An Anti-MLM Manifesto

In the late 1990s, some good friends tried to get me to join a multi-level marketing (MLM) company. It was called Quixtar, and it was a new-fangled internet division of Amway.

I talked to them about it, went through the presentation, then turned them down by writing the following email. I was sad to do it, because they were good friends. But everything in this email still rings true, 20 years down the road.

As for them, they played around with it for a year, then I never heard about it again. From my understanding, they never got anywhere with it. That is significant, because they were two of the smartest, most ambitious people I knew. So if they couldn’t make it work, then I suspect that 99% of the population can’t either.

In the text below, “Doug” is the person who recruited them (not his real name). He came to the presentation they gave me, and he gave a heavy marketing pitch about how much it worked for him, and how much money he was making.

Also, at the time I wrote this, I was working at Citibank full-time, and selling computers part-time at Best Buy to save money for my wedding. (I mention Best Buy a couple times below.)

I posted this to the /r/antiMLM subreddit some time ago. The comments there might be worth reading.

[Friends:]

At this moment, I’m inclined to not participate in the Quixtar proposal. My reasons are based on research and deduction I’ve accomplished over the last few days. I’ll outline everything below. However, for now, I’ll need some more information from Doug before I can consider this further.

Specifically, I’ll need three things:

The catalog. I’d like to have the catalog for several days so I can take it to the mall and grocery store, walk the isles, and compare prices. I can’t sign on to sell something if I don’t know what the merchandise is or what it will cost.
Contacts to Doug’s downline. I’d like the names and phone numbers of several people downline from Doug. I’d like to talk to them about their experience with the company. Ideally, I’d like people who are still in AND people who have gotten out.
Doug’s Schedule C’s from every year he’s been with the organization. Doug recruited me (and you, presumably) on the premise that “I’ve gotten rich, you can too.” This being the case, I’d like to see exactly what his income and expenses are for the business. I’m not asking for his personal tax return, just the Schedule C from this business. It will list all his income and expenses, and can give me a general idea of what I can expect.

If Doug can provide these items, I can evaluate the business more carefully.

Now, below is the information I’ve gleaned from hours and hours worth of research I’ve done since we all met on Sunday. Let me say up front that this is not meant to denigrate Doug or his business, but it does raise serious questions in my mind about this specific proposal and about the MLM business model in general. I am NOT trying to be condescending or overly negative. This is just what I’ve learned.

First of all, Quixtar and Amway are the same thing (maybe you knew this, maybe you didn’t). Officially, they deny any connection, but Quixtar will sell Amway-branded products and they’ll ship from Amway distribution centers. In fact, Quixtar is being incorporated by the two families that started Amway back in 1959.

I jumped on the Internet Sunday night and began searching. By the time I was done, I had visited hundreds of pages, some promoting Amway and MLM, and some vehemently against the same. The difference in tone between the two pages is what struck me. Whereas the pro-MLM pages were filled with the same theoretical, motivational, and – above all – vague information as the CD-ROM you gave me, the anti-MLM pages we very specific – they laid out in precise detail why the business doesn’t really work the way it’s advertised to work. Some people even listed their tax returns on the Net, showing what they made during the time they were in the business.

My research has lead me one important conclusion: there is money to be made in Amway, but it’s made by a vast minority of the participants. I saw a survey on one site that said 46% of Amway distributors make no money other than the rebate they get on the stuff they purchase themselves. Another 15-20% make less than $1,000 per year. And this money is without considering expenses – when you subtract expenses, I’m sure most people lose money. (And some of those expenses are actually revenue put back into the system – more on this later.)

Additional observations, which I’ll explain in greater detail:

It’s easy to believe that you’re making money on MLM, while in reality you’re not.
This is not income that just supports you without any effort on your part. You will have to work at this very, very hard. Moreover, I don’t think you can stop. I don’t think there’s a point when you can just kick back and let the checks roll in.

The thing that strikes me is that MLM is a closed system, yet everyone is somehow making money. Logic tells me this type of system just can’t support itself. Sunday night, Doug told me that very few people will come to the site just to buy. Almost everyone will be both a customer and distributor. If this is the case, where is the money coming from? Everyone buying from the company is also a distributor reaping rewards from those sales. So everyone is:

Supposedly paying less than retail
Collecting rebates from the sales

…again, where is all this money coming from?

Consider it this way:

Let’s say that Amway’s recruiting efforts are so successful, that they manage to recruit every single person on Earth. So every man, woman, and child is buying from Amway and is located somewhere in the chain. Based on Doug’s presentation, we’re all getting rich now. Everyone on Earth is making a fortune from this. But where is the money coming from?

