Failure Rates in YTB and Other MLMs

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Noted MLM expert Robert FitzPatrick did a recent blog post on the YourTravelBiz.com lawsuit filed by the California Attorney General. He has a nice analysis of how and why YTB is nothing more than a pyramid. These multi-level marketing companies are almost always the same, they each just have a different “hook.” In this case, the hook is travel services, although according to the company’s own numbers, very little travel is actually sold. (That’s a clue to it being a pyramid scheme… Little “real” business done, in favor of instead selling a dream and recruiting with that dream.)

Here are some interesting statistics and analysis from Fitzpatrick:

One of the main issues highlighted by the California AG is that 99% of YTB participants never earn a profit and virtually all the commissions go to the top 1%. This outcome obviously makes all claims about a YTB “income opportunity” false.

But, this outcome is the same for nearly all DSA/MLMs!

A study of eleven (11) MLMs, including YTB, showed the 99% loss rate was true for every one of the MLMs. And in 10 out of the 11, the majority of all commissions wound up in the hands of the top 1%. For some as much as 85% (Herbalife) went to the top 1%. Those 11 are representative of hundreds of other MLMs. All are members of DSA.

The massive losses among the MLM recruits are calculated and pre-determined. The losses are built into the MLM model and are the inevitable result of the “endless chain” offer. According to the laws of mathematics only a tiny fraction of all the participants could possibly be at the top of a large downline. Most have to be losers for there to be any “winners.” After all, it is the lost money from the downline that becomes the “profit” to the upline!

When all the people invest in an “unlimited opportunity”  based on an “endlessly expanding” chain something has to give. Won’t the scheme totally collapse? Yes, in a way. What occurs is that the bottom of the pyramid, composed of the lastest recruits, collapses continuously, and the scheme itself rebuilds continuously.

What gives is that “collapse” is borne by the last ones in. Massive losses are suffered by the recruits who pursued the impossible mission of building “unlimited” downlines when they were enrolled at the bottom of the recruiters’ downlines. They were doomed to lose from the day they signed up.

Their losses and the scheme’s “rebuilding” process take the form of “churning.”

At YTB, 50-80% of the recruits churn (quit and are replaced) within one year! At the start of 2007 YTB reported that it had 59,736 “registered travel agents.” During the year, it recruited another 139,237, but lost 67,908. About 50% of the number that joined had quit during the same time period. This is exactly the same with most other DSA/MLM members. The “quitters and losers” leave the MLM, and nearly all of them stop buying or using the products or service.

50-80% annual churn rates occur in ALL MLMs because the “endless chain” model causes a 99% “failure” rate. So, most quit the scheme in less than a year, after they suffer punishing financial losses. The scheme continues only if it can replace the “losers.” It uses the same claims about “unlimited income” to fill the slots each year vacated by the previous year’s “quitters.”

Could it be that all these MLM recruits did not care to make money? They signed sales contracts. They surrendered rights as consumers to become “contractors”. They took on risky legal obligations. They paid fees. They bought sales kits. But could it be that they only wanted the products or travel services at a discount? They never intended to make any income?

Well, could be, except, why would so many of such avid and loyal consumers quit the MLM schemes so quickly and never use those products ever again?  Herbalife, for example, reported that 80% of all its distributors quit the scheme each year. They don’t come back. Strange behavior for people who “loved the product”! Their “strange” behavior is evidence that what really motivated them to sign up and buy the goods in the first place was the lure of the endless chain, the impossible dream.

In the end, YTB’s sales model, marketing scheme, income promises, loss rates for its agents, concentration of commissions to its top recruiters, and churn rates of “quitters” are the mirror image of nearly all other MLMs in the DSA.

 

21 thoughts on “Failure Rates in YTB and Other MLMs

  1. David

    Just a couple of pointsabout FitzPatrick’s analysis: First, he states that very little travel is sold, yet YTB has reported $414 million in travel sales for 2007, and is ranked #26 in Travel Weekly’s Power List of the 50 largest travel agencies. Second, he states that most of the commissions go to only the top 1%. If Mr. FitzPatrick had examined YTB’s comp plan, he would know that marketing commissions are paid only through six levels. Commissions gradually diminsh through the levels, and after six, ZERO goes to the person seven levels above you. Those who are most successful in YTB are those who have a broad base, not those who have built a “pyramid”. Everyone starts at the top, building their business, sharing the business opportunity and personally sponsoring as many as one can. Most of the money is made from personally sponsoring — it’s just like any other kind of selling or retailing, whether it’s shoes or BMWs or travel stores: the more you work, the more you sell, the more you make.

