Competence and Profitability

Andrew Carnegie is widely quoted as saying, "The sole purpose of being in business is to make a profit."

Quixtar critics, particularly Scott Larsen and his intellectual "downline" (those bloggers who faithfully parrot duplicate his website claims) are prone to stating that if one were to succeed in building a successful Quixtar-affiliated business, one would do so on the backs of their own organization, with 90%+ of them losing money. Another favorite quote pertains to Quixtar being a "zero-sum game."

I submit that the methodologies that produce this sort of "analysis" relies on either what I call "Magic Math" or the experience of mismanagement, or both.

Now bear in mind, most critics are former IBOs who (having either fallen back to the job world or taken up MLM-hopping) have embarked on an internet publicity campaign against the Quixtar business model, touting their own experiences as IBOs as their credentials. Some of them, such as Passport Oasis Univera Lifesciences advocate Bo Short, made it all the way up to the Diamond level as an IBO.

One can only assume therefore, that these critics-- relying on their own experience as credentials, remember-- when they are speaking of a business structure that is built on the backs of a 90%+ downline who are losing money, they must be describing their own ill-fated efforts.

If that is the case, bearing in mind the quote from Carnegie, these critics are then individuals who either failed themselves in accomplishing the sole purpose of being in business, or failed to teach their dowline to accomplish the same, or both. Did I mention that this is the experience upon which they are touting their credentials to speak?

But before I delve further into the topic of competence, let me outline the Rules of Magic Math:
(Note: This list is not definitive and is subject to change based on the erm, "creativity" of Magic Math practitioners)

Rule #1: Ignore the IGP
Rule #2: Pad the numbers with non-performers (elaborated here)
Rule #3: Compare earnings of part-time IBOs with hourly rates of full-time employees (where assumptions of hours & performance levels are standardized)
Rule #4: Ignore conventional small business statistics (pretend IBO failure is anomalous.)

Example:

700 "active IBOs" are in an Emerald group. Among the non-platinums, an annual total of $84,000 in bonuses was distributed, which averages out to $120 each per year, or $10/month. (Scandalous! 700 IBOs in an Emeraldship and they are all only making $10/month??)

Ring in once if you notice a Magic Math rule being used here...

RINGY DINGY! Rule #1!

That's right, what's missing here? Why, merely the first of the 10 profits in the compensation plan: The 32% average retail markup, also called the Immediate Gross Profit, or IGP.

To put the scale of this omission in perspective, let's say that these IBOs are actually conventional small business owners with an Executive Business Membership from Costco, which pays back 2% of product purchases with an in-store credit, and they then sell the products at a 32% markup from their independent businesses. What Scott has essentially done is counted only the 2% Costco payback and IGNORED the small business owner's business activity completely! (See why I call it Magic Math? Use it, and the profit dissappears!)

Any system worth it's salt will be teaching an IBO to be their own best RETAIL client along with their 10 other clients (remember the FTC-required 10 Client Rule?) and will be isolating those retail funds into a SEPARATE BANK ACCOUNT (any free personal checking account will do) from which their business is paying the wholesale cost for the products. (Incidentally, this is what the World Wide Group teaches.)

Now, Magic Math Rule #2 is also certainly in play here due to the averaging being employed, as it is literally impossible for one to reach the Emerald level merely having 700 IBOs at 100 PV. Obviously, due to the requirements of the Emerald level, there are 3 Platinums-- interesting that they, being the most profitable of the group have been eliminated from the averaging, but suffice it to say, in this group there is likely a sizable but unknown number of other performers and, per the 80/20 rule, another unknown but likely larger number of non-performers who are doing (and therefore earning) nothing.

Averaging tends to minimize the relationship between performance and reward, but let's assume the worst and say that this really is a group of 696 IBOs (eliminating the 3 Platinums) which are each earning only 100 PV.

100 PV is roughly $280 in wholesale cost, or $369.60 in retail. This produces an IGP of $89.60 per month, making their supposed $10/mo gross profit to be $99.60/mo in actuality! Multiply that by the 696 non-Platinum IBOs, and that becomes an actual gross profit of $831,859.20 between them! Nothing like Magic Math to reduce the actual IBO earnings to nearly a mere 10% of itself! Heh... and Scott wonders why Quixtar Emeralds and above are hesitant to submit their business financials to his Magic Math machine?

I've elaborated already on the principles behind Rule #2 & #3 in my post "Active" IBOs & Their Income, so let me move on to the issue of Competence, which directly deals with Rule #4.

According to the Small Business Administration,

"Over 80 percent of the small businesses surveyed used some kind of credit and had outstanding debt on their books at the end of 1998. The most frequently used kinds of credit were personal and business credit cards, lines of credit, and vehicle loans."

Wow... does that mean that over 80% of American small businesses are not truly profitable? That over 80% of them have operating expenses, overhead, even (*gasp!*) tool, equipment and training costs which are not yet covered by their gross revenue? Say it isn't so! But-- but-- I thought that was unique to lowly Quixtar IBOs?!? Heh...

Just wait, it gets worse:

According to Tim W. Cohn, business analyst of marketingprinciples.com (see his CV here),

"For every small business success story there are nine failures. At least that is what the statistics tell us. After ten years, only one out of every ten small businesses started is still operating. . . What causes small businesses to fail? . . . [I]n reality there is only one reason: Mismanagement. . . The inability to consistently take the appropriate actions to achieve a desired result, is the most common way mismanagement manifests itself."