A closed system is, by definition, a zero-sum game. For one person to make a dollar, another person has to lose a dollar. It’s a little different in this case since there’s merchandise with a practical value to consider, but the basic premise holds true.

If would be different if Doug had told me that most of the sales from the site would go to non-Amway people. This would mean that profit from sales from these people (which were not subject to rebates) would go to support the Amway people who were getting the rebates. In this sense, we would just be commission-type salespeople (a proven business model and practice). But this isn’t the case. Each person who gives is also taking, so it occurs to me that this money must come from somewhere. But where?

The answer is that it comes from the 95% of people who lose money at this. The money that those people pump into the chain goes to support the 5% of the people that make a fortune.

I’ve gathered that the average person’s stint in Amway goes something like this:

They join, and they start buying all their consumables from Amway. So, they spend about $200 a month on stuff.
They also become a distributor and they buy all sorts of motivational “tools” from Amway to motivate them to increase their business (much more on this later). They buy the books, the tapes (in fact, they go on a standing order system for the tapes), and they go to several sales rallies a year.
Before they know it, they’re spending about $4,000 a year on Amway stuff.
So they pump all this money into the chain to feed their upline, then they suddenly realize they’re not making as much money as they thought they would, and they get out.

Has their experience in Amway been a failure? For them, yes. For their upline, no way. Not counting the downline they created, this person has pumped $8,000 into the system over two years or so, and they didn’t take much out. When you consider all they spent compared to what they got, they have enriched the system considerably. It’s this money that supports the people higher up the chain.

The basic premise of MLM is this: be one of the haves, and avoid being one of the have nots. Be part of the 5% that gets supported by this, not part of the 95% that does the supporting. You’ll have to pay your dues early in the system, but if you work hard enough you can break through the wall and start getting supported by the people who start paying their dues long after you do and who will drop out before they ever start getting paid by the system. These “churners” are absolutely necessary for the system to work.

(There are even phrases and terms for this in the Amway lingo: “Fake it ‘till you make it,” and “When you have a dream, the facts just don’t matter.” Remarkably, someone who quits is called a “ninety-five percenter.” At the rallies, you’re told that if you’re not making money, you just need to work harder and someday you’ll break through.)

At best, this is just a bad business plan. At worst, this is exploitation. Perhaps even fraud, depending on how it’s presented to recruits.

So how is it that all these people lose money but still stay in? Because it’s easy to think you’re making money when you’re really not.

First, the prices apparently are not spectacular. I’ve seen price comparisons, and you’ll evidently pay more for the Amway stuff than you could in a grocery store. (In fact, there’s a whole list of arguments for uplines to use when their downlines start complaining about the expense – “If you owned McDonalds, you wouldn’t eat at Wendy’s would you?” is a common one.) At $200 a month, it’s easy to put two-and-a-half thousand a year into the business on products you pay a premium on.

Second, Amway has a booming “motivational tools” business. Has Doug asked you to go to a rally yet? Don’t go – don’t ever go. In fact, avoid these “tools” like the plague. This is where the uplines in Amway make a fortune. They sell motivational books and tapes and they hold rallies all across the country. Apparently the pressure to attend these rallies and buy the books and tapes is pretty intense. It’s been estimated that expenses for these for ONE person can reach $3,600 per year very, very easily (I have no way to substantiate this number, but I saw at least three estimations from people who were in Amway for a time, and one of them included a Schedule C from a tax return will his expenses listed). I’ve also seen another number: 18% of Amway’s business comes from the sale of these “tools” to its members (again, no proof of this, but the same number kept popping up in several places).

The “tools” business for Amway has two purposes: (1) revenue, and (2) to keep the “have nots” in the business. The rallies evidently get pretty intense, with people on their feet, shaking their fists, and shouting from the front row that they’ll, “Go Diamond one day!” I’d love to see if the reality matches the stories I’ve read. The goal here is obviously to keep someone in the business who should, in reality, get out because they’re losing money and will never make any money.

To ensure you are really making money at this, carefully track your expenses. If you attend a rally, track every penny you spend on meals, hotels, and tickets. If you drive out of town to show the plan to someone, track your mileage and meals. If you buy a motivational book, track the cost. If you sign up for AMVOX (their voice-mail broadcast system), track that cost. They’ll want you to switch your phone to MCI, so be sure to account for how much your phone bill goes up. And – most importantly – if you buy anything from the catalog, track how much less you could buy them in a grocery or department store. Any premium you pay for this stuff is an expense like any other.

Another point I promised to explain –

I don’t think they will ever be a point where you get “residual” income from this, although this is a huge selling point for Amway – this is the dream they’re selling. They make it seem like you can recruit a downline, then just kick back and let the money come rolling in.