  2. Can we view the prosecution of YTB as merely being a “test case” for the prosecution of the rest of these DSA pyramid operators? Seems like YTB is such a small catch compared to Amway, Usana, and “Crazy Fox” Herbalife?

    The FTC has failed to enforce its justification for allowing Amway to operate, even in the face of the tools pyramid scam (a pyramid scheme within a pyramid scheme).

    Cutting one of the many DSA hyenas out of pack of predators isn’t going to do much to keep the rest of the pack from feeding on the meat found in badly deceived consumer wallets.

    Isn’t California Attorney General Brown acting like a predator himself, choosing to cut a weaker predator out rather than doing the correct thing and taking aim at the leaders of this bad pack of DSA hyenas?

  3. Tracy Coenen

    David – I think you’re missing the point. That $414 million in travel sales was divided by 131,000 agents. It sounds good until you see that each “agent” is selling very little in travel.

    We’re talking about $3,000 in “travel sales” per agent, which resulted in each “agent” making about $96 for the year.

    The company’s revenue in 2007 was comprised of $104 million in fees from the agents (You know, the $500 sign up fee and $50 monthly fee) and $20 million in fees from actually selling travel.

    Sure, some travel is being sold. But recruiting is exponentially more lucrative for the company The agents are making next to nothing from selling travel.

  4. David

    To the contrary, recruiting is not lucrative for the company, except to the extent that it puts more travel stores in the marketplace through which consumers book travel. You mentioned the $104M in fees for 2007, but failed to notice that YTB paid out $80.5M in marketing commissions from those fees, leaving a “profit” of $23M, which will be paid out in the future as marketers earn their bonuses.

  5. Tracy Coenen

    David – Please quit drinking the kool-aid and consider taking some business courses to educate yourself. Over 73% of the company’s income is from fees paid by the agents. That makes it clear what the business is: RECRUITING.

    Yes, 78% of that amount collected from recruiting fees was paid to the “agents” who did the recruiting. The remainder isn’t going to be paid out to agents in the future. It’s used to pay current expenses and create current profits.

    What’s nice about analyzing this company is that their numbers so clearly show exactly what their business is, and that’s recruiting new marks and collecting fees from them.

  6. Jason

    It has nothing to do with drinking kool-aid…Just about every large company has used MLM to build their business. I know people who are very successful in MLM because they put the effort into building their business. The people who quit are the people who don’t want to work the business. All of the tools are there to be successful, people just don’t know how to be business owners…just worker bees. And make no mistake…No one is quitting their jobs to do Ytb, it can and almost always is done part time. There’s a saying a man I respect told me…”Everyone wants to go to Heaven, but no one wants to die.” The vast majority would rather spend ridiculous amounts of money to try to win the lottery than work hard to get what they want.

    It is true that the recruiting side of the business is a big money maker, but Ytb has been spending inordinate amounts of money to make sure that their travel business is going to be the largest in the industry. You can’t build a business without having people there to do the leg-work…it’s called commerce. But Ytb doesn’t offer minimum wage…you get out what you put in.

    I’m sure that everyone that has posted here has a boss or owner who does half of the work that you do and gets paid significantly more. Sounds like a pyramid to me. No one is going after the owners of assembly plants and hard labor jobs where people are getting paid scratch to break their backs everyday. Its just the American way for a business owner to hire people dirt cheap to do a job the owner wouldn’t do him/herself. But no one wants to admit that the pyramid model is what all business is based.

    And lastly, as far as Ytb being a small catch…It is the largest growing MLM on Earth. They aren’t going after the weakest link. They’re going after the strongest. And nothing will come of it. Ytb is doing nothing illegal, it’s the travel industry that is putting pressure on ‘higher-ups’ to bring attention to Ytb. The heavy hitters are threatened by Ytb’s growth and want to bring them down…It’s happened to Wal-Mart, Microsoft, Mary Kay, among others.

    All in all, this is just a petty witch hunt…that will go unsuccessful.

  7. Tracy Coenen

    Jason – Most large companies haven’t used MLM. You’re out of your mind if you think that’s true. But I’ll offer you this challenge – Tell me how many of the Fortune 500 companies use MLM. Give us a list that is verifiable. (You will prove yourself wrong in doing this exercise.)

  8. Jason

    Its funny you should bring that up Tracy because I do have a list…

    1. Sprint
    2. MCI
    3. AT&T
    All use MLM to sell their long distance services and business packages

    4. Colgate-PalmOlive
    5. Gillette
    6. Mary Kay
    7. Avon
    8. Primerica

    and…oh yeah,

    8. Coca-Cola
    9. GoodYear
    10. IBM
    11. Firestone
    12. General Motors

    I hope you don’t think that these products are sold, marketed, and repackaged/rebilled by magic. Multi-Level Marketing is a key business tool in a lot of industries.

