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.


  1. This is a great explanation of how the Amway pyramid works. This is also confirmed by knowing that some groups taught a "buy from yourself" concept. Lacking real non IBO customers, the only way to profit was to recruit more downline who would eventually absorb your losses and allow you to profit when your downline was big enough.

  2. When I was recruited, Amway in the US had become Quixtar. At that time, the majority of the BWW group was preaching "change your buying habits and teach others to do the same". Retailing was never mentioned. They were proclaiming the convenience of shopping online, from your own business, buying the same things you buy from Walmart, but at a 30% SAVINGS! Web-based commerce encouraged the "buy from yourself" movement that was already well underway in the 80's. Big pins were making so much from tool sales at that time that they cared little about moving product, instead focusing on recruitment and inventing new achievements (Eagle!) to encourage more tape sales. They also realized that they would scare off potential recruits by mentioning "selling product".

  3. You don't understand several things, including the 70% rule. To answer your thread title question... Bernie Madoff.

  4. The same could be said for Hitler. If he was so bad, how could so many people follow him? Simple. Offer a solution to the horrible unemployment rate after WW1 and find a scapegoat for what got Germany into that predicament - the Jews.

    The German people were ripe for this kind of scam; and it worked. At least for a while.

    Just because amway is big does not make it honorable.

    CASSETTE TAPE anyone?

  5. Yes Tex Amway has a retail sales rule (70% Rule) in order to follow the guidelines against illegal pyramids as outlined by Federal Trade Commission. The purpose of the rule is to remove the financial incentives for distributors (IBO's) who do not have sales outside of Amway members, clients or other non-IBO customers. This is to keep Amway/Quixtar free of pyramiding accusations. The sad truth is most IBOs do not follow this rule and it is not enforced by Amway or the big pin leaders. I did not know anyone crossline, downline or upline from me when I was in the business who retailed anything close to the 70% especially because the product is over priced. We all know that the majority of Amway's sales are to IBOs that are trying to make their monthly PV something Amway will never admit.

    ***Former WWDB Lemming***

  6. Anon,

    You don't understand the 70% rule, either. There is a separate rule for minimum retail volume, the 70% rule is to prevent excessive inventory and "fake" pin levels. While there may be some indirect overlap between these issues, the main purpose of the 70% rule is to prevent excessive inventory, NOT to mandate a minimum retail level. In fact, self consumption can be used to meet at least a portion of the 70% criteria, and self consumption is not considered part of retail volume! LOL

  7. Tex, the 70% rule I'm referring to is the FTC's own, which was established in the early 80's after its Amway investigation. Of the three rules, the others being buy-back and 10 customer, it acted to both enforce retail sales and prevent some measure of inventory loading. The 10 customer rule alone would only assure some nominal sales which could be dwarfed by personal consumption (though it does prevent strictly selling to spouse, e.g.). Amway has its own lax 70% rule, which is really useless. Amway also has a "10 customer" soft rule, just to mollify the FTC, and it is sporadically adhered to at best. None of these measures Amway conform to the original intention of the FTC 70% rule.

  8. John, I'm referring to the same FTC rule, which was directed towards excessive inventory, NOT retail volume. Retail volume is a different issue and is governed by the 10 customer rule. However, ALL of these arguments are the hang nail compared to the compound fracture of the Amway Tool Scam.

  9. Tex, the 70% rule not only prevents inventory loading (in addition to the buy-back policy), but it also prevents nominal retailing to satisfy the 10 customer rule. With the 10 customer rule alone, you could be selling 50 dollars of product to friends and self-consuming 250. Now, this is exactly what goes on in Amway because their own version of the 70% rule (which is interpreted differently by different MLM's) is too permissive.

    I do agree that the tool scam itself is a worse illegal PBPS than the Amway corporate PBPS, but this blog is focused on countering Ambot arguments, not on exposing the evils of the AMO's, etc.

    Thanks for your contributions.

  10. Anon at 4:57 AM, I'm honored to finally have my blog graced by CASSETTE TAPES. I enjoy your comments on Anna and Joe's blogs. Thanks for reading.

    WWDB Lemming, thanks for your contributions as well.

  11. John, the FTC went on record in 2004, and much more recently than the 1970s, as saying that ZERO retailing, by itself, is NOT an automatic indication of a problem. See the letter and a full discussion of the issue here:

  12. 1- Neither the courts or the FTC have ruled on the legality of the practices of Amway's tool companies. The FTC's 1979 ruling did not make a determination on the legality of Amway as we know it. The tool companies at that time were only in their infancy stages. I doubt Amway in the Pokorny case wanted to take the risk that the tool companies could pass the "pyramid test." (I bet at some point in the trial Amway would have had to throw the tool companies under the bus)

    2- The 2004 FTC letter is pretty much irrelevant. The non-binding letter stating current staff opinion was written by George Bush appointees (who had ties to Amway and mlms). The letter would be similar to a sheriff stating that he was not going to have his deputies enforce a speed limit on a certain highway. Years later, Bush is gone and there is a new sheriff in town. Obama has new people in there with their own opinions and agendas.

    3- I think the federal judge in the Pokorny case would be more concerned about the opinion of his appellate court than the opinion of those in George Bush's FTC. The 9th Circuit has spoken clearly on pyramid schemes regarding buy back policy, inventory loading and retail sales.

    4- According to case law, the tool companies would have to prove that they had rules requiring a buy back of bsm inventory and that those rules were effectively enforced. Amway would have to prove that they had rules requiring retail sales and that those rules were enforced. In both areas, Amway and tool companies were vulnerable.

  13. Thanks for your excellent contribution MichMan

  14. MichMan,

    1- You are speaking of U.S. courts and regulatory agencies. It is obvious the UK and India counterparts, who have investigated the Amway Tool Scam (ATS), have found the practice to be illegal. The ATS would probably pass a "pyramid test," but it would NOT pass an ethical, moral, or legal test, because of the bait-and-switch nature of the ATS, NOT because of a "pyramid test."

    2- The 2004 FTC letter is an official FTC position, and what they are willing to pursue, it is based on another 2 1/2 decades of MLM experience, and the FTC is not as fluid in their positions as you suggest.

    3- I think the federal judge in the Pokorny case is more interested in justice than anything else, and that's why he rejected the proposed settlement.

    4- The buy-back policies are a hang nail compared to the compound fracture of the ATS.

    You're welcome for my excellent contribution.

  15. O.K., John, I'll bite. Which blog is yours? This one? If this one is yours, I wish you the best and I'd be happy to contribute.

    For the record, I love annoying the hell out of whichever ambot it is who hates for anyone to still use the terminology - CASSETTE TAPES!!!

    What difference does the medium make? It's still the exact same brain-washing amway crap.

    He/she is majoring in the minors; a no-no in ambot-land.

    One of the best questions put to ambots is this: If amway products are so fantastic/concentrated/super-de-duper/awesome, then why does almost not one ambot continue to buy them after they quit the cult???????

    Did their 'wonderfullness' go away? Or do they push/buy them b/c they were counseled/bullied by their upline?

    These are things I am willing to get to the bottom of:)

    Ta ta

    AND A HARDY 'CASSETTE TAPE' toast to all ambots.