Thursday, March 17, 2011

Wouldn't you pay a little more for quality and convenience?

So the cat's out of the bag!  Somebody's played the role of questioning child to the Emperor's New Savings and noted those promised discounts are as invisible as the opulent robes in Hans Christian Anderson's classic.  When I was prospected and offered catalogs, I came to this conclusion fairly quickly after a personal cost comparison.  Other less discerning shoppers may only notice when their bank accounts start to dwindle after signing on as an "IBO".  Experienced Ambots are prepared for this question, though.  Last week, I recounted a dialogue with my sponsor-to-be, that I have since understood to be fairly typical.  Notably, at the end, he appealed to convenience.  Another common tactic is the appeal to quality.  If you're confronted with these, don't let the Ambot wriggle off the hook so easily!  Remind him that savings were promised, and if not delivered, we're dealing with deceit.  But deceit aside, are the claims legitimate?  Last week, the first appeal was debunked real-time, as I suggested a typical Amway shopper would need to make just as many supermarket trips for perishables (meat, eggs, milk, cheese, veggies), no matter how many dry goods he purchased from Amway.  The time savings are nominal.  The second claim has been examined and debunked before, and it will be again, but if you want to know more about claims of quality, I suggest you check out this post from Joecool or read the associated article at USA today.  There are many other Consumer Reports to peruse online at Amquix and AUS.

Why are the prices so high though?  Today I want to answer this question, because I'm not sure it's entirely clear.  The obvious part is common to all multi-level marketing systems.  A heavy percentage of each purchase is paid out to IBO's as bonuses (Amway reports 32%).  Most Ambots know this figure, but they're not sure what to do with it.  I say that because it has been very common for them to boast something such as, "Amway cuts out the middle-man and passes on the savings to IBO's!"  This is part and parcel of the insidious "savings" lie I blogged about last week.  The truth is that MLM's are an incredibly inefficient means of distributing product.  The middle men haven't been cut out; they've been expanded into a staggering web of underpaid and unpaid sales agents.  Consider that if Amway sold its entire inventory online to the public, they could do so at 68% of the current distributor "wholesale" price and make as much profit as they currently do....assuming anyone actually bought the products.  As such, I see that 32% as a massive mark-up.  As a teenager, I worked as a stock boy and was baffled that we were only making a few pennies profit on most 3 dollar items on my aisle.  Consider that the mark-up on items at your local grocer is less than 5% over wholesale on most items, with some items even sold at a loss to attract customers.  It turns out that middlemen aren't nearly as pricey to the consumer as a sprawling upline.

That 32% alone, though, doesn't account for the entirety of the mark-up, which we've seen may go over 100% for some items.  I once believed that the price mark-ups were a necessary consequence of paying percentages to a bloated expanse of middlemen known as IBO's.  However, after reading a letter by former Double Diamond, Randy Haugen, I became suspicious that prices weren't always quite so high.  Specifically, Haugen alleged the prices "just seemed to continue to drift upward".  There's also evidence of much greater price inflation in that Amway was able to slash prices of homecare products by nearly 50% when they were forced to drastically change their business operations in the UK.  So what else makes the prices so high?  I believe the rest of the answer is in a country song by Merle Travis:

"You load sixteen tons, and what do you get?
Another day older and deeper in debt.
Saint Peter don't you call me, 'cause I can't go;
I owe my soul to the company store"

My dad used to sing this song when I was a kid, but I didn't know what "the company store" was or why this poor coal miner owed his soul to it.  I later discovered that company stores were once used by employers to create a closed market through which employees could spend their wages.  Generally, wages would be in the form of "scrips", which were currency only accepted at the company store.  This created a local monopoly, allowing employers to raise prices without retribution, penalizing, exploiting, and essentially enslaving their captive consumer base.  This came to be known as a "truck system", and is widely illegal.

