Amway/Quixtar: A Negative Sum game?

The purpose of this page is to investigate the average profitability of Amway/Quixtar distributors as a whole. Click here for a definition of positive, and zero sum games.

A negative sum game is one in which the participants (risk takers, game players) take home less than what they brought with them. Lotteries, casinos, racetracks are all negative sum games. The administrators of these games be it the state, the casinos, or race track all take money out of the pot which leaves less for the game players to take back home.

Most companies, be it Wal-Mart or McDonalds balance their quest to grow with the need to be profitable. If they open too many stores, saturating their markets, there will not be enough sales volume to support the average store's overhead costs. Stores on average could lose money when too many stores are in one market.

In the same light, there is unchecked growth in the number of Amway/Quixtar franchises. There is also little demand for AmQuix products from non-distributors, and distributors end up becoming their own best customers. This is the "buy from yourself" proposition made to prospects. Each distributor, buying from their own store at $200/month, generates about $56/month in gross profit for the "group". There are normal and customary overhead expenses with an AmQuix distributorship. These generally exceed $56/month ($675/year). From site visitor responses, it averages around $3,200/year.

One must ask if the business makes sense. Each new distributor adds at most $675/year in gross profit, while spending $3,200/year in overhead. Without sales to disinterested third parties, there will not be enough gross profit for distributors on average to break even. With this scenario distributors on average will lose money. The only way for one to break free of their own loses is to recruit additional money-losing participants to the scheme.

In general, IBOs will not break even on average until personal sales (BV) exceed expense levels by three to four times, or two times PV. Personal sales is defined as personal consumption plus sales of inactive, non-building personally sponsored IBOs and member/client purchases. It is likely that the average PV/IBO does not even exceed 65 PV/month. Take the IBO Profitability Challenge

"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

Amway Quixtar distributors in the same light, pay more for the AmQuix business opportunity than their chances of becoming "diamond" would justify. They are captivated by the possibility, however remote, of making "diamond".
All the detailed analysis:

In order to be able to look at the total business costs of the Amway/Quixtar distribution system more effectively, let's look at a "Direct Distributorship" as a stand-alone business. Assume first all downline distributors are part of this business and spend money on the normal and customary business expenses. At the bottom of this page there will be a sensitivity analysis to what level of "active" participation produces a break even situation.

We will call this business a "Direct Distributor Group". Because there are thousands of downline possibilities, all with there own individual income streams, it is easier to combine all distributors together at the Direct Distributor level. This is the lowest common "business unit" in Amway/Quixtar. The 25% rebate is the maximum bonus paid to the Direct Distributor.

Grouping the distributorship together will help show the economic ramifications of the typical AQMO touted system in an easier to comprehend light. The intent is to show how much revenue a group of Amway/Quixtar distributors generates versus the expenses they have in order to earn that revenue. It will also show how important it is to have customers just buying products.

 

 

Einstein points out to an Amway/Quixtar distributor the obvious profitability problems in the Amway/Quixtar Plan when AQMO overhead costs are included.

Assume now that "Direct Distributor Group" markets only Amway core products. This is an unrealistic assumption as catalog and Quixtar partner store items carry lower $/BV/PV ratios. However, it makes the analysis less complicated, and errors in favor of Amway/Quixtar. A Direct Distributor needs 7,500 PV (points)/month ($2/PV) or $15,000 per month in sales to maintain the "Direct" status. Total minimum yearly sales would be $180,000

If each distributor consumed 100 points/month of personal volume, or $200/month there would need to be 75 people in the business (game) to make 7,500 points. This would almost represent a 6-4-2 downline so often quoted by people showing the "plan". 6+24+48=78 distributors to make a direct distributorship.

The rebates to the direct distributor are at the 25% level so there would be $45,000=(180,000*.25) available as gross profit to the "Direct Distributor Group" business. There is also a bonus called the Q-12 bonus of $10,000. The 75 game participants will somehow split up the $55,000 in gross profit their purchases generated. On average each distributor is generating $733 in gross profit/year.

There is a Q-12 all expenses paid trip as well. The trip benefits will not be included, because the value would vary and it cannot be traded for cash.

Let's assume that the cost of the Amway products is equivalent to the cost in local stores. This is of course false, according to what I discovered in my price studies, but let's ignore that for now, as it is also in favor of the Distributorship.

Now each distributor is inspired to grow his business and eventually become a direct distributor himself. The distributor is working his business as he was taught. He is buying standing order tape, attending all functions, and showing the plan 10-15 times a month. Let's add up all the expenses that all distributors are spending working the "Direct Distributor Group". I assume the distributor just buys from his business with little or no retail sales. This is the commonest form of Amway/Quixtar promotion. It was the way the business was shown to me. Retail sales are assumed to be zero for now. Few distributors retail product anyway. The "10 customer rule" is largely ignored. Retailing is not a factor probably because the prices at "Amway Suggested Retail", would be even less competitive. With the advent of the Quixtar "member" status fewer and fewer people will pay "Amway suggested retail price".

