The Psychology of Distributors
I think of the Network as a "buying chain letter", or a "buying pyramid". Some people compare it to a classic investment pyramid scheme. I see it being less like a Ponzi scheme and more like a chain letter. See Ponzi scheme history. Additional info on Mr. Ponzi
From price studies, everyone on average pays a little premium on the Amway products they buy so that there is money available to pass "up-the-chain". This money is in the form of the volume rebates and bonuses, which amount to about 31.5% of BV (business volume), which is commonly, but mistakenly assumed by distributors to be also equal to $1 in sales.
In exchange for the hope to be someday "deep-in-the-chain" or on the "receiving end of large bonuses", the Amway/Quixtar Distributor gladly pays the price premium with the purchase of each and every product. It is not because the system is so "economically efficient", i.e. no stores, no inventory, no employees, and unique distribution method, etc, that there is money available for the rebates and bonuses. It is the fact that, on average, the prices are higher than the discount stores. Price premiums, as well as the lack of direct marketing and advertising expenses, allows Amway/Quixtar to pay for the bonuses. Distributors don't sell much retail because a retail customer can't participate in the "sub-conscience chain-letter or lottery mentality", hoping to be on the end of the payoff someday, like the emotionally motivated distributors.
The retail customer is looking for price, quality or service and will choose whichever outlet gives him the best deal. What little retail a distributor does is concentrated in his/her immediate family. They want to support their own family, so they may be willing to disregard price. If Amway/Quixtar Distributors were able to provide a better deal, then Amway/Quixtar distributors would also do a good retail trade. Amway/Quixtar works for those people who are willing to pay the price premiums for the future payoff of being able to be one day on the collecting side of the rebates and bonuses.
Chain letters and lotteries work too because "people have big dreams and ignore the facts", despite the known, small probability of success, and statistically poor payoff. What would happen if people start to look at the facts and not ignore them?
People play the lotteries because they are shown some big winners. It is irrelevant to them that the costs to play are greater than the statistical payoff. Lotteries, casinos, and horse tracks are "negative sum games". The participants, as a whole, take home less money than they brought to the table. The same is true for the Amway/Quixtar "opportunity". As long as few big winners are paraded in front of the Amway/Quixtar crowds at each motivational event, every crowd member thinks that someday they will also be on the stage, just as the lottery player thinks he will some day win the big payoff.
"For centuries people have been willing to pay more for a lottery ticket than their chances of winning would justify, because they are captivated by the possibility, however remote, of a big score."
Alan Greenspan - Federal Reserve Chairman
There is no doubt that in both cases someone wins the big payoff. Just what is the statistical payoff versus the cost of playing the lottery or Amway/Quixtar? In both cases there are enough "overhead costs", or inefficiencies, to make the cost to play higher than the statistical payoff. Amway/Quixtar is really a "negative sum game". This means that distributors as whole spend more money on their Amway/Quixtat businesses than they take home in rebates and bonuses, when typical "plan" overhead expenses are accumulated. See the Amway Paradox, Fun with Math.
In a lottery, the inefficiency is the money that goes to the States as revenue, and that goes to the ticket sellers as a commission. Only 50% of the money collected in lotteries is paid out to the betters. On average people lose $.50 on every one dollar bet, but they are willing to pay this for the opportunity to get the "big" payoff." The Amway/Quixtar "lottery" too, is loaded with similar overhead, such as function travel expenses, the cost of tapes, and the very attractive Amway Corporation profit margin (written up once in Forbes to be about 10% of sales after tax). Amway's return on sales exceeds that of Wal-Mart's by several times.
I'm not saying success in Amway/Quixtar is a random process by any means. It takes very hard and dedicated work to overcome the economic inefficiencies built in the system. The evidence, even from Amway, shows most distributors do not make it big, even though everyone has the "God-given" capability to make it big. The upline will sell you everything you need to convince yourself that you are out-of-the ordinary, not just an average achiever and that you have the capability to succeed in the business when 99.9% of all others don't.
"Of course, there is a danger here. Along the way we may envision scenarios that are unrealistic. I would love to sing like Pavarotti or pass like Joe Montana or shoot like magic Johnson, or write like Toni Morrison. It is real important to get regular reality checks from those we love and trust. On occasion unrealistic dreams become obsessive and need a counselor's help"
Rich DeVos Co-founder of Amway page 23 Compassionate Capitalism
You must decide if the effort is worth the reward just like buying a lottery ticket, even though the cards are stacked against you with the "overhead costs" and product price premiums.Back to the home page
Mr. Ponzzi and his Scheme: A brief history
Mr. Ponnzi lived in Boston. Having international roots, Mr. Ponzzi discovered the concept of an IRC (International Reply coupon) at the Post Office. An IRC allows one in effect to send another person in a foreign land a self addresses stamped envelope. An IRC coupon is purchased at any post office and is priced in the local currency. The IRC is valid for a certain weight and class of mail to and from any participating country in the world. The IRC is exchanged for stamps. Mr. Ponzzi discovered that different countries had hugely different postal rates when converted back, for instance to dollars.
I will use first class airmail rate for an example, although the class of service for an IRC is usually surface (slow boat). In Germany it costs 3 DM to mail an airmail letter to the states. In dollars this converts to $1.85. On the other hand it costs $.60 to mail an airmail letter from the US to Germany. In theory, if a IRC were available for air-mail there would be a profit in buying IRC's in the USA for $.60 and redeeming them for stamps in Germany worth $1.85. A profit of $1.25 on a $.60 investment. (This profit of 200+%, still does not rival the tape profit margin for Amway/Quixtar uplines of over 400%!)
Back to Mr. Ponzzi. Ponzzi discovered this opportunity for "arbitrage" or risk free profits, as the term is defined, and formed a company to capitalize on the price differences in IRC's. In order to capitalize the company, and have money to buy the IRC's, Ponzzi sold notes promising to repay a very attractive return in a very short time. Ponzzi was so flooded with people wanting to invest that he could not possibly buy all the IRC's needed to invest the money! He found it easier to take money from new investors to pay off the first investors! Then the vicious cycle began. As people started to get their money back it gave the notion of safety. Even more money poured in once the first people told their friends about the great return they just got. There was a confidence scare, but Ponzzi was able to cover the first "run" from reserves. Being able to "cover the run" gave back credibility to the scheme. After enough press and exposure, Ponzzi finally ran out of money, when everybody came back to get their money. Then laws were enacted to protect people form such pyramid investment schemes.
So my take on it is that Amway/Quixtar can't be a classic pyramid scheme since there is really no investment to pass upline. There is the kit, and that contains product at "wholesale" cost, that's about it. In Amway, if the participants want to pay a little more on every product, for the opportunity to be on the receiving end in the future, I don't think that breaks any laws. You can also find many stores that sell overpriced goods. I would say MLM's, which require a several hundred dollar up-front fee like Excel to be more in the league of a pyramid. A couple of hundred dollars is paid for the opportunity to distribute the product. This couple of hundred dollars gets split upline. As long as the new recruiting is going good, people see pretty good checks. If the recruiting slows down, so does the money flow.
So much for pyramids.