How does this relate to Amway?  Well it occurs to me that the price comparisons we have are all from the last 20 years.  By the early 90's, Amway essentially was what it is now--an illegal product-based pyramid scheme driven by distributor hyperconsumption, all operating as a facade for the cult-like, highly lucrative motivational organizations (AMO).  Prior to the late 70's, the tools businesses were not operating, and Amway functioned more similarly to Mary Kay or Tupperware, slightly more legitimate businesses, whose distributors subsist on a preponderance of retail sales rather than personal consumption.  A pre-AMO Amway, relying more on retail sales, had incentive to make prices competitive.
What happened when the tools businesses exploded, however, is that recruitment for the kingpins became more lucrative than total retail sales.  They were more interested in having distributors "plugged in" to the system than encouraging them to retail product to make a modest profit.  Amway began losing retail customers and began strictly shifting product to a captive, indiscriminate consumer-base whose M.O. was simply to make an arbitrary PV "goal" rather than to get value for their dollar.  Amway corporate realized its fortuitous predicament and began slowly elevating prices, gradually enough that these frogs in the water pot wouldn't notice the change, knowing all along that the PV hungry mob didn't actually care what that PV bought them, so long as they got PV, along with their precious nominal "rebate". This captive customer base couldn't possibly care less about value for their dollar, viewing their exorbitantly over-priced purchases as "the cost of doing business". 

IBO's are spending real money as opposed to scrips, but the similarities between Amway of the last 30 years and the old company stores are striking.  Without retail customers, Amway is operating a closed market, selling mediocre products with artificially-high prices to a captive consumer base.  Any profits realized are ultimately devoured by personal consumption, and the most ambitious IBO's become enslaved to this monthly cycle.  Perhaps they might replace their war-cry, "Freedom, flush that stinkin' job", with that Merle Travis classic:

Saint Peter don't you call me cause I can't go.
I sold my soul as an IBO...

Wednesday, March 9, 2011

Even if you don't make money, you can still save!

In the last post, I glossed over "the little white lie" of Amway, i.e., that you can avail yourself to exclusive savings on consumer products by signing up.  When I was prospected in the fall of 2002 and lured to an "e-commerce seminar", a dynamic speaker (likely emerald) showed the plan at an open meeting.  What he illustrated was surely too good to be true.  One could start his own internet business for a reasonable and refundable fee and instantly save 30% over what he might spend on typical consumer goods at Walmart or Costco over the course of a typical month.  What's more, if he could "help" others do the same, he could earn a percentage rebate on the purchases they made. 

The speaker asked "How many of you could use just an extra hundred dollars a month?"  Many raised hands.  Others laughed and exchanged knowing glances.  He continued, "What would you do with that money?  Could you buy a new computer?  Upgrade your car?  Save it up and take a trip next summer?"  The crowd grinned and nodded, imagining each scenario with glazed over eyes.  He then took a typical $300 dollar basket of goods (baby diapers, cereal, paper towels, dish detergent) and multiplied by 30% to generate $90.  He then introduced a 3% rebate we might be generating at this level of business and multiplied by the $300 to yield ~$10 per month.  He added $90 and $10 together to yield $100 and circled the figure, noting "there's your extra hundred bucks!"  A buzz was generated throughout the room, as if an auditorium of mathematicians had just watched their peer prove Fermat's last theorem for the first time.   Many who'd been irritated a few minutes ago at having been suckered into a MLM meeting while promised an "e-commerce seminar" now changed their tune.  Indeed, what we were hearing was too good to be true.  In fact, many of us thought "I'd be stupid not to do this". 

