Definition of a Pyramid Scheme

Surfing around the www.amway.com web site I happened upon this definition of a pyramid scheme from Direct Selling Education Foundation. It would seem many of Amway distributors are in violation of the rules. I have added my comments when a comparison to Amway or Quixtar is made. Although Amway and Quixtar do not fit the classic sense of an "investment" pyramid, or "product loading" pyramid, it seems there are many issues on which they can be found to fit.

 FTC speech on pyramid schemes to the IMF

Pyramid Schemes: Not What They Seem!

DON'T MAKE A COSTLY MISTAKE!

Thousands of Americans have lost millions of dollars participating in pyramid schemes. Many of the victims knew they were gambling (although they didn't know the odds were rigged against them). Many others, however, thought they were paying for help in starting a small business of their own. These people were fooled by pyramid schemes disguised to look like legitimate businesses. The purpose of this pamphlet is to help you avoid falling victim to pyramid schemes, whether simple or disguised. Simple pyramid schemes are similar to chain letters, while disguised pyramids are like wolves in sheep's clothing, hiding their true nature in order to fool potential investors and evade law enforcers.

Amway distributors sell a tape " RP391-LEGITIMIZING YOUR BUSINESS $7.00"

 

WHAT IS A PYRAMID SCHEME?

Pyramid schemes are illegal scams in which large numbers of people at the bottom of the pyramid pay money to a few people at the top. Each new participant pays for the chance to advance to the top and profit from payments of others who might join later. A typical pyramid looks like this:

To join, you might have to pay anywhere from a small investment to thousands of dollars. In this example, $1,000 buys a position in one of the boxes on the bottom level. $500 of your money goes to the person in the box directly above you, and the other $500 goes to the person at the top of the pyramid, the promoter. If all the boxes on the chart fill up with participants, the promoter will collect $16,000, and you and the others on the bottom level will each be $1,000 poorer. When the promoter has been paid off, his box is removed and the second level becomes the top or payoff level. Only then do the two people on the second level begin to profit. To pay off these two, 32 empty boxes are added at the bottom, and the search for new participants continues.

Each time a level rises to the top, a new level must be added to the bottom, each one twice as large as the one before. If enough new participants join, you and the other 15 players in your level may make it to the top. However, in order for you to collect your payoffs, 512 people would have to be recruited, half of them losing $1,000 each.

Of course, the pyramid may collapse long before you reach the top. In order for everyone in a pyramid scheme to profit, there would have to be a never-ending supply of new participants.

In reality, however, the supply of participants is limited, and each new level of participants has less chance of recruiting others and a greater chance of losing money.

THINGS YOU SHOULD KNOW ABOUT PYRAMID SCHEMES

1. They are losers. Pyramiding is based on simple mathematics: Many losers pay a few winners.

The average annual net income (after the deduction of business expenses) for all Wisconsin Direct Distributorships was, in fact, a net loss of $918." --State of Wisconsin v. Amway Corporation et al, 7/82, in which Amway and a number of Amway distributors were fined for illegal misrepresentation of income

Distributors are losing money not because cash is being passed up line, but because typical business expenses exceed distributorship gross profit. A distributor does not have enough sales to outside customers to generate enough gross profit margin to support the typical AQMO (Amway Motivational Organization) tools overhead costs which include tapes, books, and motivational seminars.

2. They are fraudulent. Participants in a pyramid scheme are, consciously or unconsciously, deceiving those they recruit. Few would pay to join if the diminishing odds were explained to them.

New, untrained distributors, who have been given inadequate disclosure of Amway/Quixtar business policies, procedures, and "system costs", perform a large share of Amway/Quixtar recruiting. There is no test of minimum competency of the "rules", despite the fact that distributors are in the business of "selling businesses". Stockbrokers must pass a competency test. What about people selling businesses where the investment can amount to thousands of man hours and dollars?

This is best illustrated by the current problems in Amway with enforcement of the retail sales rule as evidenced by site readers consistently saying there was no enforcement in their groups. In Quixtar there are hundreds of sites to be found in search engines even though Quixtar rules specifically state that sites are not allowed to be found via search engines. Many distributors go for years not knowing their uplines profit from the sale of tapes, books, and motivational seminars. Given these circumstances it is obvious that most recruiting for Amway/Quixtar are unconsciously participating in the scheme.

Secondly, many distributors are unconsciously perpetuating the myth that high level distributors to not profit form tools sales (tapes, book, and seminars).

"I was taught and therefore taught that the system was put in place to assist people in building their "Amway" business. This is as far from the truth today as you can get as when you are making 80% of your income off of the system, it is totally reversed, Amway is in place so people can sell their system!"

Don Lorencz: Diamond Direct Distributor [web site]

3. They are illegal. There is a real risk that a pyramid operation will be closed down by the officials and the participants subject to fines and possible arrest.

WHY WOULD ANYONE PAY TO JOIN A PYRAMID SCHEME?

