I was at a Barnes & Noble in Denver on my way to Wyoming to see the eclipse when I ran into some people who were trying to recruit me into a pyramid scam. This happened on two separate occasions on the same day, but I will summarize.
These people lurk in the business section of the bookstore. They dress in business clothes, and they love Robert Kiyosaki’s “Rich Dad Poor Dad”. They talk about how they are entrepreneurs and that they have millionaire mentors that taught them how to be successful. But they will be super vague and won’t actually tell you what they do. It wasn’t until later that I found out they work for Amway.
They read a lot business books and go to seminars, but they entire time, my spider sense was tingling. There was just one thing that was bugging me the whole time: Where are the customers?
Where Are the Customers?
If this product is so great, if this business model is so great, where are all of the happy satisfied customers? (There are none.) The problem basically boils down to supply and demand.
At first this seems like a really good idea. You have an online store where you can sell exclusive products, and on top of that, if you recruit someone to also sell the product, you can make a commission on the total volume of sales.
But here’s the problem: supply has doubled, but demand has stayed the same. Commission has increased for people at the top of the pyramid, but for everyone else, profit margins have actually decrease because of price competition between distributors.
After a certain point, the number of people selling products will surpass the number of people buying products. At this point, the market is completely saturated, and profit goes to zero. No one is actually able to sell their product for the suggested retail price. Instead, the only people making money are the people at the top of the pyramid, who collect a commission on the total sales volume of the entire pyramid.
Drinking Your Own Kool-Aid
As you have probably guessed by now, there are no customers in a pyramid scam. The distributors are the customers. They expect you to drink your own Kool-Aid. They expect you to shop exclusively from Amway so you can get the “whole sales discount” and also so you can drive up sales volume in order to qualify for the commission. They want you to stop using Walmart and Amazon and just use Amway exclusively.
There are no customers. There is no profit. More importantly, any potential customers will eventually join the system in order to buy products from Amway at the factory price. Customers become distributors. No one makes money by selling. You only make money by recruiting. Only people at the top have enough total volume to qualify for commission.
Another incentive for recruiting is to lock in your customer into a position underneath you in the pyramid. If you’re simply selling to them, it is possible for another distributor to persuade them to join their branch of the pyramid. When that happens all of that person’s purchase volume and sales commission goes to the person whose branch they are under.
Doing the Math
Which brings me to my next point. At what point does a pyramid scam collapse under its own weight?
Amway’s revenue in 2016 was 8.8 billion USD. That is equal to $733 million per month.
- Walmart = 485.9 billion USD (2016)
- Amazon = 136 billion USD (2016)
Lets assume we follow the model that they suggest, where you recruit 6 people, they recruit 6 people, and so on. Each distributor is expected to spend $300 a month and find a customer to spend $150 a month.
From this, we can calculate that entirety of the Amway pyramid scam is less than 8 layers deep. There are only several million customers, and most of the money is spent by distributors for self-use.
Of course, even this model is ridiculous. No normal person would spend $300 a month on health products. Even $150 a month seems like a lot. Maybe spending money on inventory to sell for a profit makes sense, but does spending $3600 a year on consumables sound like a good idea to you?