Get Rich Quix[tar] Charles C. Hoffmeyer Michigan Technological University Houghton, Michigan 49931 [email protected] December 4th, 2002 - R7

Abstract Advertised as a system to “get rich easy”, Quixtar makes high claims to convince prospects into signing on as Independent Business Owners (IBO’s). Such claims include the possibility to retire within 3 to 5 years, without selling and having no overhead costs. The problem with this system is that there are undisclosed ”system” expenses and most people must lose money in order for a few to recieve significant payments. This case focuses on numeric values in dynamic models (obtained from Quixtar/Amway/Alticor, current IBO’s, as well as past IBO’s) to create a cost-income analysis, as a means to determine profitability. Overall, most IBO’s employing the “system” operate at a net-loss until they reach the ‘platinum’ system level. A significant portion of the income above the Platinum level results from the sales of “Educational Materials” to their downline. In the long run, Quixtar appears to be a profitable venture – at the cost of ones ethical principles.

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1 1.1

Introduction What is Quixtar?

Quixtar is a multi-level-marketing e-commerce site specializing in the sale of consum products, available for use by members, clients and and Independent Business Owners (IBO’s). The company offers ‘significant’ discounts on the generic Amway branded items (Quixtar’s predecessor company), and ‘marginal’ discounts on name brand products through their partner stores. Both Quixtar and Amway are privately held by the parent company Alticor. What sets Quixtar apart from other online businesses is that a portion of the advertising cost associated with each purchase is returned to the IBO’s line which made the sale, in the form of a ‘bonus check’ at the end of the month. Clients receive no discount from suggested retail pricing. Members and clients do not receive any portion of the bonuses. People who you sponsor receive a portion of this revenue on their sales as well, which is automatically deducted from your bonus check.

1.2

How does it work?

Each Independent Business Owner is sponsored by another IBO affiliated with the Quixtar organization. Using the 9 - 6 - 3 system, each IBO is instructed to sign up at least 9 IBO’s under them, help 6 of them set up their own business and help those six each sign up 3 people to be taught how to ‘buy from themselves’. (Other lines use variants of this, such as the 6 - 3 - 2 system which works in the same manner) “Educational Materials” are optional reading, videos, seminars, and presentations. IBO’s who wish to be successful are “expected to spend on average $100 per month on education materials” [12]. Alticor does not require its IBO’s to purchase the materials, nor does it regulate the expense of education. Under most conditions, in order to sell such materials, an IBO must be at the Platinum level “...[which] means you are entering a new phase of the business” [10]. Quixtar profits are based on the number of points you earn through sales, both in the traditional manner and by ‘selling’ the products to your downline. Each product has a fixed amount of points associated with it. The number of points you earn in a given month is correlated with the percentage of the profit margin you will receive in your bonus. Various Quixtar lines of sponsorship ask that you show your dedication to the organization by maintaining a level between 100 and 300 points each month. Equation 1 indicates how much in sales of Amway products at retail cost must be 2

incurred to obtain this point significance. [7] Equation 2 indicates how much in sales of non-Amway products at retail cost must be incurred to obtain the same point significance [7]. 300pts = 716.43 Business V olume = $662.70 cost = $858.84 retail.1 (1) 300pts = 597.27 Business V olume = $1304.85 cost = $1539.75 retail.2 (2) The bonus you receive is a percentage of the profit margin (Business Volume). The percentage is determined by the number of points you have incurred for a given month. [see Figures and Statistics for more detailed information].

1.3

Why are people weary of Quixtar?

Many people believe Quixtar to be a pyramid scheme, as the people at the top of the system make a good amount of money, and those at the bottom are either losing money or nearly breaking even. A pyramid scheme is where a majority of the profits of the compensation scheme come from those participating in the compensation scheme. While it does take the form of a pyramid, it is technically an MLM – or Multi-Level Marketing system. A legal MLM lacks many key features of a pyramid scheme, including: • Does not charge ‘expensive’ fees to join. [2] • Pays no commissions or bonuses unless products are sold. [2] • No on-hand inventory requirement. [2] • Money-back guarantee. [2] • At least 70% of the products are sold to those outside the compensation system. (FTC 30-70 rule) Even as an MLM, the Federal Trade Commission gives us this warning: 1 2

Reference [7] values used, multiplied by 3 to obtain 300 points. Reference [7] values used, multiplied by 3 to obtain 300 points.

