The MLM Gas Station and $8/Gallon Gas

I've noticed that many products are expensive. By expensive, I mean priced at 2 or 3 times what the average consumer would pay. Some products like MonaVie are priced at 20 times (ounce for ounce) the price of competing juices. Other products like Protandim are similar much cheaper if you simply buy the ingredients separately.

Many MLM distributors say, "So what? Tiffany's jewelery is expensive and that's not a scam." I think you pay quite a premium for that little blue box and the brand name. However, it got me thinking, "How would an MLM gas station work?"

Imagine a gas station that charges $8 a gallon for gas next to one that charges $3. The $8/gallon gas station promises to pay you 50 cents a gallon for each person you convince to also fill up at the same $8 gas station. The catch is that you must also fill up at the gas station to earn the commissions.

One could look at this gas station and say, "Hey if I get 16 people to sign up, I get free gas. This is great! I'm going to publicize this all over the place and give it my highest recommendation because free gas is great... and if I can get 20 people to sign up, I'll actually be making money. Whoa!" That's the view that most MLM distributors have.

A more analytical, non-emotional view might look at the big picture and say, "If I recruit 16 people to buy $8 gas, they are paying a combined $128 a gallon so that I can get my gas for free. However, if all 17 of us just went across the street to the $3 a gallon place, we'd only pay a combined $51 for our gas. Yes, I wouldn't get my gas for free. I'd have to pay $3 like everyone else, but at the same time, I saved each of the 16 people $5 a gallon by not participating in the $8/gallon scheme."

Let's say that we go with the former view and try to get gas for free. It turns out that each of those 16 people have to recruit 16 people to get their free gas. That means that 256 people will have to be involved. And those 256 people have to recruit 16 more people to get their gas for free, bringing 4,096 people in. The next level has 65,536 people. If your city is sized like mine, there is no longer anyone left to recruit. That last group of some 61,000+ people are left footing the whole $8 gas so that approximately 4,300 can get their gas for free. A lot of the town's money just got funneled into the hands of the owner of the gas station with a few of the participants receiving a pittance.

A number of the people in the town will see the $8 gas for the scam that it is and stay on the sidelines completely. It will impossible to recruit these people so the scheme runs out of people even before it gets to the whole town.

So who thinks this $8 gas station is a scam? The gas station owner isn't going to admit it's a scam - he's getting exceptional profits and doesn't want to see it stop. The person trying to recruit others isn't going to admit it's a scam - their plan is to get people involved so that they can free gas.

What about the outsider watching these people pay $6 for their gas week after week because they were only able to recruit 4 people? He's likely to say, "These people are getting scammed. They could be paying $3." Most outsiders just continue about their day because they've got a lot of other things to do. Why care about the people getting scammed? It's their own fault for being dumb.

However, occasionally an outsider really cares about people and tries to educate them about what they are involved in. That leads to websites like this and articles like this one.

This post involves:

MLM Scam

... and focuses on:


26 Responses to “The MLM Gas Station and $8/Gallon Gas”
  1. Vogel Says:

    That is one of the best illustrations of this concept I’ve ever seen. It takes it to another level — social contracts/ethics, game theory, the Prisoner’s Dilemma, and Dollar Auctions. Deep!

  2. Jenay Says:

    Haha, shouldn’t you be charging for that kind of knowledge?!

  3. Cult Doctor Says:

    Very well written.

  4. Brent Hansen Says:

    Brilliant analogy!

  5. Fever Says:

    An excellent analogy if I do say so myself! It really puts things into perspective, especially for those that don’t have the moral compass to realize that while they might be getting “free gas”, those that they have suckered into joining their scam are paying through the nose.

  6. mlmmyth Says:

    Thanks Brent and Fever. Feel free to share it.

  7. Paul Benson Says:

    THIS IS A SAD REALITY! Hyperinflated profit margins are just necessary if you’re going to pay multiple levels of commissions.

    One of our Stratus leaders asked me to write a response to this article adding in the Stratus model. So here goes…

    Imagine that next to the normal $3 gas station and the $8 MLM gas station, there is a third Stratus gas station. The gas at Stratus also happens to be $3.

