You Can't Cheat an Honest Man - James Walsh [94]
Case Study: Amway
No company has been investigated—and sued—for being an illegal pyramid scheme more often than Michigan-based Amway Corporation. As a result, Amway has emerged as a kind of dividing line for the legitimacy of multi-level marketing schemes. Its structure and methods have survived legal scrutiny. But any MLM firm that operates beyond the bounds of the Amway model may have trouble with the law.
Amway makes and sells home care products, such as laundry detergent and household cleaners; health and beauty products, such as cosmetics, vitamins and food supplements; “home tech” products, such as air and water treatment systems; and some commercial products, such as janitorial and food service items.
It moves these products and services exclusively through a network of some 300,000 independent distributors.
The company started in 1949. About 10 years later, Jay Van Andel and Richard DeVos—two successful distributors—decided that some of their suppliers were in danger of collapsing and that they should go into the business themselves, making their own products and selling them through the sales organization.
Within five years, they controlled the entire organization. As they grew the business, Van Andel and DeVos decided to look for products which were readily consumable, relatively low-priced, and competitive with those found in retail stores—all of which would lead to repeat sales. This product profile has become standard for MLM programs.
When a person becomes an Amway distributor (typically for an upfront investment of about $150) he or she receives an identification number to use when ordering anything from the company. That number tells Amway everything it needs to know about the distributor, including the identity of upliners—the people who recruited him or her.
Amway distributors generally sell products to friends and neighbors at parties or other informal gatherings. People who join Amway are urged to change their buying habits. One common pitch is: “Every time you buy from a retail outlet, you are sending someone else’s kid to college.” Newly sponsored distributors—the downliners—normally purchase their products from the distributor who personally sponsored them.
For each sale above a certain minimum, the Amway distributor makes a percentage computed under a graduated schedule.The percentage of sales volume the Amway distributor receives is called the discount and averages between 15 and 35 percent of the cost of each item sold. One Amway distributor explained the system:
Say you become a distributor and order $200 worth of products a month. You’d have a gross income of $66—that’s a $60 discount from retail price, plus a $6 commission. Your annualized “income” is $792, nothing to quit the day job over.
But if you recruit six people who also order $200 a month, you now are generating monthly group sales of $1,400 for Amway, and a monthly income of $150 for yourself ($90 in commissions, $60 in discounts for products you consume). If your six recruits duplicate themselves four times each, you’ll take down $816 a month. If those 24 new recruits duplicate themselves twice, you’ll have a network of 78 distributors and a monthly income of $2,138.
When a distributor recruits a group of downliners that generates a certain level of sales (approximately $15,000 per month for six months during each year), that distributor becomes a “Direct Distributor” and is then entitled to purchase products directly from Amway.
Direct Distributors receive 3 percent of the personal group Business Volume of the Direct Distributors whom they sponsor. At that level both the sponsoring and the sponsored distributors