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Be skeptical if a distributor tells you that for the price of a “start-up kit” of inventory and sales literature - and sometimes a commitment to sell a specific amount of the product or service each month - you’ll be on the road to riches. Often consumers spend a lot of money to ”build their business” by participating in training programs, buying sales leads or purchasing the products themselves. Too often, these purchases are all they ever see for their investments. [3] Another reason that many people feel weary of signing on with Quixtar is that they feel mislead. One of the duties an IBO has is to “Show the Plan” as often as possible to convince new people to sign up so they can “Get rich easy”! These presentations are purely emotional. Solid facts are left out of the discussion. Instead a 45 minute motivational speech is given, in the form of a presentation, which includes degrading aspects of standard living, including: retirement plans, savings plans, investments, education, and 40-hour work weeks. They even go as far as saying that older people are being forced to take in foster children to supplement retirement income, because “its just not enough”. [12] During this presentation, the presenter told a cellular customer support representative that “in as little as two years, you could quit your job and be travelling the country in a Winnebago with your son”. [12] Quixtar documentation states that this is pretty infeasible: “The Average Monthly Gross Income for “Active” IBOs was $115” [13]. It goes on to indicate that Gross Income does not include the “significant business expenses, mostly discretionary, that may be greater in relation to income in the first years of operation” [13]. Based on these facts from Quixtar’s own documentation, such levels of success seem highly unlikely. Throughout the showing of the plan, many half-truthes are given. They make claims that allude to Microsoft, Compaq and IBM all voluntarily signing a non-competition agreement, but fail to indicate that it is because Microsoft, Compaq and IBM are all paid for maintaining their systems in close proximity to confidential data/trade secrets, and that such agreements are common in the industry when working closely with a given company. People may be wary in this type of system, as they have seen many businesses with the same distribution model fail time after time over the last few years: Amazon has been losing money for years, WebVan went out of business because the model was too costly, NetFlix could not deliver quickly enough to remote locations (although it is going strongly in large cities) and after the dot-bomb, investors are much more nervous about becoming part 4

of a new venture.

1.4

Why do People Join?

There are two main types of people that are attracted to the Quixtar system: those looking to supplement their income, and those looking for a way out of their current situation. The first type typically has an ample savings at their disposal and can afford to lose money for the first couple years as being part of the MLM program. They have a goal of creating their own business to pass along to their children and/or create a means for achieving a specific goal (yearly vacations, retirement fund, etc..) Their day jobs are usually of a professional nature, and have significant contacts to expand the venture (“On average, it takes 200 people to find 30 people willing to put the effort into making “the big money”. ” [12]). Risk is understood, but People of this group do not usually buy into MLM’s (but are in the best position to do so). Those who do effectively make larger profits for absorbing the loss early on. The other type is the group of people which are not comfortable with their life. They may be in a dead-end job, dread going into work, be single parents who want more for their children, unemployed, ill, or in any number of other conditions. They are willing to try anything to get out of their current position, and will be very susceptible to the use of pathos. People in this group are either not concerned with the risk and/or not aware of its possibility, and willingly accept the baseless data given to them by their future sponsor. The high hopes of success spawn off an informal ‘need’ to be part of the program. Those in this group are in the worst position to buy into an MLM, as they cannot afford the sustained loss over long term.

1.5

Ethics, Risk and Quixtar

Documentation does not indicate that Quixtar instructs their IBO’s to actively seek (or target) specific groups of people, but it seems that does occur. After a meeting, a few IBO’s wanted to see the sponsor “at work” collecting prospects. He responded by asking what locations are nearby “where lots of children are around” to find single parents to show the plan. [12] This has a heavy ring of unethical behavior (depending on your point of view). The argument has been made by many IBO’s saying that they are only trying to help the people who need it most, and reach out to those who will be the most interested in the system. While this is possible, these people are never made aware of the risk involved. Instead they are given canned

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statements, like “What risk, its only $125? Isn’t it worth $125 to make ‘the big money’ ?” [12] Some IBO’s will even offer to front the $125 cost to show how great the program is, and so there is ‘no risk’. Be aware that by becoming part of this program, you are liable for any claim that you or anyone makes in front of you about the program – if you know it to be false or not! As such, before deciding to join Quixtar one should look into their own ethical and moral beliefs to determine if this is the right business to get involved in. Also, become well aware of your legal responsibilities. A lawsuit from someone who lost $6,000 per year for 2 years will cost more than that $125 sign-up fee.

