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Amway/Quixtar Series: A Poor Business Model

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This post will discuss just the business model in Quixtar as it is presented in a showing of “The Plan.” This is the primary reason I declined the first invitation I received to check out Amway in 1998.

The Plan

If you are unaware, it basically is supposed to work as follows. Any products sold by you to anybody (including yourself) will earn you, the IBO (Independent Business Owner – more on this loophole later) a small commission on the sale of the product. In addition to commission from your own sales, you will receive another commission (smaller, but still a commission) from all sales completed by your “downline,” which consists of the IBOs that you recruited to Quixtar. With no further thinking, this may sound like a fine plan, and it exists in other situations with great success (examples will come in a later post about other affiliate programs).

Now is where red flags went up for me, and for some reason, a lot of people don’t see the problem here. The products sold are supposedly things we all use every day. Here is a link to their products on their own website. Personally, I don’t use energy drinks, expensive filtration systems, or makeup (mostly because I’m a non-goth/emo guy). I know they used to sell laundry detergent in very concentrated form as well as other actual everyday products. The consumable products are typically sold in concentrated form, or bulk quantity. I think they may still have more everyday products, I’m not sure, but that’s not all that relevant to my point.

My point is simply the basic business principle of supply and demand. Quixtar presents all kinds of supply, but for products with little demand. And to make matters worse, they invite everybody to try and sell those products. Now we’ll do some chicken scratch figures here for a little analysis. We’ll use optimistic numbers for a best-case-scenario.

The Proposed Potential

Say that I get signed on with Quixtar. I show the plan 10 times a week and manage to get one new IBO per week on average. With each person I meet, I try to sell products to them as well as get them to join the cause, if you will. Perhaps I sell $60 of products to half of the people I meet with. This puts me at $300 in sales per week. I really don’t know what the commission scale is like, but let’s say they start at 10% (being optimistic here). That puts me grossing $30 per week from my own efforts. Now, if all of my downline members produce the same numbers, and I make 5% commission on those sales, that makes me an additional $15 per week from each of them. Now, if all the sales kept up, and all of the recruited IBOs kept up pace, this income would grow exponentially and it wouldn’t take too long for me to be pretty well off. Then, naturally, those below me would gradually become wealthy…right? Well, in a perfect consumerville world, this would work great. But we live in the real world.

The Reality of the Plan

So many factors knock this business plan down to make it become terribly ineffective. First off, let’s look at supply and demand. Could I sell $300 of products to my contacts every week? Maybe now and then, but people can only buy bulk and concentrated products every once in a while. Most people prefer buying from a one stop place like Wal Mart, or whatever market place they are used to shopping from. So naturally, this number will vary greatly week to week. Now, with each additional IBO I recruit, I lose a potential customer, as well as some of the common contacts I have with that IBO. That’s just human nature, some people will prefer to buy from someone else for any number of reasons. Another realistic problem is that the people who feel inclined to buy through Quixtar may also feel like trying to sell as well. That means they are the people joining. As you might now see, with Alticor’s huge inventory, local supply is essentially rising and rising, while the demand (per capita) is dropping at the same rate. So I still make some commission from their sales, but slightly less. You can see here that as my downline grows, my commissions struggle to grow due to the fact that more sales are coming from further down the line than from my own efforts. I believe it is this realization, among with many other factors (such as earning higher commission percentages based on total downline sales), that pushes IBOs to turn into mad recruiters, but that’s for another post.

So we’ve started out thinking of an endless, exponentially growing income that has no way to shrink in size over time. We’ve ended up with a commission structure that keeps shrinking due to our efforts to make more money by bringing more people into the fold. I’d begin to feel like a dog chasing its own tail.

A Typical Business Model Example

To change it up a bit, and introduce more of the model, I’ll approach the supply and demand problem from another perspective. I recently worked at a large furniture store. The store employs sales people to sell their inventory to customers. The sales people earn a commission from all of their sales and become successful when they gain a decent sized client basis with a group of customers returning to use their services. They make a decent living, only a handful of them make “the big bucks” but most are comfortable with their pay. The store only employs enough sales people to handle the customer load that the store carries. Naturally, the company spends a fair amount of money to train the sales people, as well as provide them with the means and equipment necessary to effectively sell furniture.