I shamefully admit to being slightly excited by what I'd learned that night.  My would-be sponsor, encouraged by my positive energy, gave me a fistful of CD's to listen to, as well as a few catalogs.  I have since learned the latter is discouraged, and this was a fatal mistake for him.  Eager to see these savings for myself, I flipped through the pages, but item after item had me rubbing my eyes at the prices.  "Surely these can't be discount prices," I thought.  I took the catalog to a grocery store to compare costs.  I found about 70 items that were identical-branded items (such as "Sweet Baby Rays" BBQ sauce or Sun-Maid raisins), and compared them unit for unit at the grocer's.  I compiled an excel chart and compared my findings.  The result was that the Amway products were consistently 70% higher priced than the grocer's.  Now, keep in mind that I was comparing Amway products sold in wholesale quantity (such as 12 bottles of BBQ sauce) with single units at the grocer's.  Such a comparison should largely favor the wholesaler, since quantity generally comes with a discount! 

I would later find out that the 30% discount was to be taken off those products, lessening the cost disparity.  However, even if all products were discounted 30%, I was still left with a 20-25% cost increase to buy from Amway.  What's more?  The 30% discount is a "best case scenario" of sorts.  Certain products are offered to distributors (IBO's) for up to 30% off the retail price.  However, very few products were discounted so heavily.  Worse yet, the branded products, such as those I mentioned earlier, had the worst distributor discounts.  Only Amway products were discounted as much as 20% off the inflated retail price. 

I wasn't the only one to find such price inflation with Amway.  There is a list of comprehensive price comparisons online.  Some were less favorable even than mine.  Here's a summary:
  • Sidney Schwartz found a 63% increase at retail and a 41% increase at distributor cost.
  • Bradley Orner found an 89% increase at retail and a 49% increase at distributor cost.
  • Robert Deering found a 87% increase at retail and a 56% increase at distributor cost.
These comparisons are somewhat dated, but they agree closely with my finding of a 70% increase at retail.  Joecool recently did a much smaller price comparison on his blog.  Many commenters argued that the Amway items were superior quality, but you'll note that the only identical branded product he chose, Progresso soups, was nearly double from Amway for the same quantity. 

Back to my price comparison--when I again met with my would-be sponsor, who happened to be my boss at the time, I showed him my results.  I posted our dialogue previously as a comment on Joecool's blog:

Me: you said i'd save 30%

boss: well you won't save money on every little thing

Me: but every item I checked is grossly overpriced

boss: well you haven't taken the 30% off yet

Me: even after that, they're still overpriced by 20%! and that 30% doesn't even apply to these non-Amway branded items! and that's not to mention I'd be paying over retail for wholesale items!

boss: well, you have to factor in gas money going back and forth to Wal-mart

Me: but I'd still have to pay for shipping, and I'd still have to shop for perishables (milk, eggs, meat) and make just as many trips

boss: look, you have to change the way you think. You can't get rich saving money!

It was clear that the "30% savings!" claim was a lie, as 1) you do not by any means "save 30% over Walmart!" 2) you do not by any means get a 30% IBO discount on every item.  What I didn't realize at that time, though, was that his responses, which were delivered rapid fire, were well-rehearsed Ambot speak, gleaned from hours of listening to repetitive tapes.  This made clear a far more sinister truth:  those who propogated that little white lie knew it was a lie, and they developed an extensive line of reasoning to deflect questioning recruits when this lie was confronted. 

There are many things wrong with Amway: exaggerated claims of wealth, false promises about time commitment and time to financial independence, cult-like AMO's and tool scams, but I believe this "little white lie" is the most insidious of all.  The problem is that in those open meetings, the savings is the bait.  For all those people who shudder at the thought of prospecting friends/family into a pyramid scheme, the thing that makes them say "well I'd be stupid not to do this" is the savings.  For all those people who "could use an extra hundred dollars a month", the promise of such comes from the savings.  Of course, the trouble is that  there is no savings.  There won't be an extra hundred dollars.  And those grinning recruits, so in need of cash would soon be spending far more than they ever thought possible on consumer goods each month.

Friday, March 4, 2011

How could a company that had 9 billion in revenue be a scam?

In the last few posts, we looked at arguments Amway apologists might make when the issue of pyramid schemes are raised.  In the first case, the hypothetical Ambot set out to prove Amway wasn't a pyramid scheme.  In the second, he attempted to prove everything was a pyramid scheme, including Amway.  As I mentioned, these two cases are often made within the same conversation.  Some might call this "talking out of both sides of one's mouth", but that is of little consequence.  Ambots care little about rules for proper argumentation. 