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Figures and Statistics

2.1

Data from Quixtar/Amway/Alticor

SA-4400 of 2001 [13]: • 66% of IBOs are considered Active. • Average monthly gross income for Active IBOs was $115 • Average retail markup is 33% • Business Volume (BV) for standard products is 88% of retail ;Store for More’ products is 37% of retail MONTHLY POINTS 7500+ 6000 4000 2500 1500 1000 600 300 100

BONUS (% OF BV) 25% 23 21 18 15 12 9 6 3

Table 1: Performance Bonus Schedule Quixtar’s ‘900K’ Advertisement [16]: (fine print, expanded for all IBO’s [was 41%]) LEVEL Q12 Qualifier Emerald Founder’s Emerald Diamonds Founder’s Diamond EDC and UP Founders EDC and UP

PERCENT OF ALL IBOs 5.5227% 1.4268% 0.6933% 0.3161% 0.0134% 0.1840% 0.0393%

Table 2: Percentage of ALL IBO’s at various Levels (given table) 7

LEVEL Q12 Qualifier Emerald Founder’s Emerald Diamonds Founder’s Diamond EDC and UP Founders EDC and UP

AVG GROSS INCOME $62537 $73793 $87881 $136322 $173105 $442186 $977334

Table 3: Earnings Chart at Various Levels Amway Information Center, Question 24 [1]: Less than 10% use for primary income About 45% of US Direct Sellers earn 0-$500 per year About 45% of US Direct Sellers earn 0-$5000 per year About 3% of US Direct Sellers earn more than $50000 per year About 0.6% of US Direct Sellers earn more than $100000 per yr.

2.2

Information from Outside Sources

Quixtar/Amway Business Analysis [11]: Alticor reports 9.1% sales gain for 2002. Asian markets make up 66% of 2002 gain. 2002 North American MLM sales were at $901 million. 20% sales increase, attributed to Amway transition. Approx. 500,000 IBO’s were active in 2002. $252 Million was paid out in bonuses. Each IBO store moving $200 per month, would generate ... $675 / year. Almost 50% of North American distributors do not renew each year.

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IBO Business Model Profitability Calculator [8]: Typical Expenses [Estimated]: SOT Tape = $26 = $6.5 * 4 Go Getter Tape = $26 Voice Messaging = $25 Open Meetings = $20 = $5 * 4 Rallies = $10 Book of Month = $8 Major Functions = $400 Calculation Basis [Estimated]: Quixtar pays out 28% of Sales Profits from members are 15% Retail margins on client purchases average 25% 25% to 34% of Quixtar payout goes to ‘below platinum’ 66% to 75% of Quixtar payout goes to ‘above platinum’ Mileage calculated at $0.32 per mile. Amway: The Untold Story – Expenses [6]: (Expenses for a married ‘Amway’ couple) 9

COST 32 24 25 40 10 5 50 50 30 50 165 491

EXPENSE TYPE Weekly Open Meetings ($4 x 2 people x 4 weeks) Monthly Seminary and Rally ($6 x 2 people x 2 sessions) Amvox Voicemail Standing order Tapes ($6.36 x 6) Books (averaged for a month) Cost of video Tapes (averaged for a month) Difference in cost for purchasing from yourself Gas / Travel Expense Eat-Out Expense Long Distance Expense Cost of 4 functions averaged for monthly expense ($500 per function) TOTAL EXPENSES PER MONTH Table 4: Expenses for a ‘core’ married couple per month.

