Get Rich Quix[tar] - CiteSeerX

Get Rich Quix[tar]

Charles C. HoffmeyerMichigan Technological University

Houghton, Michigan 49931

[email protected]

December 4th, 2002 - R7

Abstract

Advertised as a system to “get rich easy”, Quixtar makes highclaims to convince prospects into signing on as Independent BusinessOwners (IBO’s). Such claims include the possibility to retire within 3to 5 years, without selling and having no overhead costs. The prob-lem with this system is that there are undisclosed ”system” expensesand most people must lose money in order for a few to recieve signifi-cant payments. This case focuses on numeric values in dynamic mod-els (obtained from Quixtar/Amway/Alticor, current IBO’s, as well aspast IBO’s) to create a cost-income analysis, as a means to determineprofitability. Overall, most IBO’s employing the “system” operate ata net-loss until they reach the ‘platinum’ system level. A significantportion of the income above the Platinum level results from the salesof “Educational Materials” to their downline. In the long run, Quix-tar appears to be a profitable venture – at the cost of ones ethicalprinciples.

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1 Introduction

1.1 What is Quixtar?

Quixtar is a multi-level-marketing e-commerce site specializing in the sale ofconsum products, available for use by members, clients and and IndependentBusiness Owners (IBO’s). The company offers ‘significant’ discounts onthe 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 ofthe advertising cost associated with each purchase is returned to the IBO’sline which made the sale, in the form of a ‘bonus check’ at the end of themonth. Clients receive no discount from suggested retail pricing. Membersand clients do not receive any portion of the bonuses. People who yousponsor receive a portion of this revenue on their sales as well, which isautomatically deducted from your bonus check.

1.2 How does it work?

Each Independent Business Owner is sponsored by another IBO affiliatedwith the Quixtar organization. Using the 9 - 6 - 3 system, each IBO isinstructed to sign up at least 9 IBO’s under them, help 6 of them set uptheir own business and help those six each sign up 3 people to be taughthow to ‘buy from themselves’. (Other lines use variants of this, such as the6 - 3 - 2 system which works in the same manner)

“Educational Materials” are optional reading, videos, seminars, and pre-sentations. IBO’s who wish to be successful are “expected to spend on av-erage $100 per month on education materials” [12]. Alticor does not requireits IBO’s to purchase the materials, nor does it regulate the expense of edu-cation. Under most conditions, in order to sell such materials, an IBO mustbe at the Platinum level “...[which] means you are entering a new phase ofthe business” [10].

Quixtar profits are based on the number of points you earn throughsales, both in the traditional manner and by ‘selling’ the products to yourdownline. Each product has a fixed amount of points associated with it. Thenumber of points you earn in a given month is correlated with the percentageof the profit margin you will receive in your bonus. Various Quixtar linesof sponsorship ask that you show your dedication to the organization bymaintaining a level between 100 and 300 points each month. Equation1 indicates how much in sales of Amway products at retail cost must be

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incurred to obtain this point significance. [7] Equation 2 indicates howmuch in sales of non-Amway products at retail cost must be incurred toobtain 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 Vol-ume). The percentage is determined by the number of points you haveincurred for a given month. [see Figures and Statistics for more detailedinformation].

1.3 Why are people weary of Quixtar?

Many people believe Quixtar to be a pyramid scheme, as the people atthe top of the system make a good amount of money, and those at thebottom are either losing money or nearly breaking even. A pyramid schemeis where a majority of the profits of the compensation scheme come fromthose participating in the compensation scheme. While it does take the formof 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 compensationsystem. (FTC 30-70 rule)

Even as an MLM, the Federal Trade Commission gives us this warning:1Reference [7] values used, multiplied by 3 to obtain 300 points.2Reference [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 sometimesa commitment to sell a specific amount of the product or serviceeach month - you’ll be on the road to riches. Often consumersspend a lot of money to ”build their business” by participating intraining programs, buying sales leads or purchasing the productsthemselves. Too often, these purchases are all they ever see fortheir investments. [3]

Another reason that many people feel weary of signing on with Quixtaris that they feel mislead. One of the duties an IBO has is to “Show thePlan” as often as possible to convince new people to sign up so they can“Get rich easy”! These presentations are purely emotional. Solid facts areleft out of the discussion. Instead a 45 minute motivational speech is given,in the form of a presentation, which includes degrading aspects of standardliving, including: retirement plans, savings plans, investments, education,and 40-hour work weeks. They even go as far as saying that older peopleare 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 supportrepresentative that “in as little as two years, you could quit your job andbe travelling the country in a Winnebago with your son”. [12] Quixtardocumentation states that this is pretty infeasible: “The Average MonthlyGross Income for “Active” IBOs was $115” [13]. It goes on to indicate thatGross Income does not include the “significant business expenses, mostlydiscretionary, that may be greater in relation to income in the first years ofoperation” [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. Theymake claims that allude to Microsoft, Compaq and IBM all voluntarily sign-ing a non-competition agreement, but fail to indicate that it is because Mi-crosoft, Compaq and IBM are all paid for maintaining their systems in closeproximity to confidential data/trade secrets, and that such agreements arecommon in the industry when working closely with a given company.