From the Yearly Expenses Table the normal potential reoccurring distributor overhead expenses are around $3,256 for a single person, and $3,800 for a couple. An active distributor admitted to me that this is about what he spends each year on his business. Of course costs can very by line of sponsorship. The costs for a married couple will be more since 2 tickets will have to be purchased for events. Food and lodging will also be more expensive for couples. For this model each of the 75 distributors spends $3,256 each year, or a total of $244,200/year as a group in overhead to build their businesses.

As people become direct distributors, their downline businesses break off to form a copy of the model we just described. The "Direct Distributor Group" of 75 people is spending 75 * $3,256 = $244,200 per year on overhead expenses compared to consuming just $180,000 per year of product. The distributors are spending more on business overhead than they are consuming in product! Even if distributors were saving 30%, as is commonly claimed, this leaves a total of $55,000+$54,000 or $104,000 to be split up among the group, or $1,386 per distributor as "income". Distributors are reaping a potential benefit of $1,386 per person, but overhead costs are running at $3,256 per person. This is a negative sum game, and costs the average distributor $1,870/ year losses!

If distributors spent only $1,386 per year on overhead, which would entail just standing order tape, 2 functions and some travel, it will be a zero sum game, since the average distributor just breaks even.

Income Statement for the "Direct Distributor Group"

Revenue:  
Product Sales at retail 180,000 + 30% $234,000
25% Direct Distributor Rebate (25% of $180,000) $45,000
Q-12 Reqaulification bonus $10,000

Total Revenue

$289,000

Expenses:  
Cost of goods sold $180,000
Overhead Expenses (for 75 distributors) $244,200

Total Expenses

$424,200

Net Loss

($135,200)

Net loss per distributor

($1,802)

 

This is the absolute best case. I have left out time working the business, and the price premiums I have found to exist.

If we try to improve the situation by adding the bonuses above direct including the 4% leadership bonus, Emerald bonus, Diamond, we add anther 6.5% on BV.

Income Statement for the all -excluding tools profits

Revenue:  
Product Sales at retail 180,000 + 30% $234,000
25% Direct Distributor Rebate (25% of $180,000) $45,000
Q-12 Reqaulification bonus $10,000
Bonuses above direct (6.5% of $180,000) $11,700

Total Revenue

$300,700

Expenses:  
Cost of goods sold $180,000
Overhead Expenses (for 75 distributors) $244,200

Total Expenses

$424,200

Net Loss

($123,500)

Net loss per distributor

($1,646)

 

Distributors would have to retail ($1802/.55) = $2993 per year of products at retail prices to generate an additional $1,646 in gross margin just to break even.

Now let's take the example to the limit and make realistic assumptions instead of unrealistically conservative assumptions. Let's remove the 30% savings by just buying for your self. Let's assume the "Direct Distributorship Group" must pay wages @$7.50/hour and each distributor works 10 hours per week (520 man-hours per year).

Income Statement for the "Direct Distributor Group" including labor costs

Product Sales $180,000
25% Direct Distributor Rebate $45,000
Q-12 bonus $10,000
Bonuses above direct (6.5% of $180,000) $11,700

Total Revenue

$246,700

Cost of goods sold $180,000
Overhead Expenses $244,200
520 hours @ $7.50 per hour *75 people/year $292,500

Total Expenses

$716,700

"Direct Distributor Group" Net Profit

($470,000)

Net Economic loss per distributor per year

($6,266)

 

So in anyone "Direct Distributor Group" of 75 people, people are spending 39,000 man-hours per year, and $244,200 in overhead expenses to distribute $180,000 of product per year to "themselves".

This business is terribly inefficient at distributing goods and services. In man-hours alone, it is less than $5 in sales for every hour invested in the business. If distributors had no expenses, the 39,000 man-hours would translate into an hourly income of only $1.41/hour! If this were a traditional business, it would go broke very quickly. It would be losing $470,000 per year.

The losses are spread out over 75 dream filled distributors, who subsidize the business with a full time job. It is no big deal to lose money. Distributors have a dream that they will make those losses back when they "make diamond". A chain letter turns out to be a more efficient game than an Amway/Quixtar Distributorship run by the AQMO's plan. The chain letter group as whole does not lose money. Money is only redistributed in a chain letter.

Conclusion: An Amway/Quixtar distributorship is a "Negative Sum game" when everyone is trying to build the business by the AQMO's plan, of "just buying for yourself".

