Tuesday, June 15, 2010

I get Amway mail, part 3

Sorry for busting up the previous thread. A new Amway distributor showed up, one "IBO Fight Back," who runs a blog called "The Truth About Amway." He had a long series of posts arguing with my interpretation of Amway distributor performance, and noted that he has been planning on a detailed response to my site for years. As the issues he brings up are interesting, I responded to some of his arguments. It got too long for the comments section, so I'm starting fresh.

IBOFB, I wouldn't be opposed to linking a post of yours if you don't want to restrict yourself to comment format. By the way, I like your profile image of the Dread Pirate Roberts. However, I've spent the last few years building up an immunity to fuzzy math. ;)

We have similar backgrounds [as numbers geeks].

Oh yes? Always glad to meet a fellow nerd. I got my MS in computer engineering from UT in 2007, and did my Masters Report on data mining topic frequency from Google News and comparing it to Digg.

Sorry about the broken link, the one I gave should have worked. The other data on percentage qualifiers is supposed to be for "IBO eyes only" so to speak, so I'll have to sponsor you first ;)

I'll pass on that offer, thanks. Indeed, part of what raises suspicion for me about Amway is the way they keep their information so close to the chest unless you are paying them. People always say that you should evaluate Amway on the same basis that you would evaluate any other business, but that's not really possible. If you are dealing with a major corporation, you can actually check out their financial statements every year, and there are specific legal requirements on the truth value of what they are saying. Sure, there are loopholes by which accountants can paint a rosier picture than reality, but there is at least a baseline where if you lie in your financial statements you can eventually risk landing in jail.

There is no such requirement from Amway, obviously. As you point out later, some statistics can't even be gathered effectively, and what they do release is what they want to release, when they want it. For instance, how would I know that these "IBO eyes only" documents are accurate? Who is overseeing them?

I'm certainly not saying they're false documents, I'm just saying that a lack of open information that can be verified always feels like a warning flag to me. I don't know what you could do about that, however.

I'll drop you an email in the morning, but to be honest I'm hesitant as they too have their problems of interpretation. You might want to check out another post of mine on the problematic use of statistics - Amway IBOs get all their products free plus extra cash.

Okay, IBO, I have now read that page in its entirety, and I have to confess that the first time through, I had a critical failure of my sarcasm detector. I thought you were serious in trying to prove that people who are "buying from themselves" make that much money. Hence I spent unnecessary time trying to explain the flaws in your reasoning before noticing that it was meant to be satire.

So if I take your point correctly, your main concern is that one simply can't construct all of the big picture starting from averages. That is, of course, true to a point, and that's why I wish more detailed information could be made available.

But it seems to me that you're deliberately going way off in the opposite direction, into a kind of numerical solipsism, in which you can dismiss all numerical analysis as "damn lies and statistics." That's where we part company. While raw numbers never tell the whole picture, when you say "The average tells you nothing at all, and anyone who pretends it does is either ignorant or actively trying to mislead you" that is clearly equally naive. There is a middle ground between thinking that a limited data set is a crystal ball and thinking that it is completely useless.

You can't, on the one hand, instruct critics of Amway to analyze it like a real business, and on the other hand dismiss all efforts at quantification as stupid. If it's a real business, then the numbers that are available mean something, as they are the only data that can be applied. The other stuff, the intangibles like motivational hullabaloo and personal growth and so forth, that is all irrelevant to analyzing the business if your core claim is that you simply can't demonstrate whether it is generally a money maker or a money sink. Isn't that what we are talking about in the first place?

Really though, it all comes down to this question of yours - does that data you have actually give a breakdown of time spent as well? This information we pretty much don't have in hard data and it's difficult for Amway to get.

Well said. You've homed in on the key point of contention right there.

Some Amway distributors (a very small number) make money at it. Some Amway distributors (a very very small number) make a hell of a lot. Meanwhile, some Amway distributors (perhaps most) spend very little time on the business. I think these are all facts that we agree on. Based on them, though, you've combined them arbitrarily to make the following claim: "Some people make a hell of a lot of money while putting very little time into the business." This does not follow.

Indeed, after thousands of emails and guest book entries in the last fifteenish years -- and by no means are they all friendly to my position, mind you -- my impression has been that the set of people who are (a) making a lot of money, and (b) spending little time, is so small that they are practically disjoint subsets. Meanwhile, the set of people who are (a) making little or no money, and (b) spending a large amount of time is a fairly large conjunction.