How do I do a 100? [7]: 100 Points, Random sampling of products from the Amway cleaning, personal care, and ‘other categories’. Equations 1 and 2 in Section 1.2 are derived from this resource. IBOA Answers and Rebuttal, Question 1 [9]: The IBOs at platinum and above might share in $20 of bonus money on $200 in sales. The $50 in tape sales however would generate approximately $44 in monthly profit to this upline group. Continuous Education costs would still exceed 10% of the gross profit.

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COST 6.90 7.25 10.50 8.75 9.35 7.65 6.75 7.25 14.45 11.00 7.40 7.00 54.55 25.65 4.40 7.20 4.95 16.45 15.45 20.95 5.50 3.95 7.75 271.05 8.13

PRODUCT AIR FRESH GREEN MED GEL BUG AND TAR REMOVER DURASHINE FLOOR POLISH D-15 INSECT REPELLENT BOWL CLEANER 2 (GRANULAR) BUFF UP FURNITURE POLISH LOC REG SILVER POL AND CLEANER SA8 PLUS DETERGENT ALL FABRIC BLEACH EXTRA PAIN RELIEF TAB ANTACID TABLETS X-TRA FOOD SUPP DOUBLE X FRUIT SQUEEZE DRINK ORANGE DETER STICK DEODORANT DETER DEODORANT SOAP NAT SHWR HAND / BODY LTN CLAR ASTRINGENT TONER CLARIFYING CLEANSING GEL CLARIFYING MOISTURIZER MOIST SHAMPOO GLISTER FLUORIDE TTHPST GLISTER ORAL RINSE MINT RETAIL TOTAL SHIPPING / HANDLING

Table 5: Table of Items Required to Reach 100 Points.

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3 3.1

Analysis using Stock Diagrams Average Case

The average case scenario assumes that the only income is the ”Average Monthly Gross Income of $115” (defined by SA-4400), and expenses are reduced to reflect the IBO’s reaction towards purchasing “education” during a period of loss. By using the average income, the assume is that over a years time loss and gain of downline IBO’s will level to an even amount, leaving upline income equal. Education materials is set to $55, reduced from the estimate of $100 per month. Education materials includes books, audio tapes, and video tapes. No major functions are attended, as the averaged monthly expense would outweigh entire gross income. Four weekly “open” meetings were attended, at cost of $4 each, and two rallies/seminars were attended at $6 each. Travel to and from seminars, rallies, open meetings, and plan showings is estimated at $50 per month. In this scenario, the IBO had only retail sales from clients (instead of outof-pocket product purchases) to minimize expenses, under the assumption that outside sales maximize profit margin.

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From this system, the following data can be derived: TOTAL MONTHLY INCOME: TOTAL MONTHLY EXPENSE: TOTAL MONTHLY NET: x 60 MONTHS (5 Years) TOTAL NET OVER 5 YEARS:

$115.00 $147.58 -$32.58 -$1954.80

Over time, it may be realized that for this scenario that income is not dependent on the level of education, downline, or meetings attended but rather on client sales. While possible to drop all expenses [with exception of the yearly IBO Fee] and turn a net income, about 50% of the IBO’s instead choose to leave the program during their first years. By dropping all expenses, the figures look better – but in most cases, the IBO will lose the support of its sponsor for not “...stick[ing] with the system” [12]:

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Net Income is accumulative for all graphs; Reflects total income gained or lost at +x time after start.

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This expense decrease is only available for IBO’s operating on the retail model, rather than the pyramid income system. Assistance from the sponsors for training and positive motivation is a large requirement for success in the system. Retail sales are only impacted by the number of products the clients purchase. Data derived from the low-expense diagram is as follows: TOTAL MONTHLY INCOME: TOTAL MONTHLY EXPENSE: TOTAL MONTHLY NET: x 60 MONTHS (5 Years) TOTAL NET OVER 5 YEARS:

$115.00 $10.42 $104.58 $6274.80

While this is a good supplemental income, it falls short of the claims that the IBO can quit their job and retire in 2 to 5 years. 14

