How many of you use beauty products? Some of you may use them and some of you might not. How many of you use home care and health care products? Most of you, isn’t it? Have you ever wondered how these products get to you once they are manufactured? You may have a good idea about this. Many people think that these products get to the stores in a simple way. A company sets up factories and manufactures products. It advertises the products they make and recruits distributors to distribute their products all over the country. The company makes a profit once the distributors receive the shipment and the distributors make a profit once the products are distributed to merchants. Then the merchant becomes the sole owner of the products and makes money by selling the products. This is the usual assimilation of people which is true most of the time.
However, did you know that there is another type of business model where the process of selling and promoting goods is completely different from the usual one you know. There are some companies that rely on this type of business model to run their businesses and make money. This is because not all businesses do not use the same strategy to get their products to people. Some businesses use different tactics to get to their customers. This helps them to avoid competition in the market. Not only that but it also gives them a sort of advantage over companies that sell similar products. One such company that employs a different strategy to grow its business is Amway. Many of you might have or even used the products of Amway. They are a global brand and they sell different types of products. But not many people are familiar with the business model of Amway. This article will tell you what exactly is the business model of Amway.
But before that let’s know a little bit about the company itself.
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What is Amway?
As you already know Amway is a company that sells beauty, health, and home care products. This is an American company that was founded in the year 1959. It was founded by Richard Devos and Jay Van Andel. Richard Devos and Jay Van Andel are childhood friends. Both of them later became business partners. They had done a lot of businesses together. The duo were partners in the sailing business, an air charter service, and even a burger stand. They were introduced to Nutrilite products by the cousin of Van Andel whose name is Neil Maaskant. Richard Devos and Jay Van Andel lost interest after selling their first box. But Neil Maaskant urged them to attend a meeting that was held in Chicago. By this time Neil Maaskant has become their sponsor. After attending the meeting they were convinced to continue Nutrilite business as they listened to the speeches given by successful distributors and the company’s representatives.
After that, they turned their “Ja-Ri” Corporation into a Nutrilite distributorship which was originally formed to import wooden goods from South America. What they found interesting was the way they made money. The company not only let them make a profit by selling their products but also paid them commissions on the products sold by the distributors who were introduced to Nutrilite by them. This is known as multi-level marketing which you are going to learn about later. Jay Van Andel and Richard Devos were successful in forming an organization of more than 5000 distributors. In 1958 along with their distributors they formed an association Amway which is short for American Way. After this, they bought rights to manufacture an organic cleaner called which was later renamed LOC. Amway bought a good amount of shares of Nutrilite in 1972 and complete ownership in 1994. During this period Amway has already expanded to many other countries. Today Amway offers its products and services in nearly 100 countries. It is also featured on Forbes as one of the top companies.
What is multi-level marketing?
As mentioned above Amway is a multi-level marketing company. Multi-level marketing is also known as network marketing. This business strategy is a bit controversial because sometimes it is also known as pyramid selling. This means that the money made by the sellers is used to pay the people who are at the top of the chain and the people at the bottom. The strategy is controversial because all the money made by the company is because of the people who actually sell the products to the customers. They have to put in the effort to promote and sell the products to customers rather than the company itself. The only thing the company does is give them products to sell. Once they sell the products the sellers receive a commission based on the number of products they sell.
There are only two ways in which you can make money by selling these products. Either you have to be a participant who sells these products and receives a commission or you have to be a distributor who distributes the products to retail owners. Here the one who is expected to sell the products to the customers is the salesperson. The responsibility of selling the products is completely on them. They have to promote these products by word of mouth and referring them to others through the people they know. These people are encouraged to recruit others so they can become a part of the chain and expand it. Most of the people at the bottom lose their money as they cannot generate enough returns. But the company that recruits them does as they rely on these people and not the sales.
Now that you know what multi-level marketing is let’s look at the business model of Amway.
The business model of Amway
As it uses the multi-level marketing strategy it has to make sure that it always maintains a few aspects of the business model. Here are the things that are crucial for Amway to make money.
Independent contractors
These are the people who are responsible for the distribution of Amway products. They are the ones who recruit others to sell Amway products to other people. It is not necessary that the ones who are recruited by these people sell the products directly to the customers. Even they can recruit another person to do this job. More these people are not called contractors or distributors but Amway Business owners. These ABOs make money in three ways. One is by selling products directly to the customers. The second one is when they get bonuses if the sales volume is high and lastly through incentives when the business grows.
Low investment
On average it only takes $100 for people to become Amway Business Owners. This is true for every country that Amway is present in. If you look at it from an investor’s point of view you will see that this is not a big amount. It has the potential to get you a lot of returns with a low risk of losing too much money. But to get the investment back the Amway Business Owners will have to sell their products and they have to do it consistently if they want to see returns.
High prices
You see the whole model of generating revenue through Amway products depends on commissions. The more people involved the more commissions you have to pay. So if Amway sells products for normal rates they won’t be getting much in return. To make sure that they earn a good return they sell their products at a very high price. By doing this they will be able to give commissions to everyone involved in the hierarchy.
Expanding network
Without this, the company will not be able to survive. If the company wants to keep growing their business then they have to constantly find new participants who will not sell their products but also recruit other people. If they fail to do this then the chain will stop growing. For Amway, the end customer who buys the product is not the only one who is considered as a customer. Everyone who is involved in the hierarchy is a customer of the company.
How does Amway make money?
Now that you have understood the business model of the company. Let’s look at the ways in which it makes money.
Registration fee
Amway charges a registration fee if you want to become an Amway Business Owner. The registration fee varies depending on which country you are living in. This acts as a direct source of income for the company.
By selling Amway products
This is an obvious one. Amway manufactures more than 450 products. Many people are familiar with some of their products. It sells these products all around the world. It generates roughly 26% of its revenue from beauty products. But the majority of its revenue is generated from Nutrition products which nearly 52%. Nutrilite, Artistry, eSpring, and XS are some of the top-performing products of Amway.
Conclusion
This is the business model of Amway. This may be one of the top companies in the world but it is a bit tough to make good money quickly by becoming an Amway Business Owner. Most of the people give up after joining the company and only a few will be able to make good returns. If you want to more about the business models of top companies check out other articles on Zeen. Click here to know the business model of Spotify.