If you've rebuffed his effort to show that "sure Amway's a pyramid, but so is everything else," you'll often see him argue in some fashion that pyramid schemes don't sell a product.  There are several spins on this, including the title of this post.  How could a pyramid scheme generate x billions in sales???  Many of my occasional readers and 2 regular followers (thanks Joecool and Annabanana!) already understand the concept of product-based pyramid schemes (PBPS), but for those of you who don't or those who want to brush up for your conversations with Amway apologists, here's a PBPS 101:

I'll refer you to my first post, in which we considered a hypothetical chain-letter, in which recipients were promised wealth if they sent $5 to 5 names on a list, added their own name, and then propogated the list to 5 new recipients.  Chain-letters are illegal pyramid schemes, as defined by the FTC.  However, as the FTC notes, "Some schemes may purport to sell a product, but they often simply use the product to hide their pyramid structure."

To easily conceptualize this, consider my chain-letter, but now instead of sending $5, each recipient pays $5 to receive something with no value.  Or to better approximate Amway's example, each recipient pays $10 to receive a product worth five retail dollars (for example, five dollars worth of soap).  Effectively, you're still transferring $5, but you're hiding by moving a product. 

The same FTC report goes on to give us "tell-tale signs" of a PBPS: "inventory loading and a lack of retail sales."  They elaborate, "Inventory loading occurs when a company's incentive program forces recruits to buy more products than they could ever sell, often at inflated prices."  As for lack of retail sales, they say "Many pyramid schemes will claim that their product is selling like hot cakes. However, on closer examination, the sales occur only between people inside the pyramid structure or to new recruits joining the structure, not to consumers out in the general public."

These two factors were the reason the FTC established two rules to govern the MLM industry.  First, there's the "retail sales rule", wherein 70% of distributor purchase must be retailed to customers outside the pyramid.  Second, there's the buy-back poilcy, wherein distributors may return unsold inventory for their money back, avoiding inventory loading.  Amway has never been in compliance with the retail-sales rule, avoiding its enforcement with a powerful political lobby.  Though Amway does offer buy-back, inventory loading is still a rampant problem for reasons we'll look at in a future post.

I think the "tell-tale signs" are really symptoms of the same problem, which is that the products in a PBPS have little to no real world market, generally because they offer poor value to consumers.  They're simply too expensive for their quality.  Many Ambots will tout the quality of their products, but consumer reports have generally found Amway products to perform average or below in comparison with leading brands, which can often be purchased at half the cost.  Furthermore, Amway sells many consumer goods through their catalogs that are branded products (e.g. progresso soup, sun-maid raisins) which can be directly compared in per unit pricing with the same brands in grocery stores or wholesale stores like Costco.  To be fair, one should compare with wholesale, since Amway generally offers products in wholesale quantity.  When I was recruited, my would-be sponsor gave me catalogs (which they're advised against) which I used to compare prices with my local grocery store.  I found a 70% price-hike on about 60-70 same brand or roughly identical products on a per unit basis.  There are many excellent and thorough pricing comparisons online which have found even worse price-hikes at Amway.  Product pricing, and further the fact I was promised I'd "save 30% over Wal-mart!" was the reason I didn't join.  The 30% savings has been known online as the first "little white lie" of Amway. 

Another aspect of these PBPS's is that some of their products will touted as superior quality, which is an argument Ambots frequently use to explain away the increased costs.  Refer them to consumer reports comparisons.  Also refer them to pricing comparisons which use identical brand products, which often don't even include shipping costs.  Remember that PBPS like Amway aren't about providing value to consumers.  The products simply confer legitimacy to the underlying money-transfer scheme.  In a future post, we will look at reasons the products are over-priced, which may not all be apparent at first blush.