3.2

Worst Case

The worst case scenario is based on the foreseeable “worst” conditions that could occur as an IBO in this program. All standard expenses come from Section 2.2 of this study, and have been reduced for a single person (instead of a married couple). It assumes that the Federal Trade Commission rules are being followed; A maximum of 30% can come from downline sales, and the remaining 70% must come from outside sources. For this case there are no client sales, so the IBO must purchase the remaining amount as an out-of-pocket expense. As quoted from the Amway website, 50% of IBO’s leave each month. This case makes many assumptions, and uses independently chosen values as filler for unknown values: income from downline is 3% of the total downline ‘Business Volume’, plan is shown 15 times per month, and 15% acceptance rating for obtaining IBO’s as a result of the plan showing. While a true “worst case scenario” would have the plan shown no times and a zero percent new IBO acceptance rating, it would not have been realistic. IBO’s and their sponsors make every effort to show the plan to as many people as possible, and an estimated low would be a small amount of random people with low acceptance.

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From these graphs, we can see that there is an average income of $32.23 per month from downline IBO’s, and the net out-of-pocket expense (after revenue-sharing) was $67.70. A total of 2.25 new IBO’s were added each month, and 50% of all IBO’s went inactive or left the program during a given month. Total average expenses for each month were $525.78. The average “Gross Income” per month for this worst case scenario was $99.93. This is comparable to the Quixtar SA-4400 figure of $115.00 per month for the average case. AVERAGE MONTHLY INCOME: AVERAGE MONTHLY EXPENSE: AVERAGE MONTHLY NET: x 60 MONTHS (5 Years) AVERAGE NET OVER 5 YEARS:

$99.93 $525.78 -$425.85 -$25551.00

This case shows that purchasing from yourself to meet the legal requirements does not pay off in the long run. It also shows us that even if we had clients purchasing the products, this scenario would not have been profitable as the expense was larger than the income by four-fold.

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3.3

Best Case

As we saw in the last case, purchasing from one’s self does not lead to a profitable business venture, and if the downline is not maintained properly it can not work properly. This case joins the average case and the positive aspects of the worst case. It is assumed that the IBO uses the “Education” obtained from the seminars and other materials to create a profitable retail business. At the same time, the IBO begins to expand their downline, by showing the plan once a day. The IBO is very convincing and has a 90% success rate in getting the signed contract. It also assumes that everyone is content with the program and only has a 10% withdrawal rate per month. The standard expenses from Section 2.2 are used for this case as well. No out-of-pocket purchases take place. We make the assumption that as the downline gets larger, the average monthly intake should get larger as well. To do this, ‘Level increase in BV’ increases the Average ‘downline BV’ by ((Number in Downline/25)*100) to compensate.

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Of interest to note is that there is a net loss for the first 1/2 year in this case. This is due to the downline not being fully established, and retail sales not outperforming expenses. As both of these mature, the income generated expands in an exponential manner. As IBO upline and downline profit were unknowns for this case and the last, changes to these figures may result in significant differences. Overall comparison values are as follows: AVERAGE MONTHLY INCOME: AVERAGE MONTHLY EXPENSE: AVERAGE MONTHLY NET: x 60 MONTHS (5 Years) AVERAGE NET OVER 5 YEARS:

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$42500.00 $506.08 $42000.00 $2520000.00

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Conclusion

This study indicates that to receive optimal performance from the Quixtar system one must form the significant retail business portion before attempting to create a large downline. By doing so, many of the “standard” expenses can be ignored early on and ensures that out-of-pocket expenses are minimized to maximize the profit margin. One should clearly understand that purchasing products from their own IBO will not increase their profits, when taking the excess expense into account. Downline sales should be decreased instead to ensure at minimum the 70/30 rule can be followed without personal purchases. Each IBO should act with due diligence and independently verify any claim made by a sponsor, IBO, or other outside sources for accuracy and legality. Personal and standard business ethics should be followed in making any claim, and must include full disclosure of the risk involved. Understanding of legal fallout for not doing so is essential to the going concern of the organization. Quixtar is not necessarily a scam as many claim, as long as full disclosure is made. It does require significant involvement and discretionary risk for success to occur.