    However, since we pass 100% of the profit to our people at Stratus, for ease of math, let’s assume the gas station has $1 of profit in each gallon of gas.
    That would mean that every Stratus Associate gets $0.52 per gallon back on every gallon they pump – dropping their cost to $2.48 per gallon. They also earn $0.20 per gallon from every partner they invite to fill up at Stratus and $0.10 per gallon from people invited by their partners.

    When they invite 2 people, they start earning profit sharing in all the Stratus gas stations, and their profit sharing grows as they help others get into profit sharing until they have replaced their income or more.

    As their team grows they begin to earn more and more points toward all kinds of extra purchases at the station. Unfortunately, some suppliers may set their retail prices a little higher than the grocery store across the street, but by in large, the prices are less, and now they’re also free!

    Normal retail profit margins are enough to generate massive success for all!
    Everyone saves! Many earn!

  8. mlmmyth Says:

    What if it seems like the Stratus price is $4.50 next to the $3 gas?

    For example the Stratus Network price of a 56-serving food supply of Wise Food is $128, plus an estimated $20 in shipping to me in California. The total price is $148.

    The first place I went to look is Amazon.com to see if they carried the product. They do. It is $99 with free shipping.

    Granted this was the first and only product that I looked at, so I don’t mean it to be representative of everything at Stratus. Frankly, I don’t have the time to compare multiple products from any of the hundreds or thousands of MLMs. However, this alone shows that it makes retailing this product through Stratus extremely difficult. This is important because these FTC guidelines say that a majority of the sales need to be made to people outside of Stratus for it to not be a pyramid scheme.

    When you say, “Unfortunately, some suppliers may set their retail prices a little higher than the grocery store across the street, but by in large, the prices are less, and now they’re also free!” It sounds a lot like what I’ve seen with Amway, including the pitch that the prices were less on average. They weren’t. These MLMs simply don’t have the scale to compete with Amazon, Wal-Mart, Target, etc. These places can negotiate much cheaper product due to the quantities they purchase.

  9. mlmmyth Says:

    Okay, I looked up another product. Diet Snapple Singles to go. They are $7.12 for 4 boxes of 6 on Amazon, plus free shipping (fulfilled by Drugstore.com). The Stratus price is $2.50 if you order 2 or more for a total of $10. Even with the Stratus cash back the Amazon price is cheaper.

    I should also mention that Amazon has an affiliate program as well, so you could create an Amazon store from any number of software packages and earn commissions. I sure hope that Stratus doesn’t cost anything to join or have any monthly fees (such as a cost for hosting your own store) or it looks to be a bad deal.

  10. Paul Benson Says:

    I agree 100%!
    Stratus is a free market system that allows people to set their own prices on their products. Stratus does not micr0-manage where suppliers set their costs.
    How I wish that all the suppliers selling their products through Stratus would make their prices more competitive. We have a number of fantastic products on Stratus at the best retail price I’ve seen in the marketplace, but many like you mentioned as well.
    For example… I sell my services as an oral surgeon through the site. My wisdom teeth and dental implants are already just below the average in my area, but I then place $500 of profit margin into the Stratus system for people to market my services. That provides some serious savings for Stratus members who have procedures done in my office, and nice commissions for the system.
    Even if people placed a $1 or less profit margin and kept the retail price competitive, everyone would be better off. It’s a paradigm shift… but one that can make a big difference as people catch on.
    Regardless, Stratus doesn’t take a dime from people unless they are making money, and as a not-for-profit corporate structure, 100% of proceeds are then paid out in commissions.
    Thanks for your input!

  11. mlmmyth Says:

    Can you point me to a couple of nationwide products that are a better deal on Stratus? Perhaps you can point out where they beat Amazon’s price on a few of them.

    If it’s a free market where people are setting their own prices on their products, why not make an Ebay store? Your products will have a lot more visibility than an unknown Stratus Network.

    It seems like overkill to ask people to join the Stratus Network to save a few dollars on your services. Just give your clients a password or coupon code that they can pass to get the savings. Or do a Groupon and get a lot more business.

  12. Paul Benson Says:

    You have hit on the bigger picture of Stratus.