. . .

"[R]egardless of whether you are a manufacturer or service company, your business will need to produce a minimum of $80,000 of revenue per employee to cover your operational costs and to produce an after tax profit.
Companies that produce over $150,000 in revenue per employee are considered healthy."

--http://www.marketingprinciples.com/articles.asp?cat=418, emphasis mine.

Let's examine the first statement first. 1 out of 10 succeed? Yikes! Anyone who listens to Brad Duncan via a WWDB CD or Major Function will know that in the Private Franchising model, they have found it consistent among all registered IBOs, that 1/3 will quit, 1/3 will consume and watch, and 1/3 will perform. Sounds better than 1 out 0f 10 to me. The best odds of all, of course, belong to the IBO who understands that principle and is willing to put in the numbers to let the 1/3 rule play out to equal 9 growing legs from among (not 19 but) 20 IBOs earning a bonus check. What about those IBOs who don't? Well, they would fall under that category of those who, according to Mr. Cohn, fail to "consistently take the appropriate actions to achieve a desired result."

Now, to the $80,000 in annual gross revenue per employee-- A business owner doing less than that is following a recipe for disaster. It would be fair to catagorize anything less than that as either mismanagement or non-performance. So how does that figure line up in terms of the Quixtar compensation plan? Where is the line between non-performance and profitability?

There are no employees, but there is a couple or single IBO which consists of a single business unit. Let's assume that business unit is the "employee."

Let's also assume that this business unit is doing a 300 PV first circle-- being loyal to their business with personal use, following the FTC required 10 Client rule, and isolating their 32% IGP in a separate account per WWDB teaching (not to mention good tax & accounting practices.)

$25,600 of that $80,000 would the IGP (no Magic Math used here!) leaving $54,400 in actual annual business volume (19,428 PV), or 1619 PV monthly. Hmm... Now, haven't I heard somewhere a number mysteriously similar to 1619 PV?
Oh that's right... WWDB teaches on tapes and in Nuts & Bolts meetings that the profit from the first 1500 PV of your volume will need to be reinvested in order to make your business grow.

So a 300 PV first circle and a total group volume of about 1500 makes you a performer (...and say, isn't that just about what the volume would be for a WWDB Eagle?)

Imagine that! Those worthless "scam" tapes are actually teaching business principles that line up with the advice from a business analysis website ranked in the top 1% of all website traffic by Alexa?

But notice that, per Tim Cohn, it takes nearly twice that $80,000 per employee (or 1,500 PV IBO) to be considered a healthy business. For the sake of simplicity and erring on the side of conservatism, let's say 2500 PV. (Say, doesn't WWDB Estimate the volume of a Double Eagle at around 2500? Amazing how that works!)

So back to our IBO business unit: Using the first 2 steps of the "Me/6/3" hypothetical business model in WWDB's FTC reviewed WSA4400 form, we'll assume that they have 6 registered IBOs, whom they are teaching to duplicate themselves in fulfilling Andrew Carnegie's advice-- each of the six also doing roughly a 300 PV circle, or the remaining 2,200 PV.

At 2,500 PV, our business unit has an IGP from their 300 PV at $268.80. Their bonus check for 7,000 BV makes a $1,260 differential, from which they must pay their 6 IBOs (2200* 2.8 * 6%= 369.60 or /6= 61.60 each) leaving them with $890.40 in bonuses plus their $268.80 IGP, or a monthly gross profit of $1,159/month.

Assuming Scott Larsen's figure of $3,000 average annual operating expense via a Tools System is accurate, that makes a $250/month operating expense, leaving a $909/month net profit. For a mere 2,500 pin. That looks fairly healthy to me!

This is not counting meals, hotel, or travel expenses, but as the H&R Block commercials have diligently reminded us this tax season, these and other things can legally be offset according to the tax laws (consult your accountant or tax preparer.)

But what about our "poor" 6 IBOs at 300 PV? Didn't I say that the claim of downline losing money was due to Magic Math or mismanagement? Let's break down their financials:

Each of the 6 downline IBO business units would have the same $268.80 IGP as our 2,500 pin, plus their $61.60 bonus, with a monthly gross profit of $330.40. Subtract that by Scott Larsen's $250 opex figure and we have a $80.40 net profit, or $964.80/year. That's not a lot, but at least it's a profit.

However, remember that 300 PV is only the first circle. They aren't yet really performers, they're simply being what futurist Alvin Toffler referred to as a "Prosumer"-- a consumer who produces income via their purchases. Like that Executive Business Membership from Costco that I referred to, with the 2% in-store credit kickback-- oh, except that membership has a catch-- a $2,100 minimum monthly purchase or $25,200 annual purchase, and they cap off the reward at $500 a year.

Which makes each of those "poor" 6 IBOs nearly a 200% winner over the best membership that Costco can offer.

Hmm... strange, but this doesn't resemble anything near the frightful figures you'll see on the critic sites. Have I said already that these individuals are touting their former IBO experience as their credentials? Which brings me back to my original conclusion:

Either their numbers are a product of their own mismanagement experiences, or they are lying using Magic Math to make their point.

In either case, why would anyone listen to them?

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