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Disclaimer

This study is not intended to be“pro-Quixtar”, nor is it “anti-Quixtar”. Rather its intent is to provide background information about the Quixtar/Amway/Alticor alliance, a collective of facts and figures from available resources, and analysis using systems diagramming. All opinions (expressed or implied) are those of the author and do not necessarily reflect those of Michigan Technological University. Data was collected from the websites of former IBO Scott Larsen, Amway, Quixtar, and the Federal Trade Commission. All uses and duplication of such data in this study are protected by the “Fair Use” clause of the US Copyright Act. Direct sponsor quotes are from a presentation that I personally attended, and is cited below. The last names of the presenters were not released, and are denoted with a ‘(x)’ in the citation. Quixtar representatives would not comment on the validity of any claim made. As such, before duplicating data and claims made, it should be independently verified. Quixtar Public Relations can be contacted at 616-787-7134, and the Federal Trade Commission can be reached at 202-326-2222.

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References [1] Amway Corporation. How much does the average Amway distributor earn? How much does the average Amway distributor earn?. Internet. WWW: http://www.amway.com/infocenter/questions/question25.asp [25 NOV 2002]. [2] Amway Corporation. Whats the difference between Amway and illegal pyramids? Whats the difference between Amway and illegal pyramids?. Internet. WWW: http://www.amway.com/infocenter/questions/question19.asp [25 NOV 2002]. [3] Federal Trade Commission. The Bottom Line about Multilevel Marketing Plans. FTC Consumer Alert: The Bottom Line about Multilevel Marketing Plans. Internet. WWW: http://www.ftc.gov/bcp/conline/pubs/invest/franchse.htm [30 NOV 2002] [4] Federal Trade Commission. Franchise and Business Opportunities. Franchise and Business Opportunities. Internet. WWW: http://www.ftc.gov/bcp/conline/pubs/invest/franchse.htm [30 NOV 2002]. [5] Federal Trade Commission. (26 NOV 2001) Freedom of Information Act Request No. 2002-152. Internet. WWW: http://www.ftc.gov/foia/quixtar.pdf [1 DEC 2002]. [6] Larsen, Scott. Amway: The Untold Story – Expenses. Amway: The Untold Story: Expenses. Internet. WWW: http://www.amquix.info/aus/toolexp.htm [25 NOV 2002]. [7] Larsen, Scott. How do I do a 100? Amway - How do I do a 100?. Internet. WWW: http://www.amquix.info/tosp/tosp30.html [25 NOV 2002]. [8] Larsen, Scott. IBO Business Model Profitability Calculator. IBO Calculator. Internet. WWW: http://www.amquix.info/ibo calculator.html [25 NOV 2002]. [9] Larsen, Scott. Question #1: Do higher pins make money from the sales of tapes, books, & tickets? Question #1. Internet. WWW: http://www.amquix.info/ibofactscom/question1.htm [25 NOV 2002].

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[10] Larsen, Scott. Quixtar/Amway Bonus Schedule - 1/2000. Quixtar/Amway Bonus Schedule - 1/2000. Internet. WWW: http://www.amquix.info/bonuses/bonuspage.html [25 NOV 2002]. [11] Larsen, Scott. Quixtar Amway Business Analysis. Quixtar Amway Business Analysis. Internet. WWW: http://www.amquix.info/ [25 NOV 2002]. [12] Norm (x). “The Plan” Presentation. Lake Odessa, MI. [23 NOV 2002]. [13] Quixtar. (2001) SA-4400. The Independent Business Ownership Plan . Internet. WWW: http://www.amquix.info/pdfs/sa4400.pdf [25 NOV 2002]. [14] Quixtar. (August 29, 2000). Quixtar Press Room: Quixtar Marks First Year in Business. Internet. WWW: http://cds.quixtar.com/010en/MQ/CDA/image/1,,9103,00.pdf [25 NOV 2002]. [15] Quixtar. (October 26, 2000). Quixtar Press Room: Quixtar IBOs Drive $518 Million in Sales. Internet. WWW: http://cds.quixtar.com/010en/MQ/CDA/image/1,,15315,00.pdf [25 NOV 2002]. [16] Quixtar. Print Advertisement. We’d like to make a point with you... $900,000 ... Get the Point? . Internet. WWW: http://www.amquix.info/britt slide.html [25 NOV 2002].

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