    We are working to build a free-market organization that can rival the Amazons and Walmarts for buying power while passing on the entire profits to the people based on their work. We mostly pay in a cooperative compensation structure rather than multi-level to better distribute the profits and to put people into profit quicker. It will take a long time to build that organization, but remember, it took Amazon 7 years to make their first dollar. We are light years ahead of that curve.

    Joining has very little to do with saving a few bucks here and there. As you know, profits, not savings, generate economy. The Stratus not-for-profit corporate structure gives us the ability to help some people save, replace an income for others, and create millionaires based on their steadfastness and work. Either way, 100% of profits go to the people instead of billion dollar juggernauts like Ebay and Amazon. Getting back to the initial point, we can do it without the hyperinflated prices we find in MLM.

    So… a few products… My personal favorite is L-arginine Plus. I personally sell thousands of dollars worth of this product every single month to customers around the world. A few of them have joined Stratus for even better savings. Most just purchase it from my personal Stratus storefront. L-arginine Plus is superior to MLM rivals Pro-Argi9 and Herbalife at less than half the cost. The manufacturer sells it through Stratus at their regular price, but passes the keystoned profit margin on to our Associates.

    Thank you for quick research into Wise Food pricing. This is also one of my personal best sellers. I approached them with your findings, and they are now making it available at Amazon’s pricing with commissions included. I’ll be able to save my customers even more with very little change in my commissions. Gotta love competition!

    The ActiveChoice Healthcare plan is another product I like to focus on, and probably a better comparison to gasoline because it’s something everyone needs (not saying that I agree with individual mandates haha!). I am able to save corporations between $100 and $300 per month per employee with this plan and give them a better benefit. Individuals can also join the organization to take advantage of group savings. While I have seen cheaper plans, they are typically weak benefits, and almost always start up-rating every year after they “get you”. Because this is a healthcare cooperative organization rather than “insurance”, any member of the organization can promote it. Any year-end profits are paid out to those who didn’t need to use the benefit rather than to multi-million dollar executive bonuses.

    I don’t expect you to agree with all we’re attempting to accomplish, but I’m proud to be part of it, and we’ve got some great things going. The people who are catching the vision are those who will help us get there. Either way, we at least have the same goal of exposing the MLM world and their questionable business practices. Keep up the great work!

  13. mlmmyth Says:

    Amway has been pitching that pitch since at least the early 90’s. They had tapes that went as far as to say that MLM distribution was going to replace Wal-Mart.

    Amazon didn’t make their first dollar because they were building out infrastructure such as warehouses and distribution facility. It’s impossible to compare unless you have the same. A lemonade stand can claim they make a dollar and are light years ahead of any corporate curve to that first dollar. I’m not trying to make a comparison to Stratus because I don’t know it detail, but I just wanted to point out how such a statement, while logically true, may not beneficial to your point.

    The 100% of the profits going to the people is often not entirely true. The companies that make the products get the profits. As I pointed out with the Diet Snapple above, Amazon and Snapple make a profit, but deliver saves to the consumer. The people are better off getting the savings than getting the profits. There’s not wrong with Ebay and Amazon collecting money for their work. If Stratus did a few billion dollars worth of sales, people would be saying the same thing about Stratus.

    It does seem like L-arginine Plus is priced in line with other products, it was even the cheapest I found. The only knock on it that I would in my admittedly 2 minutes of research is that Livestrong seems to say that it isn’t proven to help with much: http://www.livestrong.com/article/491796-benefits-of-l-arginine-and-l-citrulline/, saying that the claims aren’t substantiated by the medical community and higher doses (which L-arginine Plus has some of the highest I saw) can have negative side-effects.

    It’s interesting that Wise Food or Stratus couldn’t make the change on their own. You shouldn’t have to inquire with Wise Foods, and I certainly shouldn’t be the one to do a simple Amazon search.

    Not everyone needs a Healthcare plan. The vast majority of people do have it through their jobs. It is pretty impossible to compare health plans, because they are all different. I would be most concerned about buying your health care at the same place you buy your Diet Snapple from.