People may be wary in this type of system, as they have seen manybusinesses with the same distribution model fail time after time over the lastfew years: Amazon has been losing money for years, WebVan went out ofbusiness because the model was too costly, NetFlix could not deliver quicklyenough to remote locations (although it is going strongly in large cities) andafter the dot-bomb, investors are much more nervous about becoming part

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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 outof their current situation.

The first type typically has an ample savings at their disposal and canafford to lose money for the first couple years as being part of the MLMprogram. They have a goal of creating their own business to pass alongto their children and/or create a means for achieving a specific goal (yearlyvacations, retirement fund, etc..) Their day jobs are usually of a professionalnature, 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 donot usually buy into MLM’s (but are in the best position to do so). Thosewho do effectively make larger profits for absorbing the loss early on.

The other type is the group of people which are not comfortable withtheir life. They may be in a dead-end job, dread going into work, be singleparents who want more for their children, unemployed, ill, or in any numberof other conditions. They are willing to try anything to get out of theircurrent position, and will be very susceptible to the use of pathos. Peoplein this group are either not concerned with the risk and/or not aware ofits possibility, and willingly accept the baseless data given to them by theirfuture sponsor. The high hopes of success spawn off an informal ‘need’ tobe part of the program. Those in this group are in the worst position to buyinto 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 ac-tively 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” collectingprospects. He responded by asking what locations are nearby “where lots ofchildren are around” to find single parents to show the plan. [12] This hasa heavy ring of unethical behavior (depending on your point of view).

The argument has been made by many IBO’s saying that they are onlytrying to help the people who need it most, and reach out to those who willbe the most interested in the system. While this is possible, these peopleare 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 ‘thebig money’?” [12]

Some IBO’s will even offer to front the $125 cost to show how great theprogram is, and so there is ‘no risk’. Be aware that by becoming part of thisprogram, you are liable for any claim that you or anyone makes in front ofyou about the program – if you know it to be false or not!

As such, before deciding to join Quixtar one should look into their ownethical and moral beliefs to determine if this is the right business to getinvolved in. Also, become well aware of your legal responsibilities. A lawsuitfrom someone who lost $6,000 per year for 2 years will cost more than that$125 sign-up fee.

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2 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 ;Storefor More’ products is 37% of retail

MONTHLY POINTS BONUS (% OF BV)7500+ 25%6000 234000 212500 181500 151000 12600 9300 6100 3

Table 1: Performance Bonus Schedule

Quixtar’s ‘900K’ Advertisement [16]:(fine print, expanded for all IBO’s [was 41%])

LEVEL PERCENT OF ALL IBOsQ12 Qualifier 5.5227%Emerald 1.4268%Founder’s Emerald 0.6933%Diamonds 0.3161%Founder’s Diamond 0.0134%EDC and UP 0.1840%Founders EDC and UP 0.0393%

Table 2: Percentage of ALL IBO’s at various Levels

(given table)

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LEVEL AVG GROSS INCOMEQ12 Qualifier $62537Emerald $73793Founder’s Emerald $87881Diamonds $136322Founder’s Diamond $173105EDC and UP $442186Founders EDC and UP $977334

Table 3: Earnings Chart at Various Levels

Amway Information Center, Question 24 [1]:Less than 10% use for primary incomeAbout 45% of US Direct Sellers earn 0-$500 per yearAbout 45% of US Direct Sellers earn 0-$5000 per yearAbout 3% of US Direct Sellers earn more than $50000 per yearAbout 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 * 4Go Getter Tape = $26Voice Messaging = $25Open Meetings = $20 = $5 * 4Rallies = $10Book of Month = $8Major Functions = $400

Calculation Basis [Estimated]:Quixtar pays out 28% of SalesProfits 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)

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COST EXPENSE TYPE32 Weekly Open Meetings ($4 x 2 people x 4 weeks)24 Monthly Seminary and Rally ($6 x 2 people x 2 sessions)25 Amvox Voicemail40 Standing order Tapes ($6.36 x 6)10 Books (averaged for a month)5 Cost of video Tapes (averaged for a month)50 Difference in cost for purchasing from yourself50 Gas / Travel Expense30 Eat-Out Expense50 Long Distance Expense165 Cost of 4 functions averaged for monthly expense ($500 per function)491 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, per-sonal 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 $200in sales. The $50 in tape sales however would generate approximately $44in monthly profit to this upline group. Continuous Education costs wouldstill exceed 10% of the gross profit.