    And there was a little department store by the name W.T. Grant that started the whole thing called “franchises” (another name for network marketing) that is responsible for the creation of places like Wal-Mart, Kmart, Target, McDonalds, Subway, GNC, Independent Car Dealerships, etc…etc…etc…

  9. Tracy Coenen

    Oops. Sorry Jason. We don’t allow lying here. Try again. The only ones of those that use MLM are Mary Kay, Avon, and Primerica. And Mary Kay isn’t on the Fortune 500 list. I’ll give you one more chance to be truthful before you’re no longer welcome here.

    Fortune 500 list – Which companies use MLM to sell their products. The truth this time.

    And since you’re so unreliable… For each company on the Fortune 500 list that you contend uses MLM, you must provide a link to proof of your claim.

  10. Jason

    First of all, I don’t know who you think you are calling me a liar or policing who can post on here. It’s obvious you are one of those people that like to attack people that disagree with you and make it personal on blogs. I didn’t say that the companies I listed were MLM companies…I said that they use MLM to grow and promote their business. I must have made all of that stuff up I just put up there. Trust me, this will be the last post that I put on here…I don’t like dealing with close-minded people who think that they have everything figured out. I bet you didn’t know that network marketing is even being taught in some universities did you?

    You can do your own research before you discredit my statements. Go ahead and continue your personal crusade against MLM because its obvious you’re one of the people that failed doing it…one of the lazy drones. And if you’ve never tried, then you’re the most unreliable person in this discussion.

    If you’re such an expert on this, you would have known already that the companies I listed do in fact use network marketing for their businesses…in fact, many of them have started their own subsidiary companies dedicated to that alone. You can find your own links if you want, I don’t have any more time to dedicate to this ridiculousness.

  11. Tracy Coenen

    Jason – I called you a liar because that’s exactly what you are. The companies on your list don’t use MLM or network marketing, and you’re refusing to provide proof to back up your statements because NO PROOF EXISTS.

    MLM promoters are all the same – Tell me I don’t know what I’m talking about but refuse to prove anything they say, because they can’t prove it. It’s easier for you to run away, because you can’t prove what you’re saying. People like you make false (but impressive-sounding) statements to make MLM look good. The problem? The statements are false and I have a good time exposing them!

  12. Tracy Coenen

    And regarding MLM being taught in universities: Another lie to make MLM seem credible. The truth is that a couple of case studies have been done on companies like Mary Kay, and those case studies are sometimes used in business classes. Students are assigned case studies in order to analyze what a company has done and critique their methods. (In Mary Kay’s case, the case study that was done illustrated how to motivate a sales force for as small a cost as possible. Mary Kay uses dollar store trinkets to get women to invest thousands of dollars. It’s brilliant.)

    But no college or university actually “teaches” MLM as a recommended business model.

  13. Norman

    It will sound quite ironical. I supported Tracy and her comments even though I am in network marketing for more than 10 years and have had much successes. MLM is like an addiction and disease to me. Once I am caught in it, it’s hard to come out of it. I am still into one of the online MLM now even though I know that it’s still a waste of time and money to pursue the impossible dreams that only less than 1% of the MLM distributors will ever make money from it. I stcik on because it is like getting rid of drugs addiction bit by bit and this is my last straw. I highly recommend the three books that helped me get out of this destructive MLM addiction. They are ‘All That Glitters Is Not God : Breaking Free from the Sweet Deceit of Multi-Level Marketing by Athena Dean (Paperback – Jun 1998)’, ‘False Profits: Seeking Financial and Spiritual Deliverance in Multi-Level Marketing and Pyramid Schemes’ and ‘Consumed by Success: Reaching the Top and Finding God Wasn’t There (Paperback)
    by Athena Dean (Author)’.

  14. justme

    Go Tracy!! way to uncover Jason as a liar to to portray MLM as what is. A false promise of riches to those who need it the most. People invest their hard earned money in the hype of things to later find out it was all a lie. Jason, you are just another brain-washed pencil pusher who is defending MLM to feel better about yourself and the mistake you’ve made. get out of it and stop rippin’ people off

  15. dlaw

    This is nuts my wife is hooked on this MLM crap and thats just what it is crap she tells me all these storys about all the money shes going to make, But I have found a great queston to ask anyone in MLM so how much have you made? and prove it and not in the MLM’s stock or whatever we are talking cash in had profit they dont say a word ot they come back with you just watch……..I have been and nothing no money just talk talk

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