  14. Scintre » Online Business Day 2 Says:

    […] mlmmyth.org I read a few interesting articles about how MLMs work (you can check them out here and here). Essentially it was talking about how any MLM which is marketed as a money making opportunity […]

  15. Chris Doyle Says:

    What you describe above is a classic pyramid scheme, not a MLM. The FTC and other authorities will look at the motive for people buying products and as exactly the same product can be bought in the same street for under half the price, the only motive can be to earn bonuses. As this can only be done by recruiting people (there is no retail option in your story)then the FTC will come to the conclusion that its a pyramid scheme.
    A genuine MLM will have a)a retail option, b)will have genuine customers who only want the product even if they join the company and choose to pay at wholesale prices. In your example, people who only wanted to buy the gas would go somewhere else and get the same product for under half price.

  16. mlmmyth Says:

    Chris,

    Tacking on an option, doesn’t necessarily make it legit. For the sake of your argument, we can amend the story to allow distributors to sell gas cards. The gas cards are priced at $100 for 10 gallons of gas. This preserves the $8 wholesale discount for joining.

    Consumers in general consider gas to be the same product. However, the gas merchant can claim some special filter process or additive that makes them different. For example Chevron has Techron. It’s not materially different, but I’ve seen vitamins sold via MLM that aren’t materially different either. The point of this article was to use something that people consider a commodity, gas, to illustrate how ridiculous it can be to charge double. I’ve seen MLMs charge 5x or even 10x a comparable product, making this be more accurate if it was $20 or $40 a gallon gas.

    Unless every MLM wants to make their books public there’s no way to know if they have genuine customers who want the product. Furthermore, unless the company provides the preferred customer option, we don’t know if those people who join the company and choose to pay at wholesale prices are just distributors who are failing to recruit people into the pyramid scheme.

  17. Chris Doyle Says:

    No one is talking about ”tacking on an option” but there must be an option for people who only want to buy products. In your example you’re selling gas at $8 a gallon where it is available in the same street for $3 a gallon. The exact same gas. Now if the gas at $8 had something special about it we’re talking a different subject, but you said it was the same gas.
    You will need to show how a MLM company’s vitamin product at say $30 a bottle, is exactly the same as one in a shop at $5 a bottle. Normally, in my experience, the MLM product is of much higher quality, better ingredients with no chemical fillers etc, so they justify the price. This is backed up by the fact that all the well known MLM companies have tens of thousands, some millions, of customers who only buy the products…with no interest in earning money.

  18. mlmmyth Says:

    First off, let’s recognize that we can both be correct here. It can be both a pyramid scheme and an MLM. As the FTC says, “Not all multilevel marketing plans are legitimate.”

    I was the one talking about “tacking on an option” to make a retailing option for you, since you seemed to want one. Also we added a unique additive, which I’ll call Gastech, that is unique to this gas station. This will make the gas not exactly the same. The marketing of the gas station will pitch it as a higher quality product. So you see, we’ve made two changes that don’t meaningfully impact how it works and what you claimed was a pyramid scheme before is now an MLM… at least according to what you’ve said.

    No MLM will have exactly the same vitamin product as one you can buy elsewhere. It doesn’t mean that the vitamins are fundamentally different. This is why I used gas to illustrate to the point. Again, we can change the gas in an inconsequential way with an additive in the same way that an MLM company may change a vitamin in an inconsequential way with a goal of just being “different.” I have not seen the FTC or any court of law specify anything about products being different as a factor when it comes to pyramid schemes. Perhaps you can cite a source on this.

    Normally, in my experience, the MLM product is not of any higher quality, no better ingredients and with the same chemical fillers, and they don’t justify the price. Even products with top of the line ingredients and no chemical fillers, like those you might find at Whole Foods, are not priced at 5x to 20x of other products.

    I have not seen any evidence that there are tens of thousands or millions of customers who only buy the products with no interest in earning money. Please provide specific disclosures of such numbers from 3 or 4 MLMs to prove your point.

