MLM's Negative Cash Flow Quadrant

MLM's favorite author Robert Kiyosaki and author of the "cash flow quadrant" makes the following reference to the MLM business:
"I believe network marketing gives people the opportunity to build up the passive income they need for support while they learn to become professional investors. Even if they have little money, they can still invest 'sweat equity' for five years and begin to generate more than enough passive income to begin investing...Many famous franchises cost a million dollars or more to buy. Network marketing is a like buying a personal franchise, often for less than $300." -- Robert Kiyosaki - Rich Dad Poor Dad--
quadrant.gif (5989 bytes)Kiyosaki's book details the four quadrants, in which people could find their finances.  One could be an employee, self employed, a business owner, or an investor.  Mr. Kiyosaki advocates that the reader strive to be in the "B" and "I" quadrants.   The "E" and "S" quadrants should be avoided. 

In his book, the "Cash Flow Quadrant", Mr. Kiyosaki however does not detail the "cash flow Quadrants" associated with the MLM (multi-level marketing) business.

negative_quadrant.gif (17913 bytes)Since Mr. Kiyosaki recommends MLM as a way to make a "positive cash flow", he has done his readers a great disservice by not highlighting the various "cash flow quadrants" associated with MLM businesses such as Quixtar. 

Unbeknownst to most readers of Kiyosaki's books, the MLM business can also be similarly broken up into four cash flow quadrants.

There are three positive cash flow quadrants and one highly negative cash flow quadrant.   Unfortunately the majority of "I" type MLM participants fall into quadrant one and end up experiencing a high negative cash flow to the other three quadrants.   The financial losses experienced by the "I" quadrant IBOs are the source of the positive cash flows to the other three quadrants.

The "I" Quadrant

The first quadrant is the "I" quadrant or "IBO" quadrant and is characterized by people spending money.  As Mr. Kiyosaki points out, expenditures are "negative cash flow".  An IBO is expected to buy products from the "B" quadrant.  The IBO is also expected to purchase system materials from the "S" quadrant if he wants to be able to get any help from their upline.  The IBO also makes purchases from the "E" quadrant external sellers.  The "I" quadrant IBO is characterized by his willingness to spend money "on his business".  The largest number of MLM participants are in the "I" quadrant and most have negative cash flows.

In most cases the small amount of income kicked back from the "B" business to the "I" business, in the form of bonuses is not enough to even pay for the IBO's automobile expenses.   Most serious "I" quadrant MLM participants are losing between $5,000 to $10,000 per year in the "I" quadrant.  This individual usually has a job to finance the negative cash flow and is trading his time and his money for one day hoping the "I" business will provide him residual income.   The "IBO" is unknowingly working for free for the wealthy "S" business owner by promoting the "S" business owner's tape and seminar business.  The IBO is being paid no commission for this promotion.   The "S" system business owner exploits the hopes and dreams of the "I" quadrant participant so that he can keep them buying the system and expand the upline's "S" business by getting their friends to buy tapes and seminars.   The "I" quadrant participant usually lacks sufficient information and experience about the business opportunity and is lured into the scam by unverifiable and exorbitant income claims of the "I" quadrant.

The "B" Quadrant

The "B" quadrant is the MLM business owner.  These are people like the billionaire DeVos and VanAndel families of Amway and Quixtar.  The "B" type businesses usually sell overpriced products to their captive line of "IBOs", who hope to one day become wealthy in the "I" quadrant.   The "B" quadrant business owner pays back a portion of sales as bonuses to the "I" quadrant participants, usually in the form of a pyramided compensation scheme.   This "B" business leverages the efforts of hundreds of thousands of "I" quadrant participants (IBOs).   Starting and owning such a "B" business requires significant capital investment and risk.  In general old "B" type businesses have large positive cash flows. 

The "S" Quadrant

In the "S" quadrant, the "system seller" is leveraging a large group of "IBOs" from the first quadrant to promote and market their "wealth creation and motivational" systems.  The cash flow in the "System" quadrant is generally very positive and also extremely lucrative.  The profit margins on the tapes, CDs and seminar tickets are highest when you are the system producer.  There still can be extremely good cash flow just being a high level system seller, instead of the producer.   The "S" quadrant can generate anywhere from 1 to 20 times the cash flow generated from the income of the "B" business quadrant.  This happens because all the "I" quadrant participants are doing the promotion for the "S" quadrant business owner for free.  In most cases the "I" quadrant business owner pays money from his own pocket to promote the "S"  business owners' business.  The "S" quadrant creates cash flow without repeated investment of time by the "S" owner, since the "I" quadrant IBOs are doing the majority of the promotion.  The "S" quadrant business MLM'ers usually will employ "I" quadrant participants or relatives to run the shipping and warehousing operations for the tapes, CDs and books.