If the group is now supplemented with "customer-distributors" not looking to build the business, and not having business expenses, each active distributor needs to (3200/889=3.6), or 2.36 "customer distributors" including himself to work out of the zero sum game for the group. (@ 100PV or $200/month in personal consumption) This means any group with more than 42% active-building distributors, they will be losing money as a whole. Some individuals will be making money, and some will be losing. As a group however, they will not be covering their expenses. In order for the system to be a positive game some, some distributors must go "non-active" and become "customers", to avoid the incremental expenses to the group calculation.

Assume that fewer distributors are building the business, 42% for our example, and that no one has any expenses. The $1.41/hour average wage (from above) has just increased to $5.07/hour, with no other business expenses. The Amway Corporation is getting a pretty good deal on labor when you consider it. The distributors in the best case earn $5.07/hour on average, and the corporation must not pay Social Security Taxes, health benefits, or pension benefits. Typical benefit packages can be amount to 30% of the base wage.

Some will say that if the business grows fast enough (i.e. Just show the plan 12-15 times per month) then the group will make money. The mathematics does not support this. As a whole, the group still loses money. This is the little known side effect of the power of "replication". Every new distributor brings incremental income of at most $889/year to the "Direct Distributor Group". Every new building distributor also brings incremental overhead expenses of far more than $889/year to the group. Every new active distributor to the group also brings a time investment of 520 man-hours per year. Take a "snap shot" of the group at anyone time. There will be x distributors each buying their 100PV of product adding income at a rate $889 per year to the income pot. There will also be x distributors spending money on overhead at a rate of $1300-$3200/year, and spending time at a rate of 520 hours per year. No matter how fast the group grows, the potential expenses grow faster than the revenue side. As long as a distributor's expenses exceed the incremental revenue he can bring the group, it will be a losing proposition on average for the "Direct Distributor Group". This is not logical or rational, but needless to say, people still do it.

So why would this type of business exist? Each distributor believes they can beat the others and grow quickly enough to get out of the losses to be the one on top collecting the bigger rebates. The same psychology exists with a lottery. People are willing to pay $1 in order to win a lottery that pays $250,000 for 20 years, when the statistical payoff is $0.50. In the same light, the average Amway/Quixtar distributor is willing to spend $6,266 in cash and non-cash expenses per year to have the shot of making a $125,000 at Diamond. All the while, the statistical payoff is only $889/year at 100PV in average personal consumption. In engineering terms ( I'm an engineer), the lottery is 50% efficient at redistributing money to the game players; Amway in this sense is only about 14% efficient.

Site Visitor Rebuttals

"The investment of the business is what you are counting as a net loss."

This is an interesting view to look. Any business with capital invested will normally depreciate that investment over time. I have not heard of any Amway distributor depreciating their tapes and seminar costs over time. Since the purchase of tapes, books and seminars appears to be an on going year-in, year-out expenditure, it would hardly fit the classic definition of an investment in an asset. Any corporation that spends money on training typically expenses the costs in the year they were incurred. Secondly it they were depreciated, the steady state depreciation expense will most likely be the annual rate of consumption. I've never head of one AQMO system, which did not have on going tape purchases and seminar participation not listed as a key to success.

"This analysis would be like comparing the investment of 70 subway franchises and balancing them with one franchise profit."

The topic of "investment" is handled above. The main point here is that in a random survey of say 75 Subway sandwich shops, where one adds all sales revenue and business expenses into one pot, the result will be a net profit. Combine the expenses and revenue of 75 Amway/Quixtar distributors and you will most likely have a net loss, if there are more than 25% very active distributors in the group and retail sales are not emphasized. A curious distributor could map out the structure of his direct distributor's business. He could identify the people attending functions, buying tapes and estimate their expenses. Based upon the pin levels and downline structure he could estimate retail sales as well. Once this is done they can see if their own group is losing money as a whole trying to distribute Amway/Quixtar.

 

Similar analysis at another web site

See also "Fun with Math"

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Definitions:

A negative sum game is one in which the participants (risk takers, game players) take home less than what they brought with them. Lotteries, casinos, racetracks are all negative sum games. The administrators of these games be it the state, the casinos, or race track all take money out of the pot which leaves less for the game players to take back home.

A positive sum game is a game where the participants, as a whole, take home more money then they brought to the game. An example of this would be all the McDonalds franchisers. The franchisers on the whole produce a net profit. Another example would be Wal-Mart. One the whole all the Wal-Mart stores produce a net profit. The unprofitable stores are generally closed. The game player, the franchise holder, takes more in revenue from customers than he pays out to his labor and vendors. All McDonalds franchises combined together will report a net profit.

A zero sum game is a game in which the participants, as a sum, take home all the money they brought. A home poker game, an investment pyramid, or chain letter are all zero sum games. The participants take all monies home that they brought to the game. Some participants may take home more or less than what they brought, but all the participants together, take home all the money that was brought to the game.