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COST PRODUCT6.90 AIR FRESH GREEN MED7.25 GEL BUG AND TAR REMOVER10.50 DURASHINE FLOOR POLISH8.75 D-15 INSECT REPELLENT9.35 BOWL CLEANER 2 (GRANULAR)7.65 BUFF UP FURNITURE POLISH6.75 LOC REG7.25 SILVER POL AND CLEANER14.45 SA8 PLUS DETERGENT11.00 ALL FABRIC BLEACH7.40 EXTRA PAIN RELIEF TAB7.00 ANTACID TABLETS X-TRA54.55 FOOD SUPP DOUBLE X25.65 FRUIT SQUEEZE DRINK ORANGE4.40 DETER STICK DEODORANT7.20 DETER DEODORANT SOAP4.95 NAT SHWR HAND / BODY LTN16.45 CLAR ASTRINGENT TONER15.45 CLARIFYING CLEANSING GEL20.95 CLARIFYING MOISTURIZER5.50 MOIST SHAMPOO3.95 GLISTER FLUORIDE TTHPST7.75 GLISTER ORAL RINSE MINT271.05 RETAIL TOTAL8.13 SHIPPING / HANDLING

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

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3 Analysis using Stock Diagrams

3.1 Average Case

The average case scenario assumes that the only income is the ”AverageMonthly Gross Income of $115” (defined by SA-4400), and expenses arereduced to reflect the IBO’s reaction towards purchasing “education” duringa period of loss. By using the average income, the assume is that over ayears 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 permonth. Education materials includes books, audio tapes, and video tapes.No major functions are attended, as the averaged monthly expense wouldoutweigh entire gross income. Four weekly “open” meetings were attended,at cost of $4 each, and two rallies/seminars were attended at $6 each. Travelto and from seminars, rallies, open meetings, and plan showings is estimatedat $50 per month.

In this scenario, the IBO had only retail sales from clients (instead of out-of-pocket product purchases) to minimize expenses, under the assumptionthat outside sales maximize profit margin.

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From this system, the following data can be derived:

TOTAL MONTHLY INCOME: $115.00TOTAL MONTHLY EXPENSE: $147.58TOTAL MONTHLY NET: -$32.58x 60 MONTHS (5 Years)TOTAL NET OVER 5 YEARS: -$1954.80

Over time, it may be realized that for this scenario that income is notdependent on the level of education, downline, or meetings attended butrather on client sales. While possible to drop all expenses [with exception ofthe yearly IBO Fee] and turn a net income, about 50% of the IBO’s insteadchoose 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 thesystem” [12]:

3Net Income is accumulative for all graphs; Reflects total income gained or lost at +xtime after start.

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This expense decrease is only available for IBO’s operating on the retailmodel, rather than the pyramid income system. Assistance from the spon-sors for training and positive motivation is a large requirement for successin the system. Retail sales are only impacted by the number of products theclients purchase.Data derived from the low-expense diagram is as follows:

TOTAL MONTHLY INCOME: $115.00TOTAL MONTHLY EXPENSE: $10.42TOTAL MONTHLY NET: $104.58x 60 MONTHS (5 Years)TOTAL NET OVER 5 YEARS: $6274.80

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

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3.2 Worst Case

The worst case scenario is based on the foreseeable “worst” conditions thatcould occur as an IBO in this program.

All standard expenses come from Section 2.2 of this study, and havebeen reduced for a single person (instead of a married couple). It assumesthat the Federal Trade Commission rules are being followed; A maximum of30% can come from downline sales, and the remaining 70% must come fromoutside sources. For this case there are no client sales, so the IBO mustpurchase the remaining amount as an out-of-pocket expense. As quotedfrom the Amway website, 50% of IBO’s leave each month.

This case makes many assumptions, and uses independently chosen val-ues as filler for unknown values: income from downline is 3% of the totaldownline ‘Business Volume’, plan is shown 15 times per month, and 15% ac-ceptance rating for obtaining IBO’s as a result of the plan showing. Whilea true “worst case scenario” would have the plan shown no times and a zeropercent new IBO acceptance rating, it would not have been realistic. IBO’sand their sponsors make every effort to show the plan to as many people aspossible, and an estimated low would be a small amount of random peoplewith low acceptance.

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From these graphs, we can see that there is an average income of $32.23per month from downline IBO’s, and the net out-of-pocket expense (afterrevenue-sharing) was $67.70. A total of 2.25 new IBO’s were added eachmonth, and 50% of all IBO’s went inactive or left the program during agiven month. Total average expenses for each month were $525.78. Theaverage “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 forthe average case.