There are very positive and upbeat distributors who write to me, to be sure, but quite a lot of them vanish without a trace at the question "How much are you, personally, making as a function of your time?" The ones who do claim to be making money almost always come across like Chris here, lamely repeating something like "I am so too making more than minimum wage!" and backing up this claim by saying that he knew some people who once made $100 in four hours. (Conveniently cherry picking a small window so as not to acknowledge the numerous hours when those same people were working for next to nothing. It's like hedge fund managers reporting their performance by annualizing the returns of their best week.)

You seem interested in proving me wrong, showing that seriously working the business is a sure path to wealth, but how can we even have common ground to discuss this if you're saying up front that no objective analysis of time vs money exists, or is even possible? Why would anyone consider joining a business in which even basic personal accounting can't be done?

Having said that, MonaVie, an MLM company which expanded primarily through recruiting existing "stars" from other companies, publishes more comprehensive statistics including average hours. MonaVie has the "advantage" of being a much more homogeneous company, with only a handful of products and thus approaches, and the stats have their own weaknesses, but as you can see even at significant income levels the average hours worked is quite low. There's no reason to believe Amway (or other MLMs) are substantially different.

Thanks for this link. Actually, the patterns that look interesting to me are different than what you're suggesting. The average number of hours worked increases as average income size increases. For people at the highest levels, this is clearly a full time job. A cushy full time job, I grant you that, but when you are talking about fractions of fractions of 1%, that's not all that interesting. I don't see any sign of your claim that people who STOP working continue to maintain income at a high percent of their former levels, and if they do, they must be balanced out by people who are working a lot more hours.

Meanwhile, it's clear that a solid 85% of people are making, at best, $35 or less for a typical 6 hours of work, which is substantially below minimum wage, just as I've been saying. Sure, they're not working full time (hence the common characterization by more senior distributors that they are lazy or stupid), but even given the work they are doing, they'd be better off working a single 6 hour shift at McDonald's, wouldn't they? Shouldn't the starry-eyed dream language include that hard fact for comparison's sake?

Finally, presenting the check size alone as the value of the work seems a little misleading. Correct me if I'm wrong, but it appears to me that the bonus check is not pure profit, but income. As with any business, profit is the difference between income and expense, and this table doesn't appear to reflect expenses at all. I sure don't know how much the profit margin is for the typical distributor, but I'm pretty sure the expenses are greater than zero.

Someone in the third bracket (Star 500, making $76 a week for 6 hours of work) appears to be making more than minimum wage. Not a lot more; $12 per hour is minimally skilled office worker territory, but it's something. However, if they spent just over $30 a week doing routine business tasks like driving to meet people or some similar thing, then their returns are back at minimum wage again, bringing you up to the 92nd percentile before business is better than a fry cook shift. And that's not even getting into the question of whether or not they are spending money purchasing stuff that they wouldn't have bought otherwise (more later).

Speaking of profits, when we say that the average distributor "makes" $115 a month (give or take), is that income or profit? I honestly am not sure.

For arguments sake I'd like you to just consider a scenario, and leave aside all other issues.

Imagine you have a range of products that are excellent quality and there is a significant market segment that would consider them good value. Then imagine you tapped that segment and introduced them to your products. They could then order them from your website, pay you, and have them delivered to their door without any further intervention from you, with all logistical type issues outsourced.

Why wouldn't that be a legitimate business model, that, given enough people using the products, couldn't develop a significant "passive" income?

Well, I know you said that I should assume your scenario is correct and leave aside other issues, but first I do want to voice one objection. Where you've described the products as "high quality," it seems that the metric you've applied in a previous post is that the products are popular. I'd argue that this is an invalid way to identify a good product when it comes to an MLM, because popularity is a self-fulfilling prophecy in this case.

What Amway and other MLMs accomplish for most people (i.e., the trivially "active" distributor who tries to sell to his brother occasionally), as we've seen, is not tremendous wealth, but fostering a buying mentality. Consumers will describe them as quality products, certainly, but I suspect that the real reason they are focused on buying things like Nutrilite (a product which is more or less off the radar outside the MLM community) is because they believe they need to buy products valued by Amway in order to boost their business. That's a damn fine argument if you're a manufacturer looking to sell stuff through Amway -- you have plenty of ready made customers who will buy your stuff and call it the most awesome thing ever, regardless of actual quality. For the rest of you, the old zero-sum problem shows up again.

So, that aside, let me answer your question. The reason it's not a realistic business model (IMHO) is that it purports to create money from nothing. I mean, look, we're at least ten years past the point where selling stuff on the internet is impressive. Can we agree on that? People can make their own Amazon store or even set up their own website on a shoestring budget, with a modest fee to a company that handles credit transactions. Delivering the items may take up a bigger chunk of your budget, but that's something offered through a wide variety of channels these days.

