Climbing to the top

Multi-level marketing provides profit opportunities, at a cost

Cavalier Daily/April 14, 2004
Corinne Shamy

A recruiting e-mail sent by an independent business owner from Quixtar encouraging University students to register as part of a multi-level marketing system.

With tuition on the rise and books and beer not getting any cheaper, college campuses are brimming with students looking for ways to make an easy buck. At the University, there are several businesses that claim to provide students with a chance to earn as much money as they are willing to work for.

One such opportunity is offered by Quixtar Inc., a self-described multi-level marketing Internet commerce company.

For a registration fee of $40, any entrepreneur can become an independent business owner with Quixtar, according to a Quixtar spokesperson who cited company policy in requesting to remain anonymous. Many choose to go further, paying $120 to receive an introductory product package.

"We provide them with what they need, and then we leave it up to them," she said, adding that the average Quixtar business owner earns $115 a month.

Business opportunities

Multi-level marketing relies on a network of sales representatives, clients and distributors to provide profit opportunities. In the case of Quixtar, those interested in buying wholesale products from the company's Web site must log in using a code provided by an independent business owner, who then receives a percentage of the sale.

Owners also recruit additional independent business owners from which the sponsor receives a cut of their sales.

First-year College student Joshua Stevens is an independent business owner for Quixtar. Steven said he began working for Quixtar over a month ago after he met another Quixtar business owner from his hometown of Chesapeake.

Quixtar does not directly recruit members, but instead relies on its independent business owners to introduce the business opportunity to family, friends and clients, the company spokesperson said.

Stevens said initially he was interested in the program because it seemed like an easy way to make money in college.

In their last fiscal year, Quixtar generated more than $1 billion in sales. Two-third's of Quixtar's business comes from the sale of health and beauty products.

Other multi-level marketing businesses, such as Vector Marketing, the sole distributor of CUTCO cutlery, operate differently.

Vector spokesperson Sarah Baker Andros said the company actively recruits students to participate in entrepreneurial positions. Recruiting is done through college campuses, newspapers and the Internet, with representatives at hundreds of colleges and universities across the country.

Approximately 85 percent of Vector's sales force is comprised of college students, who serve approximately 12 million clients. Last year, sales for CUTCO approached $250 million.

"Some of our best students come from U.Va.," CUTCO District Manager Tony Fraga said. "Vector Marketing presents a wonderful opportunity for students who are interested in sales to build the skills they need in any profession."

Since registering as an independent business owner with Quixtar 54 days ago, Stevens said he has made $3,000, a level which he said usually takes four months to reach. Stevens attributes his success to the fact that he has already sponsored or referred 79 additional business owners.

Stevens said he initially sponsored only a half-dozen business owners. Those six recruits, however, went on to sponsor 73 more owners, from whom Stevens receives a share of profits.

Stevens explained that Quixtar has a point system that rewards business owners and their sponsors for how much they sell.

Although he does not receive a direct bonus for sponsoring additional business owners, Stevens does receive 100 points for each of his recruits with over $250 in product sales.

Vocal opposition

Despite the opportunities provided by multi-level marketing, there are many vocal opponents to such business models. One prominent detractor is Carnegie-Melon Professor Dave Touretzy, who runs a Web site titled "Amway/Alticor/Quixtar Sucks!"

Alticor, founded in 1959, is the parent company of Quixtar, begun in 1999, and Amway, which now operates exclusively overseas.

"They're a scam, and Quixtar is an Internet version of the scam," Touretzy said.

The Web site, which is hosted on the Carnegie-Melon's server, contains a controversial report which compares the practices of Amway/Quixtar to those of the mafia.

Amway has threatened the professor and the university with legal action for posting the report on his Web site, though no official charges have been filed, Touretzy said.

"I disagree with the fact that Amway is trying to silence critical speech," he said.

The author of the report, Notre Dame Law Professor G. Robert Blakey, declined to comment, citing a court gag order.

Another common criticism of multi-level marketing is that such businesses operate in a similar manner to pyramid schemes, which are illegal.

Pyramid schemes are in essence business models in which each person is dependent upon the person below him or her. In most variations, an individual signs up for the business, but in order to make money he or she must sign up other people under them to sell products so that he or she can receive a part of their sales.

"The basic characteristic of a pyramid scheme is that you promise outrageous returns and pay the dividends from new money that is invested," University Economics Prof. Ron Michener said. "The only way to pay the returns is if the new money is flowing in fast enough which is possible for a little while."

Pyramid schemes are inherently unworkable, he said. Logistically, it would be impossible to recruit new members at the pace necessary to provide sufficient returns for everyone involved.

A fine distinction

Michael P. Dooley, a University law professor who specializes in business finance, said what makes pyramid schemes illegal as well is that they depend solely on the efforts of others rather than on the substantial effort of the profiteer.

Though independent business owners are required to pay a fee to register with Quixtar, their spokesperson stressed that the payment does not represent an investment.

"An investment implies that there will eventually be a return on the money, like in the stock market," the spokesperson said."All money exchanged between clients, IBOs, and Quixtar is for purchasing goods."

Stevens elaborated on the various profit means available through Quixtar. Income for business owners consists of a return equal to a percentage of total sales, including items bought for personal use and consumption. This is supplemented by a $20 registration collected from members who purchase discounted access to the Quixtar Web site using the owner's individual code.

Stevens explained that Quixtar sells products at wholesale prices, which are made possible by the increased efficiency that comes from eliminating traditional middle-men, such as retail outlets. He added that Quixtar does not spend any money on advertising or marketing, which helps to keep prices down.

Since Quixtar does not profit from the fees paid by new independent business owners, the company's business model is not legally classified as a pyramid scheme. Instead, money is made from profits on product which are sold. This is what would make it possible, in theory, for an independent business owner to earn twice as much as the owner who referred them to register.

"Success is directly proportionate to the amount of effort they put in," the Quixtar spokesperson said. "There are people who find it to be very profitable."

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