But they fail to mention something important: people drop out. Remember the “churners”? The system needs these people. Your downlines are not set in concrete. People drop out of the system all the time (two years ago, my stepfather’s entire family was buying through my stepsister – they’ve all since stopped). Consequently, you’ll have to recruit people into perpetuity. You will need to replace the people you lost over and over and over again.

(Don’t believe me? I’ve been recruited by people who I know have been in this for years. A girl I knew from work left me a message a few weeks ago – “Deane, remember me? …this company I’m with wants to expand and I wanted to know if you were interested…” I know she got started in this back in 1990 when we worked together – she tried to recruit me then, in fact. So here she is, nine years later, calling someone she hasn’t talked to in five years to join her downline. You’d think she would have been able to kick back and live off her downlines by now.)

Sunday night, Doug told me, “I retired two years ago.” Well…no he didn’t. He was there showing me the plan that night. He came to your house and recruited you a week earlier. How many hours a week do you think Doug spends on this? I’d imagine quite a few. So he hasn’t really retired from anything, he just has a different job now.

Also, in visiting the pro-Amway sites, I saw one phrase over and over again: “This is so successful, that I quit my job to do this full-time.” So…have you really quit? If you’re spending 40 hours a week on Amway, or 40 hours a week on an office job, you’re still spending 40 hours a week somewhere.

It gets worse: in your recruiting efforts, you will eventually run out of friends, family, and co-workers to recruit. Then you’ll have to start “cold contacting,” which essentially means calling people you don’t know and showing them the plan. If you can’t do this, then I wouldn’t bother starting with the business, because this seems to be the key to survival. The people who win with Amway can and do recruit new people constantly.

(More stories: Last year, I got a call from a guy in Minnesota to whom I sold my first car back in 1987. I met him again at a car show in Canton in ‘97, and he was now calling me to join his downline. I had literally known the guy for about ten minutes. Also, a man came into the Best Buy computer department on Monday looking to recruit people. He had the same CD-ROM you gave me last week. It got me thinking about another guy from a few months ago that came into Best Buy – he never gave me the CD, but the way he explained it, it had to be the same thing.)

So, just like tracking your expenses, be sure to track your time. Log every minute that you spend on this: log the time you spend maintaining the web site, the time you spend showing people the plan (they tell you to show it 5-7 seven times a week), the time you spend traveling, etc. Then, at the end of the year, divide your time into your profit and see how it comes out.

For instance, say one of you spends five hours a week on this, and the other spends seven. That’s 12 hours per week total; 624 hours per year (minimal time, considering you need to “show the plan” 5-7 times a week). Now let’s say you receive checks totaling $10,000 in a year. That’s a pretty good year, and it may take you several years to get to this point. But then subtract your expenses, counting everything I mentioned earlier. It’s not at all unreasonable to think that two of you would have $4,000 in expenses for the year (like I said earlier, you do much better if you stay away from the “tools”). So this means you had $6,000 in profit for the year, or $9.61 an hour. That’s about what I make selling computers at Best Buy.

It’d be okay if there was a point where you could just quit and let your downline do the work, but like I said before, I don’t think that will happen. I think you’ll be recruiting people forever.

In the end, I come back to the same point over and over….

Amway is a closed system. Everyone who gives also takes. So where is the money coming from?

…and I get the same answer…

It comes from the vast group of people who do not make money. They feed the people that do. There has to be a food chain – the big money makers have to get their money from somewhere. The only place it can come from is the newcomers.

Do people succeed? Some, absolutely. I’d venture a guess that Doug is one of them. (If he provides his Schedule C’s, I can tell you for sure.)

But to succeed in MLM requires a lot more work than they make it seem. You need to put many hours into this, and many years of losing money before it pays off. The break-even point is likely years into the future. When it does pay off, you’ll need to keep working and working to make it keep paying off. I think the idea that you don’t have to work at this is a line of crap – this will probably consume more of your time than any other home business would.

Guys, I hope you prove me wrong. Nothing would make me happier than for you to tell me in a couple of years, “Deane, you should have gotten in. We’re making a fortune.” Fantastic – I’ll be the first to congratulate you and tell you I was wrong. Then I’ll join in and curse myself for waiting so long. But, as I’ve laid out above, I think success in Amway is the exception, not the rule, and the effort it ultimately takes makes it no better than any other enterprise.

You’re welcome to forward this message to Doug. If he’s willing to provide the three items I mentioned in the beginning, then I’m happy to consider the idea further. If not, then please thank him for taking the time to present the offer.

Deane