Amway (starting in the Quixtar era) provides the same package, online sales and delivery, and then claims that you the distributor will also get a passive profit via that process. Or in some cases, four or five distributors are all claiming a share of the profits. And all I want to know is: why?

Ultimately, what value do you, Mr. Distributor, provide to this product that I couldn't get by ordering my stuff on Amazon? If it's because there is stuff being sold through Amway that you can get nowhere else (i.e., Nutrilite)... why is that? Say I'm Nutrilite, and I've actually got a high quality product to sell. Why shouldn't I just cut out the distributors from the chain and keep more of the profits? The only reason I can see is that Nutrilite will sell more of their product through Amway because of brand loyalty and the proposition that each buyer will get wealthy. Great deal for a Nutrilite manufacturer! Selling more is good! Unimpressive for the bottom line of distributors, where adding more customers also adds more people claiming the bonus pool at the same time.

Finally, I want to address this question from an earlier comment which caught my eye:

From your various links and other posts you're clearly a secular "rationalist" much like myself. Tell me - if a study came out on say, homeopathy, and it was full of incorrect data, false comparisons, and false assumptions, how accurate would you consider it's conclusions?

Here's the thing. A hallmark of pseudoscience is not so much that it uses fake data, but that it is by nature unmeasurable. Following the scientific method requires you to come up with stuff that you can quantify. You say you can mix medicine with water and get super-medicine? And the more water you use, the stronger the super-medicine? Fine. Make me a hypothesis about what super-medicine does, create some viable experiments, and accurately report your findings regardless of whether or not they confirm your hypothesis. That's the way science is done when it's not faked.

Anyone who follows The Amazing Randi knows what pseudoscientists do when placed in the same situation. Either they propose an incredibly vague test that can easily accomodate confirmation bias, or they come up with some ad hoc explanation when the data doesn't support them. Oh, your negative attitude blocked my psychic powers, they'll say. The medicine would work better if a believer took it. Ah, there must be a hidden water pipe that is messing up my true Divination abilities. Like that.

The way I look at it, Amway is in this category. Critics of Amway make do with responding to what little data is available, but the data in support of Amway tends to be weak, unreliable, or behind a pay wall; or perhaps you're hesitant to share it "as they too have their problems of interpretation." Your page which "proves" that you can continue making most of your money after you stop working the business is a case in point. Like you said, you can't possibly gather enough information to objectively make that case, so you extrapolate from what an upline said as well as your personal feelings based on anecdotes of some people you know.

Similar to belief in God or supernatural powers or amazing medical panaceas, the claim that you can easily make millions without creating your own products or adding any genuine value to them is an extraordinary claim that should be backed by extraordinary evidence. Your main objection in most cases seems to be that I should find better evidence to refute.

3 comments:

  1. In response to the point:

    "Imagine you have a range of products that are excellent quality and there is a significant market segment that would consider them good value. Then imagine you tapped that segment and introduced them to your products. They could then order them from your website, pay you, and have them delivered to their door without any further intervention from you, with all logistical type issues outsourced."

    What that basically describes (and I've heard that exact phrasing from my former upline) is a business similar to Avon or Mary Kay. I actually have no problem with these companies (my aunt sells products for Avon).

    Amway, however, is significantly different as it adds a 'you get a bonus for recruiting others'. In the case of Avon, if you introduce someone to the company, you don't get a cut of how much they sell (or their PV/BV points, which equates to the same thing; their work making you money).

    That is what I find objectionable about Amway; others benefiting from the hard-work of others that they have no right to benefit from (i.e. a person who owns a company deserves to benefit from the work their employees do because they pays them/owns the company).

    Good post Russell, as per usual.

    ReplyDelete
  2. Nutri-what!? Seriously--what is it and why don't I know I need it?!

    ReplyDelete
  3. Amway has ripped off millions of people for several decades, to the tune of 10s of billions of dollars.

    Read about it on this website: http://thenetprofitgroup.yolasite.com and forward the information to everyone you know, so they don't get scammed.

    Amway is a scam, and here's why: Amway pays out as little money as they can get away with, so they support the higher level IBOs ripping off their downline via the tool scam.

    As a result, about 99% of IBOs operate at a net loss, while the top 1% make several TIMES more from their Amway tool scam than from the Amway products. This was made illegal in the UK in 2008, but our FTC is unable to pull their heads out of their butts to stop it here.

    ReplyDelete