Is The Pyramid Negative?

The following was published at Quixtar Blog Forum, by the author and owner of The Quixtar Blog. It is reprinted here under permission and is licensed under a Creative Commons Deed, some rights reserved, license. Except where noted.

The Negative Pyramid Myth

There’s a popular saying among some Quixtar critics — The Pyramid Is Negative (TPIN). The basic premise is that overall, more money is lost in Quixtar and Amway than earned. For example, a Diamond living off “residual income” is enjoying that lifestyle at the expense of others losing money.

Another way to look at TPIN is that in order for an IBO to make a profit (after expenses) he must have a minimum number of people under him who are operating at a loss (losing money). So, at any given time there are more people losing money (spending more than they earn) than gaining money (earning more than they spend).

Another way of explaining it is “millions lost billions.” Not sure that explains it too much but it’s a popular slogan for the Quixtar critics.

The Myth?
I’ll use an example to explain the “myth” of TPIN.

You and 30 of your friends and family join “Imaginary MLM” but not all joined up at the same time (some are under you, others under their friends, etc.) and all of them have refused to spend a dime on any support, motivational or training materials.

The “Imaginary MLM” works like this – If you join and buy $100 in products you get a check for $5. If you refer someone to join, you get $3 for each $100 they purchase each month. And of course, the people they sponsor move $2 to you for each $100 they spend and so on.

Here’s an example of how it would look for a group of 30 under you with a total of three levels and each person spending $100 each month:

1 (you) – $100 + $5 (rate of $5 per $100)
3 – $300 + $9 (rate of $3 per $100)
9 – $900 + $18 (rate of $2 per $100)
18 – $1,800 + $18 (rate of $1 per $100)

You’re Negative!!!
If you look at the above example it’s pretty obvious that you, the person on top, is negative. After all bonuses are calculated you’re still out $50. That’s a crappy business right? Wrong!

What did you spend that $100 on? You didn’t just toss it in your trash right? No, you spent it on products! You bought products that you used and supposedly enjoyed. Now, don’t start hollering about prices and value and “Imaginary MLM’s” bottom line yet, I’ll get to that later.

What you must understand is in the above scenario you, the guy at the top, paid for actual products and services. And, at the end of the month, you received $50 back from your purchases and from others under you doing the same thing.

Nobody is negative and at the very least, each person spent $100 to get $5 back. Yes, there’s a problem with paying taxes on a coupon but don’t put the horse before the cart here. The issue to tackle right now is TPIN.

TPINN?
So, is the Pyramid really negative? Well, by just examining the numbers it is most certainly NOT negative. Everyone in “Imaginary MLM” spends $100 on products, has no business expenses and receives some sort of bonus. The net expense each month is $3,100 but that bought $3,100 worth of products.

The problem with TPIN is that it doesn’t include products into the equation. If you ditch the tool and business expenses in Quixtar, you’re left with basically what amounts to a buyer’s club. Of course it’s not so simplistic but TPIN is flawed because it doesn’t accurately address the complexity of the issues and thus gives rational apologists ammunition to dismiss the TPIN philosophy as the rantings of ignorant fools.

Prices and Value
I’ve said over and over that arguing about Quixtar prices is stupid. I still believe it but if anyone is to buy into the TPIN philosophy the argument advocating its truth must be based on product pricing and value.

If in the above example, you pay $100 for a tuna sandwich each month and get that $5 bonus check then we could honestly say you’re an idiot and that The Pyramid Is Negative. However, if you spend $100 and take home a new lawnmower, then clearly The Pyramid Is Positive.

So the debate lies in determining the value of products and services you bought with your $100. And that, my friends, is no easy task because value is an extremely subjective concept.

Would I pay $90 for a Tommy Hilfiger T-Shirt? Hell no. That’s not a value… to me. But it may be a great value for you. I really do spend $28 for a bottle of shampoo but I don’t mind because I absolutely love it. Is that a good value? Is the price too high? It’s really hard to determine.

Now, if I find that same bottle of shampoo for half the price at a discount store, then yeah, I’m probably paying too much. But you see the dilemma that I’m illustrating here right?

The whole price and value ambiguity is the wiggle-room that MLM businesses like Quixtar use to legitimize their business.

The Tools and Monkey Wrenches

Obviously if you toss in tool expenses then the whole TPIN thing holds up mighty well because you’re paying lots of money for basically nothing… right? Well, I would say yes but there’s an entire industry in Western Culture (aka The Self Help Movement) that’s trained us to attach value to books, tapes and seminars that tell us the same thing over and over and over again. I’m not saying it negates TPIN but I can understand how some Quixtar faithful convince themselves that they’re wisely spending their money on tools… at least for a little while.

If we recalculate the earlier example with the inclusion of tool money we see TPIN emerging very clearly:

1 (you) – $100 (products) – $250 (tools) + $5 (rate of $5 per $100)
3 – $300 (products) – $750 (tools) + $9 (rate of $3 per $100)
9 – $900 (products) – $2,250 (tools) + $18 (rate of $2 per $100)
18 – $1,800 (products) – $4,500 (tools) + $18 (rate of $1 per $100)

Retail Sales

To further illustrate the flaws with TPIN let’s toss in retail sales. What happens when you, at the top of a 30 person pyramid in “Imaginary MLM,” sell $700 (your cost) worth of products each month for $1,000? Your bonus increases to $40 (excluding downline performance) and your net profit increase by $300 (minus any expenses you incurred acquiring those customers). And what if your downline duplicated your performance? Where is the “negative” here?

Why Is MLM A Problem Then?

None of this is to say that MLM is a great way to do business. It’s not. MLM is one of the worst ways to market, distribute and consume products ever developed by modern man. Additionally, MLM is structured in such a way that it encourages abuses of the system and places an emphasis on recruitment (easy money) while de-emphasizing retail sales (hard money).

My point is to expose the flaws with TPIN in hopes that others will seek a more solid position from which to launch their assaults on the multitude of problems that need attention in the MLM industry (and Quixtar in particular). I may have missed something here and if so, point it out and I’ll add it to the mix.

The preceding was reprinted because I found it quite an impressive summary for critics and Independent Business Owners of Quixtar, alike. I’ll take comments here, but you can join the discussion to agree or disagree with the author at the above links

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