Pyramid promoters are masters of group psychology. At recruiting meetings they create a frenzied, enthusiastic atmosphere where group pressure and promises of easy money play upon people's greed and fear of missing a good deal. Thoughtful consideration and questioning are discouraged. It is difficult to resist this kind of appeal unless you recognize that the scheme is rigged against you.

Amway motivational organizations have quarterly "rallies" and seminars, one is even called "Dream Weekend", where distributors are worked into heated, emotional frenzies, when told all their financial dreams will be fullfilled if they just show the plan 10-15 times/month for 2-5 years. At one seminar I went to, Double Diamond Fred Harties presented a multimedia show including upbeat music and videos of him pulling out in his Lamborghini Countach. Even Amway admits this on their WEB site see below for quote.

"Why do Amway meetings appear to some people like a cult?
Amway meetings are full of energy, enthusiasm, and excitement - just like most sales motivation meetings - because this is a proven way to motivate people to sell AMWAY® products and build their businesses by sponsoring others. Some people aren't accustomed to that. Yet, most successful companies know that enthusiastic meetings increase morale and boost results in any sales force. This enthusiasm motivates our distributors to help and support one another, and that builds sales"... Amway WEB site

 

DISGUISED PYRAMID - WOLF IN SHEEP'S CLOTHING

Some pyramid promoters try to make their schemes look like multi-level marketing methods. Multi-level marketing is a lawful and legitimate business method, which uses a network of independent distributors to sell consumer products.

To look like a multi-level marketing company, a pyramid scheme takes on a line of products and claims to be in the business of selling them to consumers. However, little or no effort is made to actually market the products. Instead, money is made in typical pyramid fashion, from recruiting. New distributors are pushed to purchase large and costly amounts of inventory when they sign up.

Although Amway and Quixtar do have "Retail Sales Rules", if you were to ask any ex-distributor and most current distributors you would soon find out this rule is not enforced. It will be interesting to see if Quixtar uses its computerized database of orders from IBO's, Members and Clients to finally police and enforce the rule. Most ex distributors, who earned performance bonuses, will admit they had few to no customers outside of Amway.

For example, you might have to purchase $1,000 of nearly worthless products in order to become a "distributor." The person who recruited you receives $500 (a fifty percent commission) and $500 goes to the top (the company, in this case). Notice the similarity to the simple pyramid scheme diagrammed earlier.

Most disguised pyramids, however, are not this easy to unmask. Pyramid schemes often choose products which are cheap to produce but which have no established market value, such as new miracle products, exotic cures, etc. This makes it difficult to tell whether there is a real consumer market for the products. The best way to avoid a disguised pyramid fraud is to know what to look for in a legitimate income opportunity.

MULTI-LEVEL MARKETING - LEGITIMATE INCOME OPPORTUNITIES

Multi-level marketing is a popular way of retailing in which consumer products are sold, not in stores by sales clerks, but by independent businessmen and women (distributors), usually in customers' homes. As a distributor you can set your own hours and earn money by selling consumer products supplied by an established company.

In a multi-level structure you can also build and manage your own sales force by recruiting, motivating, supplying and training others to sell those products. Your compensation then includes a percentage of the sales of your entire sales group as well as earnings on your own sales to retail customers. This opportunity has made multi-level marketing an attractive way of starting a business with comparatively little money.

HOW TO TELL THE DIFFERENCE BETWEEN A LEGITIMATE BUSINESS AND A DISGUISED PYRAMID SCHEME

Pyramid schemes seek to make money from you (and quickly). Multi- level marketing companies seek to make money with you as you build your business (and theirs) selling consumer products. Before you sign up with a company, investigate carefully. A good way to begin is to ask yourself these three questions:

1. How much are you required to pay to become a distributor?
2. Will the company buy back unsold inventory?
3. Are the company's products sold to consumers?

1. Start Up Cost? IF THE COST IS SUBSTANTIAL, BE CAREFUL! The start- up fee in multi-level companies is generally small (usually for a sales kit sold at or below company cost). These companies want to make it easy and inexpensive for you to start selling.

Pyramid schemes, on the other hand, make nearly all of their profit on signing up new recruits. Therefore, the cost to become a distributor is usually high.

CAUTION: PYRAMIDS OFTEN DISGUISE ENTRY FEES AS PART OF THE PRICE CHARGED FOR REQUIRED PURCHASES OF TRAINING, COMPUTER SERVICES, PRODUCT INVENTORY, etc. These purchases may not even be expensive or "required," but there will be considerable pressure to "take full advantage of the opportunity."

Right at the onset of your Amway Quixtar career you will be asked to sign up for Amvox, Standing order Tape, to buy a few recruiting videos, 10-20 contacting tapes, profiles of success book, WEB access, WEB hosting and many more items. The sale of "tools"; books, tapes and motivational supplies within Amway has no "retail" customers. At the least, the Amway and Quixtar motivational organizations are operating as pyramid schemes inside of Amway/Quixtar. Amway's comment on tool profitability.

The use of books and tapes is "optional", but it routinely said in the Amway Quixtar motivation organizations that "Tools are optional, but so is success", or "tools are 100% optional, but 100% necessary". The Amway web site makes three separate references to "tools". Amway/Quixtar must know that their big distributors are walking a very tight rope.

