Amway, short for ‘American Way’, is a multi-level marketing company that deals in beauty, health and home care products. Multi-level marketing is the new name of the age-old pyramid scheme that has been made illegal or strictly regulated in different parts of the world. Jay Van Andel and Richard DeVos started out Amway in 1959 from Ada, Michigan. Amway business model is a variation of network marketing. All the business proceedings are done through various affiliate companies that sell Amway products across the globe. Amway has been greatly successful in their endeavors. Amway and its sister companies under Alticor recorded sales worth $8.8 billion in 2018.
However, the traditional pyramid schemes are known for being fraudulent as they do not benefit anyone at the lower levels of the pyramids. Hence, Amway has been investigated by several companies in the past for their practices. Moreover, institutes such as Federal Trade Commission (FTC) have been keeping tabs on Amway for alleged pyramid scheme practices.
Forbes has ranked it as one of the top companies in the world in the past. However, this did not stay like that for long because of their business practices. Amway business model is based on direct selling and multi-level marketing. Their business model has sparked a lot of controversy in the past and it is still under the microscope for their practices.
What is Multi-Level Marketing?
Multi-level marketing is one of the oldest marketing techniques known to man. They are also known as network or referral marketing. The contentious technique of marketing has been under a lot of scrutiny. Partners and promoters sell the goods and services of a company in this method of marketing. The seller is not the only person who makes money out of the sale in this case. There is a multi-level system of commissions established which is used to pay the associates involved in the selling process.
The sales personnel take care of the fulfillment of transactions. They work lower down in the hierarchy. The personnel sell the products directly to the retail distributors using promotional marketing. Moreover, they are expected to recruit new sales personnel so that they can expand the hierarchy under them. The idea is to expand the network of salesperson so that more sales can be recorded. The new additions to the network can either sell the products themselves or sponsor others to sell those products.
So How Does it Relate to Amway Business Model?
Basically, Amway business model is an amalgamation of the multi-level marketing that we just mentioned in the last two paragraphs. You can learn about a different business model, the franchise business model, over here. The business model can be referred to as a ladder which has a trader or seller at each step of the ladder. Each seller engages with the network of sellers under them. Every trader on the ladder is responsible for selling the products of the company.
The Cogs of Amway Business Model
Business model of Amway is very easy to understand. It is a simple model that works on the understanding of networks. To work with Amway, you will need to do the following:
- Become a distributor of Amway
- Act as a distributor or independent business operator (IBO) of Amway products
- Sell the products of Amway and bring in new recruits to the network of sales personnel to make profits
You make money when you sell a product or and IBO appointed under you makes any sale. You get a commission for every sale that you make and sale made by an IBO under you. They get a bonus commission when the IBO recruited by you successfully sells their product.
How is the Amway Business Model Any Different?
Companies have a certain chain of command that is followed by the employees. This chain of command can be in terms of income, power, and responsibility of the personnel. People at the top of the ladder consists of people who were recruited during the earlier phase of the company. These people tend to make more money than the people who were recruited later into the network of the company. Most companies that employ the multi-level marketing model adopt this as the standard.
However, things are different with the Amway business model. People who were recruited later into the network can earn more than the former recruits in the Amway business model. The business model has a simple approach to revenue of the sales personnel. The revenue of a distributor is directly proportional to their number of sales.
Amway tend to sell actual commodities to its consumers. Hence, if you study the model closely, you will realize that distributors are not paid for expanding the network. They have to make sales to earn profits. Amway enters the market discreetly and depends on word of mouth to increase the sales of their products. They want people to join their network so that their products can reach out to a larger audience.
Who are the Consumers of Amway?
The Amway business model requires the new recruits to pay an entry fee to join the established network. So, basically, every person in the Amway ladder is a customer of Amway itself. To sell for Amway, they need to pay a fee that makes them eligible to join their network.
Amway and other similar companies do not disclose the participants responsible for the company’s revenue. It is speculated that most of the revenue generated by Amway comes from participating customers that are the people who pay an entry fee to join the network.
To explain this better, think of the business model this way: you are an employee of Amway that needs to buy a shampoo. Instead of buying it from some other store, you buy the shampoo provided to you by Amway. This completes a transaction. You paid for the product but you also made money through the commission of the sale.
Similarly, you continue selling the products to other customers and get more people to join the network so that you can make commission when they make a sale. The idea is to keep selling and bringing in new recruits to maximize your profits.