  19. Chris Doyle Says:

    Now you’ve moved the goalposts and you have gas that is in some way better or unique from other gas, then you can charge whatever the consumer will pay, but in your opening post the gas was the same as other gas, just the price was different, so you were explaining a pyramid scheme not a MLM.
    Yes, your opinion of MLM products is that they’re not worth the money; my opinion, along with millions of others is the opposite.
    We’ll leave it at that.

  20. mlmmyth Says:

    I didn’t move the goalposts. I adapted the analogy to satisfy your concerns while still presenting my point. This way productive discussion could continue without the getting bogged down on the products being exactly the same or there not being retailing. If tweaking to the analogy made it more suitable for you to understand, then I was open to making them.

    Once again, the original post describes an MLM. You may say it is also a pyramid scheme. As I pointed out with the information from the FTC it’s possible to be both. It’s like how all squares are rectangles, but all rectangles are not necessarily squares. Just because you think it is a pyramid scheme (i.e. a sub-class of MLMs like a square is a subset of rectangles) doesn’t mean it isn’t an MLM (like how rectangles are indeed rectangles.

    I asked you for proof of these millions of people and you decided not to provide it, but just repeat your statement. You can say it all you want, it doesn’t make it true. Please next time, you’ll bring proof of the claims you make.

    While you are at it, still looking for information from the FTC or courts about products needing to be different to differentiate a pyramid scheme. Hopefully you’ll realize that it is pretty silly to think that making an inconsequential difference to a product absolves the business/distribution scheme from being illegal.

  21. Chris Doyle Says:

    My last post on the subject:
    1. A pyramid scheme is determined by the motivation to buy the products. If the motivation is because people want the products without any business attached, its not a pyramid; if people are only buying the product to qualify for bonuses, its most likely a pyramid scheme.
    2. In your opening post nobody would be motivated to buy the product on its own at $8 because they could buy it at $3 down the road, therefore the only motivation would be to earn bonuses, thus a pyramid scheme not MLM company.
    3. You then changed it to say the gas would be better than any other gas so you could charge more for it. Fine. If people are motivated just to buy the gas, no problem not a pyramid scheme.
    4. Millions of customers buying without expectation of making money? I’ll give you 2 companies, there are many more: Amway and Avon. Millions of people buy their products without any bonuses coming their way.
    That’s my lot on here. Goodbye.

  22. mlmmyth Says:

    Chris Doyle said, “1. A pyramid scheme is determined by the motivation to buy the products…”

    I couldn’t find any evidence of this being the case.

    The FTC says, “Not all multilevel marketing plans are legitimate. If the money you make is based on your sales to the public, it may be a legitimate multilevel marketing plan. If the money you make is based on the number of people you recruit and your sales to them, it’s not. It’s a pyramid scheme. Pyramid schemes are illegal, and the vast majority of participants lose money.” Notice there’s no mention of the word motivation or anything related to it. It has nothing to do with consumers buying products, but the make-up of the earnings on the sales side of the transaction.

    The FBI has a document on pyramid schemes as well and there’s nothing related to the motivation of the customers buying the products.

    The FTC recently (well months ago now) got a court order to shut down the Fortune High-Tech Marketing. They didn’t do a survey of buyers and come up with a statistical analysis of their motivation to buy the products.

    Chris Doyle said, “2. …thus a pyramid scheme not MLM company.” As you’ve been shown a few times now it would be an MLM company. You may claim that it is also a pyramid scheme, but there’s not doubting that it would be a MLM company. Some MLM companies are pyramid schemes. Anyway, this point is negated because as we’ve shown in #1 it has nothing to do with motivation to buy the products, but how commissions are earned.”

    Chris Doyle said, “3. You then changed it to say the gas would be better than any other gas so you could charge more for it.” No, I didn’t say that it was better. I said that an additive was added to make it different. Different is not necessarily better. In fact, I even said that it was inconsequentially different.

    Chris Doyle said, “4. Millions of customers buying without expectation of making money?… Millions of people buy their products without any bonuses coming their way.” You had said that “all the well-known companies”, but you give me an example of two and give no documentation to show your point. Just because the bonuses didn’t come people’s way it doesn’t mean that they are happy customers just enjoying the product. They could be distributors who are failing at recruiting people. Penn and Teller did a show for Showtime call BullSh!t (episode name: Easy Money) that followed a Zrii distributor who kept buying product and kept trying to recruit people with no luck. It’s just a real-world example that we can’t assume that people without earnings are just people not trying. If the company has preferred customers, then that’s great evidence that they have real consumers who are not failing distributors like this Zrii guy.

