Network sales or pyramid scheme?

This is the first of the two-part series highlighting the business models of Amway and Herbalife. — ED.

Amway, Herbalife’s business models draw controversy

Since the Fair Trade Commission (FTC) recently unveiled information on 124 multi-level marketing companies in Korea, controversy has sprung up again over such firms as Amway and Herbalife.

Although the companies have continued to claim their legal basis, critics are still suspicious about their revenue model.

Recent FTC data showed the payment gap between the top and bottom layers of recruits is widening.

The so-called sponsor allowances — incentives for sales — were given to 1.64 million salespeople among 8.29 million who are registered with the 124 firms as of last year. The antitrust watchdog noted that the number of 8.29 million may include those who do not sell products and those who have registered with several companies.

Among the 1.64 million, 16,370 salespeople who accounted for less than 1 percent of the top level received an average of 57 million won ($51,000) in sponsor allowances, up 11.8 percent year-on-year.

The remaining 99 percent got 470,000 won on average, an 11.3 percent drop from a year earlier.

The top 10 companies in terms of revenue gave allowances to 1.22 million salespeople. Each of the salespeople got 1 million won on average. The 10 firms include Amway Korea, Atomy Korea, Nu Skin Korea, Unicity Korea, Herbalife Korea, BOM Korea, Seacret Direct Korea, ACN Korea, Afull and Aphrozone.

Business bellwether Amway’s top 1 percent of salespeople received 53.46 million won on average, while its overall salespeople got 780,000 won. The runner-up Atomy gave 55.85 million won to the top 1 percent and 950,000 won to its overall salespeople.

Such a huge gap has provoked complaints among salespeople registered with the firms.

Uncertain about the amount of allowances paid to their colleagues, Amway salespeople have grumbled about the gap reported by the press. To receive bigger incentives, suspicions have it that some of them even reduced prices of items they sold without the company’s permission.

“If you are considering joining multi-level marketing companies or buying products from them, you should check details on the firms that are revealed by the FTC every year,” a commission official said.

“You should also know that the total amount of sponsor allowance should be less than 35 percent of sales, according to the law.”

Amway Korea refuted the criticism, saying the data fell into the trap of false statistics.

“Because consumers are categorized as salespeople in the data, the amount of allowances per person seemingly gets lower,” an Amway Korea spokesman said. “It is impossible for us to accurately distinguish consumers from salespeople.”

Ongoing conflict

The size of the multi-level marketing business in Korea has grown into a 5.13 trillion won industry, the third-largest in the world. However, it still seems to have a poor reputation among most people here.

An internet community named Anti-Amway is full of negative opinions and stories on Amway and other multi-level marketing firms. Most of the stories are written by husbands who worry about their wives working for the companies.

They criticized the companies for raking in profits in Korea, while their salespeople earn less than the minimum wage. The members said the firms are trying to avoid their responsibility by being vague about the distinction between salespeople and consumers.

Some of them even liken the firms to a pseudo-religion.

“Joining multi-level marketing firms may not be bad in itself,” a community member wrote. “However, most salespeople tend to spend a huge amount of money to get more allowances, eventually losing money.”

An Amway Korea spokesman emphasized that “our method of direct selling is different from illegal pyramid schemes.”

Industry experts have also demanded the deregulation of multi-level marketing, or direct selling.

“The multi-level marketing business must be regarded as a competitive industry sector from now on,” Prof. Kwak Kwan-hoon of Sun Moon University said in a symposium in March. “Unlawful acts should be prevented in advance, rather than being regulated afterwards.”

Prof. Han Sang-lin of Hanyang University said the term should be changed, so as to address negative perspectives on the business model. “We should adopt the term, direct selling, instead of multi-level marketing,” he said.

In fact, the controversy is no exception in other countries.

Mary Kay, a U.S. direct sales company specializing in cosmetics, has also faced criticism, accusing the firm of setting up a pyramid scheme.

The firm, however, ingeniously avoided the trap, by allowing bottom level recruits to earn 50 percent of profit margins, even if they never bother to find down-line recruits, according to “New Ideas from Dead CEOs” by Todd G. Buchholz.

“In a pyramid scheme, a recruit must bring in yet more recruits to stay afloat,” the book reads. “The bottom layer of recruits sends its profits upstream and must recruit a new layer or else they go broke.”

Buchholz said Mary Kay’s 50 percent profit margin for beauty consultants was a significant leap from the typical 35 percent commission at the time.

Given the lower layer of salespeople in Korea statistically fail to earn such a fat profit, however, the controversy over multi-level marketing companies will seemingly continue here.