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...
