The Amway Business Paradox 

 The basic business concept of Amway is ideal. It has the best business characteristics; low total dollar overhead, no employees, few fixed costs, financial rewards in proportion to effort, and low initial investment. There are no accounts payables or receivables. Most distributors profess the power of Amway is in recruiting other people to be distributors to "reproduce effort". These distributors consume the product and intern recruit others to consume and likewise recruit. This gives the impression of an exponential chain reaction of growth. Since the power of Amway is in "networking", most distributors downplay the need to retail any product. Retail sales are avoided because, it is selling, sales require time, are transaction based, and they pay no residual income like building a line of dedicated self-consuming distributors/consumers.
Assume for a moment that Amway products were competitively priced with products from other methods of distribution. The Amway business model takes the money normally spent on marketing and advertising and makes it available to distributors for their services in distributing Amway product. If for instance, Wal-Mart and P&G had combined advertising, marketing, and distribution costs, amounting to 30% of the retail sales price, then Amway distributors could divide this money among themselves. After one compares the costs of Amway products, to discount stores, one will quickly find out that some of the Amway rebate and bonus money comes from having higher prices as well.
 

If the typical household spent $200/month or $2,400 per year on Amway distributed products, there would be, at the 25% rebate level, at most $600 per year, available to split up amongst distributors. As long as the distributors business expenses, are kept under $600/year, then, on average, distributors would make a net profit. The available gross profit per distributor at $200/month increases from $600 to $756 when one considers bonuses above the direct distributor level. Total rebates and bonuses amount to at most 31.5% of sales on Amway core products, at distributor cost, in the very best case.
Amway/Quixtar motivational organizations (AQMO's), run by high level distributors, sell tapes, books, seminars, and other products otherwise known as "tools", to their downlines. "Tools" are used to provide training in contacting new recruits, and more importantly, motivation and self-improvement tips to keep distributors in the business when the financial rewards are not so great. Unfortunately, the cost of tools is an overhead cost, and typically is written off against taxes as a business expense. The high level distributors commonly admit that product sales can be correlated to tools sales. Those groups moving the most tools are also moving the most products.

"..so we can chart your business and keep a check of the pulse...to see what your standing order (tapes sales) is doing, and what your attendance at major functions is doing. If that is healthy then your PV is gonna be healthy." Triple Diamond-Ron Puryear Tape: "Basics of the Business" RP681

 

According to the high level distributors, without the purchase of tools few people will stay motivated enough to keep on consuming the Amway products, and recruiting new distributors.

"Without tapes, without conventions, without seminars you have nothing. You have a bunch of people who are not sticky. Who will not order. Someone who will not Amway will not order from Quixtar." Emerald Distributor-Todd Rainsburger-Tape: "Why Quixtar?"

"I also see that the tools are essential. No, they are not required, but, I have not heard of anyone who went past Direct without them, including Dexter Yeager". Site visitor -active IBO

"Petitioners' Amway distributorship relied heavily on novice or part- time salespeople, and frequent motivational meetings appear to have been helpful to sustaining the sales and growth of petitioners' distributorship". Jordan v. Commissioner of Revenue US Tax Court TC Memo 91-050

Often it is said that without the purchase of tools, your business will not be successful. It is especially difficult to retail Amway products to neighbors and friends since most non-distributors do not see enough value in the products to continually purchase them. Distributors strive to only recruit other self-consuming distributors. It is too much work to service customers who might only buy occasionally. Their sales do not generate an easy, effortless residual income stream. Without any additional retail markup and rebates derived from "outside retail" sales, each self consuming distributor brings a potential of only $600 of gross income to a direct distributorship group, while possibly spending many times that amount on "tools". Distributors are intrigued by the potential chain reaction from recruiting, and the effortless residual income once he gets enough people into the chain.

Distributors must have tools in order to create excitement and interest in the business. This eventually moves Amway product. The more tools the self-consuming distributors buy, the more motivated he is to consume Amway products and try to get others to consume Amway products. As the consumption of tools creates more overhead costs, the business becomes less profitable. When tool costs exceed $600/year/distributor, there will be losses on average for all distributors. $600 is only a fraction of the normal and customary expenses of the typical Amway distributorship according to the AQMO's. The most active distributors have expenses exceeding $3200/year. Most distributors do not understand that each new incremental distributor adds only $600 in gross margin that can be split up among the group. Each new incremental distributor brings additional incremental overhead costs easily exceeding $600. Clearly once each distributor spends more than $600 on overhead then distributors on average, are losing money. In this case the total expenses of the group far exceed the gross margin rebated from Amway.
 