Applying Quixtar’s Model to the Store

Now let’s say that as they made a sale, each sales person offered a similar sales position to the customer. If every week, one sales person brought on one new associate, we’re looking at a 100% growth rate each week. Start with 30, then 60, then 120, then 240 after just one month.

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I’m going to throw this in, even though with logic applied, this could be the one equation that puts a stop to anybody thinking of joining Quixtar. I’m a bit of a math guy, so why not throw some actual math in here? At a growth rate that Quixtar promotes to its IBOs (basically get as many people in your downline as you can), the growth quickly gets out of hand. And for this example, I’m going to use 1 new recruit per person per month, instead of week. Okay, here goes, starting with 30 IBOs:

Months Number of IBOs
1 30
2 60
3 120
4 240
5 480
6 960
7 1,920
8 3,840
9 7,680
10 15,360
11 30,720
12 61,440
13 122,880
14 245,760
15 491,520
16 983,040
17 1,966,080
18 3,932,160
19 7,864,320
20 15,728,640
21 31,457,280
22 62,914,560
23 125,829,120
24 251,658,240
25 503,316,480
26 1,006,632,960
27 2,013,265,920
28 4,026,531,840
29 8,053,063,680

I stopped after 29 months, because by that time, with constant growth of one new recruit per IBO per month, the number of IBOs exceeds the current population of the entire Earth by more than one billion people. Even if this was one new IBO per year per person, after 30 years, the whole world would be involved in Quixtar, and society would utterly fail.
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Okay, back to the matter at hand. Now we’ve got 240 people who can sell furniture to their friends, walk in customers, or even themselves, and make a commission from the sale. Even though it’s a large furniture store with lots of inventory, it’s going to be a great struggle for every one of those sales people (with increasing competition each week) to make even a few sales.

How is this Plan for the Store Ownership?

We’ll stop there for a minute, and look at this plan not from the sales person’s perspective, but from the employer’s eyes. If they had to come up with training materials, insurance plans, desks, work schedules, and all the typical things provided to maintain effective sales people, it’s going to cost a fortune and really, be unattainable. However, let’s say they changed things up a bit so they could turn a profit, now that they’ve got an entire portion of the community trying to sell their furniture.

First off, let’s make all the sales people not employees, but every last one of them will be an owner of their own furniture business. Of course, that will just be a legal description, since we will continue to provide all the inventory and means to run our business, which is actually what they are claiming as their own business. This will free us up from providing an insurance plan, materials to perform business such as desks, office space, phone systems, and so on. We’ll still handle payroll because we are still making good money from each sale, while paying commissions to all the sales people. But we have a problem. The sales people aren’t going to do so well if they aren’t trained and motivated properly. Well, now that the sales people are technically not employed by us, we can actually sell them the training material. If they were employees, selling training material would be ridiculous (and possibly illegal, I’m not too sure on that one), but we can surely sell material to independent business owners! Now, we can’t require the training materials because each sales person “runs their own business,” so let’s hold rallies with motivational speakers who will get them excited to see the latest training materials so they can sell more and start making money! So now it looks like our only costs are that of a warehouse, but we are making the money of a warehouse and a store with hundreds, even thousands of sales people! If any of the sales people fall out, it’s no problem to us, we don’t have to pay severance or any type of 401k or anything. And finally, why not charge each sales person a recurring fee to be able to sell our products, because hey, why not?

Alright, true, that was much less detailed than it would really be, but hopefully you see where I’m going with this. That is roughly how Alticor (the parent company of Amway/Quixtar) makes money off of this plan, while each IBO struggles. It’s really an ingenious business plan for Alticor, since they don’t support their sales people at all, and any money going to to those sales people comes from income already generated by that particular person. They really can’t lose.

A Little Psychological Twist

I’m going to talk psychology later on, but I want to put a bit of it in here because it relates very much to this business model. Quixtar IBOs are constantly told that standard jobs, referred to as J-O-B (Just Over Broke), are set up for failure. Yes, they discredit the business model that so many companies have employed to become large enough to support thousands of families across the globe. IBOs are told that in a typical 9-5 job, all their efforts are only going to make the boss more wealthy. You work your butt off while your boss sits back in his chair and reaps the rewards of all your hard work. You have to be in at a set time each day while he’s out playing golf. They basically fuel hatred for the standard boss.