    Furthermore, we know that from the huge churn in MLMs that for the most part it is the distributors failing and leaving and new ones coming in. If the people were just happy consumers 70% of them wouldn’t leave every year. Coke doesn’t have to replace 70% of its sales every year because people don’t want to be customers of it anymore.

    Hope this helped and you learned something.

  23. Lee Says:

    The attrition or churn rate is really strong evidence that residual income is a myth as well as the notion that MLM is a bunch of happy customers who just join to buy products. If you’ve ever been to an MLM presentation, it’s about woo and hype, not about the products. I suppose some MLM are more about product sales but the presentations I’ve seen were about getting rich in 2-5 years and making big bankrolls.

  24. mlmmyth Says:

    Good point Lee. I agree about the woo and hype. You can see it on almost every MLM companies home page… the picture of people vacationing on a cruise or beach or driving a luxury car. As the FTC says, endorsements must be generally expected results and not misleading. Any page offering that is violation.

  25. David Says:

    mlmmyth said, regarding “motivation” being important –

    MLMMYTH:”I couldn’t find any evidence of this being the case.”

    Well, you’ve just stated you know almost nothing about MLM then and don’t even bother to keep up with legal developments in the industry. I suggest you try the Burn Lounge decision as a starting point

    MLMMYTH:”Notice there’s no mention of the word motivation or anything related to it. It has nothing to do with consumers buying products, but the make-up of the earnings on the sales side of the transaction.”

    That cite is regarding the basic “vanilla” and obvious pyramid scheme. Motivation for purchase is the key to understanding pyramid schemes that attempt to hide under the veneer of a product. It’s been a topic of much debate in MLM discussions for quite some time, so it’s a big surprise someone who has registered a domain and runs a website about MLM isn’t aware of it!

    MLMMYTH:”The FTC recently (well months ago now) got a court order to shut down the Fortune High-Tech Marketing. They didn’t do a survey of buyers and come up with a statistical analysis of their motivation to buy the products.”

    They didn’t need, FHTM was a fairly clear cut version of the obvious pyramid scheme, since their revenues were primarily generated from recruiting. I quote from the complaint – “More than 85% of the compensation paid to FHTM Reps is tied directly to recruiting new members. ”

    MLMMYTH: “Some MLM companies are pyramid schemes.”

    I agree with you and disagree with Chris on this point. “Product based pyramid schemes” may I think be considered an illegal version of MLM.

    MLMMYTH: Anyway, this point is negated because as we’ve shown in #1 it has nothing to do with motivation to buy the products, but how commissions are earned.””

    Incorrect. Commissions may be coming from sales of products to ostensible end users, but if the end users are purchasing out of illegitimate demand (ie because they think they’ll get rich doing it and convincing others to do it, or even more obvious incentives) then you don’t have a real sale to a real end user, and it’s just a cover for recruiting.

    MLMMYTH: “You had said that “all the well-known companies”, but you give me an example of two and give no documentation to show your point. Just because the bonuses didn’t come people’s way it doesn’t mean that they are happy customers just enjoying the product. They could be distributors who are failing at recruiting people.”

    They could be, but you need to provide some evidence for that extraordinary claim. Amway’s income disclosure shows for example that fewer than half of their registered members qualify as “active” under a definition that includes them as active even if the attempt to do something once in a whole year. From Pokorny v Amway we know that fewer than 1 in 8 spend any significant money training materials or seminars (defined as over $100 over their lifetime as a distributor), yet from TEAM vs Quixtar we know more than half who register order products. Statistics from training organisations such as WWDB and N21 show that fewer than 1 in 10 even do the minimum recommended work (that’s work, not results) every month and BERR vs Amway showed the majority of sales was reorders and only 6% were selling products.

    So clearly there are many people purchasing and repurchasing the products with little or no attempt to build a business – the statistics show this quite clearly. So does real world examples like myself, who bought Amway products as a distributor for more than a decade while doing nothing to build a business.

