At the meetings, the distributors are often pressured to buy more tapes, books and videos from the diamond and emerald speakers. Most of the profit from these sales goes directly to the diamond and emerald distributors.
Another expense that many distributors face is called Amvox. Amvox is Amway's voice mail service and distributors must pay fifteen dollars a month for that service. The purpose of Amvox is to inform distributors of meetings and news in their area.
Amway distributors also frequently purchase hundreds of dollars worth of products per month, in addition to the starter kit costing about one hundred dollars. (Burstein and Lauerman, 1996). While this may seem like small amounts the costs add up. As one former distributor revealed, "After a year and about $1,000 lost on meetings, tapes, etc., I got fed up with this and stopped attending meetings and demanded our standing-order tape subscription be canceled." ("Some Fractions of Amway Use Cult Tactics," 2002).
Pressure is often exerted upon distributors to sell products, buy tapes and books, because their sales and purchases are paying the diamonds' and emeralds'. A former distributor said, "I have spent well over $2,000 per year for four years on books, tapes, and functions and I was told, 'If you want to be successful, you need to.' Most months, I got a check for $6.05." (The System wasn't Working&It was my Fault, 2001).
I have found that the majority of people who join Amway as distributors lose money. These potential distributors are often not clearly told the cost of meetings, tapes and book, which they are required to purchase when first approached to join. They are often told they need to buy at least two hundred dollars worth of products for themselves and sell at least another five hundred dollars worth of products to buyers.
We are all at risk, because multi-level marketing companies, such as Amway, usually may target you as a potential distributor. Such companies often target the poor, undereducated, and unemployed. This concerns me because it seems as though these companies are trying to take advantage of others. "They love people who are broke because they're weak." (Felps, 1998).
So how does a distributor get to the top of the pyramid and become a ruby, emerald or diamond? It's nearly impossible, according to one web site I visited. "The number of new pins for 1998 was the lowest in the past seven years, with new Diamonds down to 19 from a 1996 peak of 49, and new Emeralds down to 72 from a 1993 peak of 150" (Amway: The Untold Story, 1999).
A few people on the top of the pyramid who are diamonds include the founders of Amway, Jay Van Andel and Richard M. DeVos and their sons Steve Van Andel and Dick DeVos. They also serve on the board of directors. For those not born into "diamond status," it is nearly impossible for most distributors to work their way up the Amway ladder, given their high drop out rate.
Distributors need more distributors under them so that they can advance up the Amway multi-level ladder. But most distributors quit Amway after only six months because of their losses. "Amway's track record is one with a high dropout rate, low average incomes and lawsuits from competitors, regulators and its own distributors. It is often referred to as a cult, and is considered a pyramid scheme."(Felps, 1998). Without new committed distributors below these older distributors it's impossible for them to work their way up to ruby, emerald or diamond status.
Through my research I have found many former members who now discuss the money they lost. One former distributor explains, "At this point we were receiving six dollars a month from one customer ordering products. We were spending eight dollars to get to open meetings--that is the gas to get there. We spent six dollars per tape, $10-$15 per book, $15 for Amvox (Amway's voice mail service). We were spending around fifty dollars per month at this point--not including gas to get to the functions." All the supplies and meetings were costing this couple of hundred dollars every other month. "That was just to get into the function plus hotels and not including transportation, food etc." Yet another former member says that it cost him $4,000 a year just to "work" the program. (Felps, 1998).
After joining Amway, distributors may eventually realize that they are losing money as well as their free time, and this often causes spiraling problems at home. I came across one detailed story of a wife who left her husband after he joined Amway; the last straw was when he approached a relative at a funeral to sell Amway products. ("A Former Amway Wife Speaks Out," 1998). As you can see this is a major problem, had former distributors known about the high costs of joining Amway, they might have never joined to begin with. ("God Bless all the Survivors," 2000).
With all this negative information about multi-level marketing schemes, how can entrepreneurs and potential distributors beware of a potential scam? How can they protect themselves? They most often cannot rely on these companies to disclose all costs nor can we force those companies to disclose all their financial information such as every distributor's income. However, as potential distributors anyone can and should ask more questions. It is also very important to research a particular company before paying for a start-up kit. Potential distributors need to be well informed before handing over any of their money.
The Federal Trade Commission has a wonderful web site for further information and advice. The web site is http://www.ftc.gov/bcp/conline/pubs/alerts/pyrdalrt.htm.
In conclusion, here are the facts I have uncovered: multi-level marketing companies appear to prey on those who are unemployed and desperate for work.
My fear is that most of the people being deceived by the high costs are young adults just starting off in the world, and the undereducated. The Federal Trade Commission clearly states, "Do your homework! Check with your local Better Business Bureau and state Attorney General about any plan you're considering -- especially when the claims about the product or your potential earnings seem too good to be true." (The Bottom Line about Multi-Level Marketing Plans, 2000).
You should strongly consider doing a detailed background check regarding any company you want to work for, especially if it shows any signs of being a multi-level marketing program. You can check reports at your local Better Business Bureau.
My advice based upon my own research, is to avoid multi-level marketing schemes all together, they may take your "pipe dream" and make it into a nightmare. The best solution is always: "buyer beware."
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