Now, when I look at the differences between standard business models and that of Quixtar, it seems the other way around to me. It sounds like Alticor is making all kinds of money from the efforts of the sales people, who are in turn very limited as to how much they can make. In addition to Alticor making money from your efforts, each person in your upline (those above you in recruitment) is making money from each of your sales. I understand that standard bosses could end up making more money from your efforts if a business does well due to your hard work, but it’s much less direct than how those above you make more money from your work in Quixtar. It’s laid out right before them that everyone above them will gain financially from their own efforts. Quixtar tells their IBOs exactly what is happening to them in Quixtar, but twists it so each IBO believes that it is not them in this horrible trap of making others more money, but the every day employee who is stuck.

Conclusion: A Poor Business Model

I hope this accurately and effectively teaches people about how the Quixtar business model works from the standpoint of making a living from being an IBO alone. To me, the likelihood of success is so minimal that I’ve never had to think twice about taking part in such an organization. Feel free to comment away. I realize I haven’t presented this without bias, but I’ve given my most honest opinion of how I see the effectiveness of the Quixtar business plan.

Comments (9)

You present an excellent case. However, from what I have been told, Quixtar intends to implement its famous “Chewbacca Defense.” And as you know this defense is infallible.

Haha awesome. That just does not make sense!

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Billy,

You’ve misunderstood the business model. The business model is *not* recruiting. Network marketing isn’t a business model per se – it’s a marketing strategy. You don’t make money through recruiting other folk, you make it through sales volume – exactly like any other product distribution business. Recruiting other sales folk is little different to expanding a store and recruiting sales staff to increase your sales volume.

It doesn’t matter if you’re talking Amway/Quixtar products or Ferraris, if everyone is selling your products, you won’t have any customers for your products. Ferrari can potentially saturate the market as well.

The reality is of course that it doesn’t happen. Not everyone wants a Ferrari, and even those that do don’t want one at the same time. And even fewer want to sell Ferrari’s.

Sales strategies can, and do, change depending on the state of the market. At present, the health & wellness market is increasing dramatically, and through A/Q we have access to some of the top-rated products in the category. As such, many groups that work with A/Q are having an increased focus on retailing of these products. 5 or 10 years ago, there was a huge interest in ECommerce and taking advantage of the internet, so there was a push to promote the fact we had an internet opportunity. 20 years ago there was renewed interest in environmentalism, so the environmentally friendly cleaning products were promoted.

Times change, strategies change. Just like any other business.

the truth about amway and quixtar

ibofightback, I see what you are saying, but I’m not sure you understood my point. In theory, your theory of making money through sales sounds nice, and by legal description (so as not to be defined a pyramid scheme, and thus illegal), that’s what IBOs do. But by necessity, they become more focused on recruiting than on product sales. I’ve seen it from every IBO I’ve known, and I know the seminars focus on recruiting, not on product sales. Why else would there be quotas on how many times to show the plan each week?

Question: Regarding MLM’s. Let’s say the product is cigarettes. Every recruit will puchase one to two cartons per week and everyone they recruit will do the same due to addiction. Will this model succeed?

How much are you required to pay to become a distributor?

Thank God! Someone had the sanity to post some REAL business logic when applied to the ‘network marketing’ world of businesses. As your post explains, those businesses simply make money off their hapless slave servant ‘business owners’. There’s a similar model in franchising that I think you’d find fascinating. The basic premise is that you sell and entire franchise, not for a few hundreds of dollars, but a few hundred THOUSANDS when you know the business model doesn’t work. Then when your franchisee fails, you agree to ‘resell’ the franchise to another potential franchisee and make your same hundreds of thousands again. It’s called ‘churning’ in the franchise world. I unfortunately discovered one of these traps 2 weeks too late and lost about $60k in it (1-800-Radiator). UPS Store and Quiznos have been some of the poster childs for churning. Check it out as I think you’d find them a fun read.

Wow, I haven’t heard of churning before. Sorry to hear about your loss! I’ll read up on it for sure.

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