The "E" Quadrant

The "E" quadrant MLM participants are the "External" or indirect beneficiaries of the MLM business. The "E" business owners might be the hotel operators, restaurants, gas stations or book authors who obtain cash flow from the "I" quadrant MLM participants.   Mr. Kiyosaki is such a "E" business owner since his books speak positively of the MLM business.   The "E" business owners are independent from the "B" business.  If the "I" quadrant business owners stop spending, then the "E" business owners lose cash flow.  A "S" business owner can increase the cash flow to an "E" business operator by recommending their services or products.    In this light, the "E" business owners tend to praise the "B" business and the "S" business owners in order to obtain favorable recommendations for their products, enhancing their sales to the negative cash flow "I" quadrant business owners.

Mr. Kiyosaki joined Amway in the mid 1990's as an IBO but the primary reason was to get his foot in the door as a "E" quadrant participant to sell his books.  The resulting sales via the recommendation of the "S" quadrant participants catapulted his books to the best seller's list and the rest is history.   Mr. Kiyosaki never even made platinum in Amway.  It wasn't necessary since he knew the money was in the other three quadrants of MLM.

Each MLM participant resides in at least one of the four Quadrants, and sometimes three.

Where one is, is determined by where the main source of income comes from. Many rely on jobs paychecks and are therefore "I" type negative cash flow business operators, while others are self-sufficient in their "S", "E", or "B" business.

IBOs reside on the upper left side in the negative cash flow quadrant.  The other Quadrants are for individuals who receive their cash primarily from the "I" quadrant participants' losses.  

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The Parable of the Independent Bucket Owners

When I was growing up I had a smart dad and a stupid dad. 

My smart Dad told me a simple story when I was 12 years old. It was smart Dad’s way of explaining the difference between the upper left side of the MLM negative cash flow "I" quadrant, and the MLM 'S' quadrant. 

Once upon a time there was this quaint little village. It was a great place to live except for one problem. The village had no water unless it rained.

To solve this problem once and for all, the village elders decided to put out to bid the contract to have water delivered to the village on a daily basis. 

One company offered to take on the task and the elders awarded the contract.

The company, AMerican WAter deliverY (AMWAY), came up with an innovative plan to hire people to carry water back and forth on a commission basis.   American Water Delivery created a pyramided compensation scheme whereby bucket carriers could recruit other bucket carriers and obtain a slice of the commissions paid to those they recruited.   Since the people hired would be independent contractors, AmWay would not need to pay a minimum wage or social security taxes.  This reduced AmWay's risk of doing business. 

The demand for water was pretty high and hundreds, if not thousands of people were needed to carry water.   They could work as much or as little as they wanted. The bucket carriers were told that they were independent and would be called "Independent Bucket Owners (IBOs)".   With the hope of being able to make above average incomes, through increasing the numbers of independent bucket owners, the bucket owners had an incentive to recruit other bucket carriers.   This is "I" quadrant thinking. 

A few of the original IBOs observed that the per bucket commission rate paid by American Water Delivery (Amway) was not sufficient to keep people interested in carrying water over the long distances for long periods of time.   Other jobs paid more per hour than water carrying for AmWay. 

So a few IBOs created a motivational system to help bucket carriers dream about the day when they would have thousands of bucket carriers below them and they could sit back and enjoy their residual income from the bucket carriers now doing all the work.  In fact many bucket carriers started selling walkman cassette tape players and tapes so that the IBOs could listen to all the bucket carrier success stories while they carried their next load of water. 

These bucket carriers also created training systems to help bucket carriers recruit other bucket carriers.  These systems included training tapes, CDs and seminars that were then sold to all the "I" quadrant participants.  

The "System" owners found they could make a lot more income from selling their motivational and training systems than from the American Water Delivery business.   Some system operators sold buckets to their downline for $100 each, claiming the bucket was special and that they were the  key to carrying water most efficiently and cleanly.

The "System" business operators found the turnover in bucket carriers was high, but there was still a steady stream of hopeful bucket owners who were more than willing to "walk the miles" and do whatever it took to build their own downline of independent bucket owners.   The "System" business owners thrived due to the sales of motivation supplies to the constantly changing population of "Independant Bucket Owners".  The "system" owners found the individual bucket owners would promote the systems for free since they believed in the integrity, honesty and the sincerity of the people promoting the Bucket System (BS). 

The system operators found that the money was not in carrying water itself but in promoting the Independent Bucket Owners business plan.  With this revelation the "System" business was born.  This is what we call "S" Quadrant thinking.

As it turned out, in their quest to recruit more people under them, the Individual Bucket Owners ended up spending more on living expenses on the road for prospecting other potential bucket owners then they ever earned from carrying water.  That however did not matter since they had a dream, and if the dream was big enough the facts did not matter.  Again, this is the "I" Quadrant thinking.

My smart dad told me if I wanted to make money in MLM or Quixtar, that I should focus on the "S" business since that is where the money is. 

My stupid dad believed the money was in the "I" business but my smart dad really knew better.

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