T K Arun
Amway is a big, privately held, American company, with an annual turnover in excess of $8.5 billion. The widow of one of its co-founders, Betsy DeVos, was President Trump’s Secretary for Education. A nondescript non-entity, the company is not. Yet, the company’s Indian operation finds itself in serious legal trouble with its assets seized and accused of being a pyramid scheme.
A pyramid scheme is a Ponzi scheme that turns victims into collaborative agents of fraud. A Ponzi scheme is one that promises investors high returns and makes good on that promise, early on, by paying earlier investors out of the capital offered up by later investors. The scheme will break down when there is no more a large enough supply of fresh investors to generate the promised returns.
In a pyramid scheme, each victim is offered a chance to earn by recruiting new investors. Each recruit energetically enrols new recruits, receiving a reward for each direct recruit and for each recruit by every direct recruit, and for every indirect recruit down the line. The number of recruits added keeps expanding. A visual representation of the total number of people in the scheme would represent a pyramid, if the first recruiter, the original scamster, is placed on top, his direct recruits placed below him, their recruits in the third rung and so on.
Where does Amway get in trouble?
Amway sells its products by direct selling by its agents. The agents are recruited by agents recruited earlier. A slice of the income generated by each seller is paid to his or her recruiter. This gives every seller an incentive to hire ever more sellers and to encourage every new recruit to hire new recruits themselves. Sellers higher up on the hierarchy of recruitment receive a slice of the income generated by sellers down the hierarchy of recruitment. In this respect, it looks very similar to a pyramid scheme.
Yet, there is one vital difference between a pyramid scheme and a so-called multi-level marketing scheme with a salesforce that can be visually represented as a pyramid, in terms of their recruitment precedence. Ignoring this crucial difference is what gets Amway in trouble and the authorities confused.
The authorities have accused Amway of charging excessive rates for its products and that the final price paid by consumers is excessive because of all the commissions it has to include in a hierarchy of sellers. This is to misunderstand the nature of pricing. An Enforcement Directorate official should go to one of Delhi’s wholesale markets and buy something in bulk and compare the unit price charged there to find out the extent of price mark-up in the maximum retail price. This is not fraud, but a business practice to cover the costs of stocking and distributing goods after they leave the manufacturers’ premises, so that those engaged in stocking and distributing earn their livelihood.
In direct marketing, the costs work out similarly. Goods compete with similar goods in terms of price and quality. Amway goods cannot be sold if they are non-competitive with similar goods. The extent of the mark-up is not evidence of fraud.
How to differentiate and how Amway’s selling strategy is not a pyramid scheme?
The crucial question is whether recruiters of direct sellers earn a commission from the very act of recruiting or not. If they do, the scheme entails fraud. If the act of recruitment does not generate any income for recruiters or their recruiters up the pyramid, there is no fraud. Direct Selling guidelines prohibit any registration fee for becoming a direct seller. Amway says it does not charge any registration fee. In that case, what is the scope for confusing a multilevel direct selling operation with a pyramid scheme?
When an individual becomes a direct seller, he or she buys an initial kit of things to sell. The crucial question is, does the sale of this initial kit count as a sale by his or her immediate recruiter or their recruiter higher up along the hierarchy? If it does, the operation can look like a pyramid scheme. Even if the new recruit makes no sales, his or her direct and indirect recruiters would receive an income.
Suppose the initial kit is sold directly by Amway and its sale does not count towards direct or indirect sales of the recruiter involved, this confusion would disappear. When a new seller makes a surplus from the sale of that initial kit, and that surplus accrues to the seller and to the chain of recruiters up the hierarchy, it is perfectly legitimate – only the value added by the seller is distributed to the hierarchy, and the act of enrolling as a seller does not generate any income for anyone except to the company from the sale of that initial kit.
If Amway ensures that the sale of the initial kit to a new seller is directly attributed to the company and not to the direct recruiter of the seller or the indirect recruiters up the chain, its model of multilevel selling will look like a pyramid in structure, but will still be strictly kosher, generating income from genuine sales, distinct from a fraudulent scheme that generates income from the act of recruiting sellers.
This article was first published at Money Control as- Amway | How to tell a pyramid scheme from a genuine, multilevel direct selling scheme
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TK Arun is a Senior Journalist and Columnist based in Delhi.