 

Without the ever present motivation provided by "Amway motivational tools", the less interested the average distributor will be in continuing the business.

"The reason the system is needed is because people are naturally unmotivated. To become very successful in the Amway business you need the system to stay motivated. What is the big deal there?" Site visitor

"Tools" keep distributors interested enough so that they continue to buy Amway product for self-consumption. Tools however, increase each distributor's overhead costs, to the point, which exceeds the available $600 gross profit each individual distributor brings to the group. Distributors, on average, can't survive and grow without tools, and but yet can't be profitable with them.

"If the goal was for an association to flourish and succeed, you would think that the sales and motivational materials would be really inexpensive so that everyone would be able to see and use them. " - site visitor

Without your active financial participating in the System (i.e. buying tapes and attending seminars) you will most likely lose your ability to "parade" a upline Diamond or Emerald in front of your group. The "parading" and handshaking with these people is necessary to convince new recruits that there are actually people making good money in Amway. This is hypocritical because these people "successful in Amway", are only financially successful because of the profits from selling books, tapes and seminars. They are successful because they give the illusion that the Amway products business is the source of their income when in reality the System is the major source of their income. I have received numerous E-mail where distributors who stopped using the system also stopped receiving support. This is just additional evidence that the compensation generated by moving Amway products is just not high enough to justify the work, without the added revenue of the System.

The one thing that keeps distributors interested in Amway is also the largest single overhead cost, which prevents the average distributorship from being profitable. This is the Amway Business Paradox!

 

Profitability for the individual self-consuming distributorship is attainable, but only when that distributor starts to take more than the $600 he brings to the group. As distributors take more than the $600 they bring to the group, then other distributors must take less than the $600 they bring. Since the $600/year/distributor gross margin, is not uniformly distributed amongst distributors some will make a profit. A far greater number will report a net loss. The greater the profit of any one distributor the greater the number of distributors losing money. Assume for the moment that the distributor overhead is $2,400/year. A total of 8.3 self-consuming distributors will be needed to create enough gross margin to allow one distributor a net profit of $2,000/year. This assumes he is paying his downline the 3% rebates on 100PV. The total cumulative loss of his downline in this case is $19,400/year, not including the price premiums they will be paying over discount stores, and not to mention all the time. A distributor with a net profit of $30,000/year needs a downline of at least 61 people who cumulatively are taking losses of $142,855/year, or $2,326/distributor/year. The table below shows how many distributors are needed at $200/month sales, and $2,400/year of expenses, to make one distributor profitable by various amounts. See Fun with Math! and A Negative Sum game What does Amway have to say about "just buying for yourself"?

Distributor Net Profit $ / year

Distributor Net Profit $ / Month

Number of Downline distributors with a loss

Cumulative

Downline Losses

$0

$0

4.5

$10,582

$500

$42

5.5

$12,786

$792

$66

6.0

$14,074

$1,000

$83

6.4

$14,991

$1,500

$125

7.4

$17,195

$2,000

$167

8.3

$19,400

$2,500

$208

9.3

$21,605

$3,000

$250

10.2

$23,809

$4,000

$333

12.1

$28,218

$5,000

$417

14.0

$32,627

$6,000

$500

15.9

$37,036

$7,000

$583

17.8

$41,445

$8,000

$667

19.7

$45,855

$10,000

$833

23.5

$54,673

$15,000

$1,250

33.0

$76,718

$20,000

$1,667

42.4

$98,764

$25,000

$2,083

51.9

$120,809

$30,000

$2,500

61.4

$142,855

 

The only way to break out of the Amway Paradox is to service retail customers, decrease the amount spent on overhead, or recruit consuming distributors who don't spend money on "tools".

Retail customers are far and few between since the Amway premium products are not competitive with discount stores. Most distributors are not interested in "selling", they just want effortless residual income. If retail customers were to regularly buy from a distributor then they could easily become a self-consuming distributor, and avoid the retail markup. There will always be some fraction of the public who will be self-consuming but not building distributors. If the US Amway distributor force is 750,000 strong and only 41% are building distributors, then 0.2% of the US population (542,500/265,000,000) fits this category. Assume that the number of US households is 1/5th the population. An Amway distributor will have the probability of signing up and retaining maybe one out of every 100 contacts as a self-consuming distributor. If the Amway products were more competitive they might be able to eventually penetrate more than a 1% share of US households and provide a new area of growth. Until this happens, the US operations of Amway might only grow as fast as the number of US households.

"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

 

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