    MLMMYTH: Penn and Teller did a show for Showtime call BullSh!t (episode name: Easy Money) that followed a Zrii distributor who kept buying product and kept trying to recruit people with no luck.

    P&T’s MLM show was full of nearly as many logical fallacies as their show on smoking. I enjoy much of their work but in some areas they really are clueless.

    Are there people who try hard and fail? Sure, of course there is. Are there people who are only purchasing the products cause they think it will make them rich? Almost certainly.

    It’s a huge leap to go from that to assuming its the norm, especially when hard data (much of it independent) shows otherwise.

    MLMMYTH: Furthermore, we know that from the huge churn in MLMs that for the most part it is the distributors failing and leaving and new ones coming in. If the people were just happy consumers 70% of them wouldn’t leave every year. Coke doesn’t have to replace 70% of its sales every year because people don’t want to be customers of it anymore.

    Neither does MLM, what you’ve stated simply isn’t true (at least not for legitimate MLMs). Take Amway again. We know from court cases that only 30% of *first-year* distributors renew (ie first year churn is 70%) – but we also know that more than 50% didn’t even place a product order after joining. In other words 60% of new distributors who actually ordered *did* renew. If you have a store and people who come in and don’t buy stuff stop coming in it doesn’t affect your sales much does it? Furthermore we know that second year renewal rates are more like 70% and that the majority of sales are from reorders.

    MLMMYTH: Hope this helped and you learned something.

    I hope this helped and you learned something.

  26. mlmmyth Says:

    David from @thetruthaboutamway said “Well, you’ve just stated you know almost nothing about MLM then and don’t even bother to keep up with legal developments in the industry. I suggest you try the Burn Lounge decision as a starting point”

    The BurnLounge (not Burn Lounge) decision wasn’t made at the time I left the comment. Even so, the Burn Lounge decision doesn’t appear applicable to the comment that you stated.

    David from @thetruthaboutamway said “That cite is regarding the basic “vanilla” and obvious pyramid scheme. Motivation for purchase is the key to understanding pyramid schemes that attempt to hide under the veneer of a product. It’s been a topic of much debate in MLM discussions for quite some time, so it’s a big surprise someone who has registered a domain and runs a website about MLM isn’t aware of it!

    I think you mean “site” (or maybe citation), but no the FTC document that I mentioned is not regarding obvious pyramid schemes. In fact it is just the opposite giving consumers tips because it isn’t obvious. The FTC doesn’t seem to be aware of motivation either, so maybe you should take issue with them. It’s almost impossible to figure out the motivation of thousands of people. I don’t see a court of law taking a survey of the people to get their motivation to determine if it is legal or not. The law isn’t determined by reading people’s minds.

    David from @thetruthaboutamway said “They didn’t need, FHTM was a fairly clear cut version of the obvious pyramid scheme, since their revenues were primarily generated from recruiting. I quote from the complaint ‘More than 85% of the compensation paid to FHTM Reps is tied directly to recruiting new members.'”

    I missed where FHTM clearly disclosed that 85% of the compensation was tied to recruiting. Wait, I don’t think they disclosed that at all. And if it was an obvious pyramid scheme, why was allowed to run for 10 years?

    David from @thetruthaboutamway said “I agree with you and disagree with Chris on this point. ‘Product based pyramid schemes’ may I think be considered an illegal version of MLM.”

    Okay, but when I look at the FTC guidelines, I can’t find one MLM that isn’t a “product-based pyramid scheme.” I can always look at the top earner and see that he makes more money from his downline than from his sales to non-representatives of the company. According to the FTC guidelines this would be a pyramid scheme. So I can’t seem to find a legal one.

    David from @thetruthaboutamway said “Incorrect. Commissions may be coming from sales of products to ostensible end users, but if the end users are purchasing out of illegitimate demand (ie because they think they’ll get rich doing it and convincing others to do it, or even more obvious incentives) then you don’t have a real sale to a real end user, and it’s just a cover for recruiting.”

