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.

Um yeah, it's a pyramid scheme...but so is everything else!

"If you can't beat 'em, join 'em", or so the saying goes.  Yesterday, I dispatched the first of two hackneyed stock-phrases the Ambot will employ when he's confronted with the words "pyramid scheme"--in short by flat denial, supported by the erroneous reasoning that since you can make more money than your upline, it cannot be a pyramid scheme.  It's not uncommon for the bemused Ambot to abandon this line of reasoning when he becomes uncomfortable, opting for the opposite approach:  to embrace pyramid schemes!  Yep, that's right.  Often times in the same conversation, an Ambot will argue both sides and pray something sticks.  "Sure, Amway's a pyramid scheme, but so what?  Everything else is, too!"  Generally, corporations, the military, and the government are then compared to Amway in terms of their hierarchical or pyramidal structure.  It's as if those who employ this argument believe the problem with pyramid schemes is the shape, and if it can be shown that other credible systems share it, then pyramid schemes must be OK.

I encounter this reasoning frequently, and it's not just with Amway.  Apparently, members of many MLM schemes are taught this counter-argument to the pyramid scheme challenge.  Just last week, I posted a link on my facebook page, asking friends to sign a petition on pyramidschemealert.org for FTC investigation into Amway.  As you may know, Amway has failed to comply with the regulations the FTC put in place in the late 70's after their first investigation.  Anyhow, it didn't take long for a fellow to respond to my request with the following haughty, disrespectful comment.  Bear in mind, this fellow hadn't spoken to me in 13 years, but I've found that people are passionate about their MLM, almost as much as their political views and religions.  Here's the comment:

I own a company, so I am on the top of a pyramid, I have investors under me, they have agents under them and the property managers under them then the office workers, then I guess at the bottom would be the cleaning crew and maintenance workers. If you disect [sic] every company in America, you will find the pyramid structure! If every pyramid was shut down it would have to start with the government, Obama is on top of that pyramid LOL!

What do these two men have in common?

Yes, LOL.  This same argument is regurgitated in many an Amway meeting by many an ambitious IBO trying to sponsor many a naive recruit.  When I was prospected 9 years ago, I heard this same reasoning.  As I mentioned before, it's as if those who use this argument believe that the problem with a pyramid scheme is the shape.  But of course, that's just asinine.  It's not the shape, it's the concept, and that is that very few people get very rich from the modest losses of very many, and those very many only comply because of false promises of wealth.  The crucial obvious point that these IBO's miss, for all their recycled stock quips, is that in any of these other hierarchical systems, those on the bottom level are all fairly compensated for their work.  They're paid an agreed upon wage, and there are no false promises of wealth to dupe them into participation.  Not only that, but in any of these other examples, it is possible for an appropriately qualified individual to be hired or elected into a lofty position on his own merits, bypassing the lower ranks.  In a pyramid scheme, on the other hand, the prevailing principle of success is "dibs".  Those who get in early get rich.  There's a lot to be said for charisma, ability to motivate, and willingness to deceive, but there's no substitute for getting in early, and that's why in a saturated market, such as the US, new diamonds are far more scarce than lottery winners. 

There are a lot of things wrong with pyramid schemes, especially the massive global fraud known as Amway, but none of these is the shape.  Fortunately, the similarities between legitimate corporations and pyramid schemes end there.  Nice try Ambots.