AVERAGE MONTHLY INCOME: $99.93AVERAGE MONTHLY EXPENSE: $525.78AVERAGE MONTHLY NET: -$425.85x 60 MONTHS (5 Years)AVERAGE NET OVER 5 YEARS: -$25551.00

This case shows that purchasing from yourself to meet the legal require-ments does not pay off in the long run. It also shows us that even if we hadclients purchasing the products, this scenario would not have been profitableas 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 aprofitable business venture, and if the downline is not maintained properlyit can not work properly. This case joins the average case and the positiveaspects of the worst case. It is assumed that the IBO uses the “Education”obtained from the seminars and other materials to create a profitable retailbusiness. At the same time, the IBO begins to expand their downline, byshowing 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 iscontent 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. Noout-of-pocket purchases take place.

We make the assumption that as the downline gets larger, the averagemonthly intake should get larger as well. To do this, ‘Level increase in BV’increases the Average ‘downline BV’ by ((Number in Downline/25)*100) tocompensate.

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Of interest to note is that there is a net loss for the first 1/2 year in thiscase. This is due to the downline not being fully established, and retail salesnot outperforming expenses. As both of these mature, the income generatedexpands in an exponential manner. As IBO upline and downline profit wereunknowns for this case and the last, changes to these figures may result insignificant differences.Overall comparison values are as follows:

AVERAGE MONTHLY INCOME: $42500.00AVERAGE MONTHLY EXPENSE: $506.08AVERAGE MONTHLY NET: $42000.00x 60 MONTHS (5 Years)AVERAGE NET OVER 5 YEARS: $2520000.00

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4 Conclusion

This study indicates that to receive optimal performance from the Quixtarsystem one must form the significant retail business portion before attempt-ing to create a large downline. By doing so, many of the “standard” ex-penses can be ignored early on and ensures that out-of-pocket expenses areminimized to maximize the profit margin.

One should clearly understand that purchasing products from their ownIBO will not increase their profits, when taking the excess expense intoaccount. Downline sales should be decreased instead to ensure at minimumthe 70/30 rule can be followed without personal purchases.

Each IBO should act with due diligence and independently verify anyclaim made by a sponsor, IBO, or other outside sources for accuracy andlegality. Personal and standard business ethics should be followed in makingany claim, and must include full disclosure of the risk involved. Understand-ing of legal fallout for not doing so is essential to the going concern of theorganization.

Quixtar is not necessarily a scam as many claim, as long as full disclosureis made. It does require significant involvement and discretionary risk forsuccess to occur.

5 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 Quix-tar/Amway/Alticor alliance, a collective of facts and figures from availableresources, and analysis using systems diagramming. All opinions (expressedor implied) are those of the author and do not necessarily reflect those ofMichigan Technological University. Data was collected from the websitesof former IBO Scott Larsen, Amway, Quixtar, and the Federal Trade Com-mission. All uses and duplication of such data in this study are protectedby the “Fair Use” clause of the US Copyright Act. Direct sponsor quotesare from a presentation that I personally attended, and is cited below. Thelast names of the presenters were not released, and are denoted with a ‘(x)’in the citation. Quixtar representatives would not comment on the valid-ity of any claim made. As such, before duplicating data and claims made,it should be independently verified. Quixtar Public Relations can be con-tacted at 616-787-7134, and the Federal Trade Commission can be reachedat 202-326-2222.

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References

[1] Amway Corporation. How much does the average Amway distributorearn? 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 betweenAmway and illegal pyramids? Whats the difference be-tween Amway and illegal pyramids?. Internet. WWW:http://www.amway.com/infocenter/questions/question19.asp [25 NOV2002].

[3] Federal Trade Commission. The Bottom Line about Mul-tilevel Marketing Plans. FTC Consumer Alert: The Bot-tom Line about Multilevel Marketing Plans. Internet. WWW:http://www.ftc.gov/bcp/conline/pubs/invest/franchse.htm [30 NOV2002]

[4] Federal Trade Commission. Franchise and Business Opportu-nities. Franchise and Business Opportunities. Internet. WWW:http://www.ftc.gov/bcp/conline/pubs/invest/franchse.htm [30 NOV2002].

[5] Federal Trade Commission. (26 NOV 2001) Freedom ofInformation 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 Calcu-lator. Internet. WWW: http://www.amquix.info/ibo calculator.html [25NOV 2002].

[9] Larsen, Scott. Question #1: Do higher pins make money from thesales 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 Busi-ness 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 NOV2002].

[14] Quixtar. (August 29, 2000). Quixtar Press Room: Quixtar MarksFirst Year in Business. Internet. WWW: http://cds.quixtar.com/010-en/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/010-en/MQ/CDA/image/1,,15315,00.pdf [25 NOV 2002].

[16] Quixtar. Print Advertisement. We’d like to make a pointwith you... $900,000 ... Get the Point? . Internet. WWW:http://www.amquix.info/britt slide.html [25 NOV 2002].

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