    A retail sale defined by the FTC in many places as someone who is outside of the program (here is an example). If a representative has signed a distributor contract with the company, it is not a retail sale. MLMers argue this, but it is quite clear from what the FTC says. You may say that the FTC doesn’t necessarily make the law, and I would be willing to agree, but MLMers trying to say that the government organization protecting consumers is wrong are treading on thin ice. You never want to be on the side against consumer protection.

    David from @thetruthaboutamway said “They could be, but you need to provide some evidence for that extraordinary claim. Amway’s income disclosure shows for example that fewer than half of their registered members qualify as ‘active’ under a definition that includes them as active even if the attempt to do something once in a whole year. From Pokorny v Amway we know that fewer than 1 in 8 spend any significant money training materials or seminars (defined as over $100 over their lifetime as a distributor), yet from TEAM vs Quixtar we know more than half who register order products. Statistics from training organisations such as WWDB and N21 show that fewer than 1 in 10 even do the minimum recommended work (that’s work, not results) every month and BERR vs Amway showed the majority of sales was reorders and only 6% were selling products.”

    The claim that people are failing isn’t extraordinary. The churn rate in MLM is well-documented. If an MLM’s registered users are not “active” over the course of a year, the MLM should terminate membership. It doesn’t make sense to call them members at all. You can say that 1 in 8 don’t spend more than $100 in training, but I have to wonder about that. They don’t put gas in their car to go meeting? They don’t go to any of the annual conferences? If the number is so low, it is only because as many of 60-90% are churned out each year, meaning that most get out before they get sucked in.

    David from @thetruthaboutamway said “So clearly there are many people purchasing and repurchasing the products with little or no attempt to build a business – the statistics show this quite clearly. So does real world examples like myself, who bought Amway products as a distributor for more than a decade while doing nothing to build a business.”

    People not intending to build a business should never, under any circumstances, sign a distributor contact. The MLM can easily create a preferred customer program for these people. Even shady MLMs like LifeVantage does this. Their annual churn rate of distributors is 92%. Their annual churn rate of preferred customers is 95%. The product, Protandim, is billed as reducing or eliminating oxidative stress, which is relevant for a person’s entire life. So even when you have people who are supposedly not interested in the business, they aren’t interested in continually buying the product.

    At least the preferred customer system, allows one to determine who is a customer or a distributor. If an MLM doesn’t implement that very basic safeguard, it’s probably got something to hide… or to use your words is an obvious illegal pyramid scheme.

    David from @thetruthaboutamway said “P&T’s MLM show was full of nearly as many logical fallacies as their show on smoking. I enjoy much of their work but in some areas they really are clueless.”

    Maybe you want to give some examples to prove your point. I didn’t see any logical fallacies and I’m quite good at it as I’ve found dozens in this Tim Sales video.

    David from @thetruthaboutamway said “Are there people who try hard and fail? Sure, of course there is. Are there people who are only purchasing the products cause they think it will make them rich? Almost certainly.”

    Sure there are both. It is a strawman logical fallacy to imple that it is 100% in either place. The question is how many people of each are there.

    David from @thetruthaboutamway said “It’s a huge leap to go from that to assuming its the norm, especially when hard data (much of it independent) shows otherwise.”

    The hard data, such as the huge churn rate, doesn’t show otherwise.

    David from @thetruthaboutamway said “Neither does MLM, what you’ve stated simply isn’t true (at least not for legitimate MLMs). Take Amway again. We know from court cases that only 30% of *first-year* distributors renew (ie first year churn is 70%) – but we also know that more than 50% didn’t even place a product order after joining. In other words 60% of new distributors who actually ordered *did* renew. If you have a store and people who come in and don’t buy stuff stop coming in it doesn’t affect your sales much does it? Furthermore we know that second year renewal rates are more like 70% and that the majority of sales are from reorders.”

    This begs the question of why they’d join and not order a product. How many people get a Costco membership and never buy a product there? I can’t imagine it is that many. It certainly would be a shock if it were 70%. I would be pretty surprised if it were 10%. So clearly something is wrong in Amway-land. It sounds like you are saying that Amway isn’t a legitimate MLM because they too share that huge churn rate.

 

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