"I was taught and therefore taught that the system was put in place to assist people in building their "Amway" business. This is as far from the truth today as you can get as when you are making 80% of your income off of the system, it is totally reversed, Amway is in place so people can sell their system!"

Don Lorencz: Diamond Direct Distributor

2. Buy Back of Inventory? IF YOU COULD BE STUCK WITH UNSOLD INVENTORY, BEWARE! Legitimate companies, which require inventory purchases, will usually "buy back" unsold products if you decide to quit the business. Some state laws require buy-backs for at least 90% of your original cost.

It was my experience and experience of other site readers that tools are very difficult to return since it is up to the upline and not Amway. [Supporting page]

3. Sales to Consumers? IF THE ANSWER IS NO (OR NOT MANY), STAY AWAY! This is a key element. Multi-level marketing (like other methods of retailing) depends on selling to consumers and establishing a market. This requires quality products, competitively priced. Pyramid schemes, on the other hand, are not concerned with sales to end users of the product. Profits are made on volume sales to new recruits, who buy the products, not because they are useful or attractively priced, but because they must buy them to participate. Inventory purchases should never be more than you can realistically expect to sell.

Amway has just over 50% of distributors who renew. With these poor numbers one would question if Amway products " are useful or attractively priced ". It is ironic that if these products were such a great value that more people would not stick around to buy them. Despite Amway's lip service to needing to have sales to outside customers, if you were to ask any ex-distributor and most current distributors you would soon find out this rule is not adequately enforced. It will be interesting to see if Quixtar uses its computerized database of orders from IBO's, Members and Clients to finally police and enforce the rule.

HOW TO PROTECT YOURSELF FROM A BAD INVESTMENT

1. Take your time. Don't let anyone rush you. A good opportunity to build a business in a multi-level structure will not disappear overnight. People who say "get in on the ground floor" are implying that people joining later will be left out in the cold. BEWARE!

2. Ask questions: About the company and its officers. About the products - their cost, fair market value, source of supply, and potential market in your area. About the start up fee (including required purchases). About the company's guaranteed buy-back of required purchases. About the average earnings of active distributors.

Amway has not even posted on its web site the average earnings of active distributors. It claims "Amway cannot adequately answer this question, because Amway distributors run their own businesses, determine their own expenses, set their own retail prices, and aren't required to report their earnings to us." It could at least the average performance bonus paid to active distributors. Previously it had been stated to be $88/month. It has since modified the page to use only data from "the Direct selling industry".

3. Get written copies of all available company literature.

Amway has very little printed data and usually one must first buy a kit to just obtain the rules. Anti-Amway WEB sites contain more information on Amway than Amway will release! Amway provides none of the following information:

4. Consult with others who have had experience with the company and its products. Check to see if the products are actually being sold to consumers.

New recruits are specifically told not to talk to anyone about the Amway presentation they just saw. Their training tapes stress that prospects should be told not to talk to other people since there are "so many misconceptions out there about Amway"

5. Investigate and verify all information. Do not assume that official looking documents are either accurate or complete.

Ask the Amway Corporation for more business information. Ask these business questions. You won't get an answer. Here is the place to write to: http://www.amway.com/Email/contactUs.asp

WHERE TO GO FOR HELP

For help in evaluating a company, contact the Direct Selling Association, your local Better Business Bureau, your local district attorney or your state attorney general. If you suspect that a company may be an illegal pyramid, contact your state and local law enforcement offices and the Federal Trade Commission.

MORE HELP!

If you are thinking about paying for help in starting your own business, disguised pyramid schemes are not the only danger. For help in spotting and avoiding business opportunity frauds, send a self- addressed, stamped envelope to any organization listed below for a free copy of DSEF's Promises-Check 'Em Out or the FTC's "Franchise and Business Opportunities."

This pamphlet was published by the Direct Selling Education Foundation, a Washington, DC not-for-profit public educational organization. It is tax-exempt and contributions to it are tax- deductible. The objective of the Foundation is to serve the public interest with education, information and research, thereby encouraging greater public awareness and acceptance of direct selling in the marketplace. The Foundation funds consumer and academic conferences; supports speakers, research and case studies for university marketing professors; develops and distributes consumer information literature and audiovisual materials; and maintains a library in Washington, DC.

Direct Selling Education
Foundation
1666 K Street, NW, Suite 1010
Washington, DC 20006

Direct Selling Association
1666 K Street, NW, Suite 1010
Washington, DC 20006
(202) 293-5760

(202) 293-5760

For a free copy of this brochure, please send a self addressed stamped envelope to Direct Selling Education Foundation at the above address.

This brochure was originally published in cooperation with the National District Attorneys Association's Economic Crime Project. It has been prepared in cooperation with the Federal Trade Commission, Washington, DC 20580.

Copyright 1991 Direct Selling Education Foundation, quotes and reprints permitted with attribution.

So is Amway, Quixtar and its Motivational Organizations an illegal pyramid using the above guidelines?

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