Web Informant #241, 21 March 19, 2001:
Rexall's rotten eCommerce example


Pyramid schemes are probably as old as their Egyptian namesakes, and Internet-fueled pyramid schemes were probably invented soon after Al Gore thought about the Internet. But lately things have taken a turn for the worse. Rexall, a nationally known drug and health products retailer, last year launched a combination eCommerce affiliate/multi-level marketing program. And the results, while legal, spell trouble for unsuspecting participants.

Before I tell you more about this, let's first define our terms.

An affiliate program allows people to collect commissions for referrals from their web site to a vendor's site, when browsers actually purchase something from the vendor. They are extremely easy to setup, and there are thousands of them in existence. I have been an affiliate of Amazon.com for several years and donate the small amount of money I make selling books from my web site to charity. Most of the people who run affiliate sites don't usually receive big incomes, because you need tremendous site traffic and plenty of purchases. But the sites are a nice way to direct traffic to your favorite merchants. Some non-profit organizations have set up large affiliate web pages and use them as a fund raising tool. Affiliate programs are legal, and most of them are free to setup and maintain.

A multi-level marketing (MLM) program is something whereby one person tries to sell stuff to others, who in turn try to create their own distribution networks and recruit others down the line. Each person who refers others down the distribution chain gets a small commission from the overall sales, so if you are high enough up on the chain, you can receive some pretty big checks. You have no doubt come across people selling you Amway, NuSkin, MaryKay or other items in this fashion. People that sell stuff via MLMs are called independent business owners (IBOs). The whole concept works on moving money from people lower down on the pyramid, err, distribution chain, to people higher up. Sure, you are selling legitimate products. But by the time you quit, you'll find that most people don't make the advertised hundreds of thousands of dollars in profits, and are lucky to clear even a small profit. MLMs are legal, and most of them will cost you some money to setup and to maintain.

Finally, we have pyramid schemes. These are not legal, because they are structured in such a way financially as to prevent anyone -- except the persons at the very top of the pyramid who begin such ventures -- from making any money. The schemes typically don't sell any real product, and people that get involved in them quickly lose money rather than make any. The US Federal Trade Commission has a nice explanation of the differences between MLMs and pyramids on their web site:

So, why has the Rexall.com MLM program got me all in a lather? Anyone that gets involved in it should beware that they are likely to not make much money, and could wind up losing lots of money. And I think this particular combination of MLM/affiliate program can create a lot of suckers. They are not the first to combine the two, to be sure. But they are one of the larger ventures to do so.

I found out about the program by getting an email from my cousin, who was proudly telling me about his latest web storefront that he assembled. Curious, I took a closer look and found out that he had created an affiliate site on Rexall.com. But it isn't really a true affiliate site: it is just an MLM to funnel money from unsuspecting marks. And it is shameful that Rexall is doing this.

Rexall claims it is legit because they are helping you to sell health and beauty products, real products to real people. While not a lawyer, I think this is probably true. But your friends and anyone else who decides to buy from your web site need to buy lots and lots of Vitamin C before you'll see some serious cash. Chances are you will also need to buy some extra-strength Tylenol before you opt out of their MLM system.

A pyramid scheme requires that participants purchase something, and generates its cash by paying people to recruit others. Rexall makes it clear that you only have to purchase a $30 kit to open your storefront. In addition, although not required, you are also encouraged to spend another $20 to order your technology "toolkit" to set up your storefront. And if you really want to get serious about collecting commissions, unless you sell $150 worth of product a month, you won't become part of a confusing series of bonus and additional commission programs. You try making sense of this page, and tell me what you think.

What makes the Rexall scheme unusually reprehensible is several reasons. First, the company combines two programs that by themselves rarely make money for the vast majority of their participants: affiliate programs and MLM. What are the chances that you will become rich from this venture? Not high. Getting to the bottom of understanding both programs will require a fair amount of research and technical expertise, not to mention wading through some very carefully crafted legalese.

Second, Rexall has been very clever in terms of marketing it to folks who are new to the Internet and eCommerce. In other words, they choose people who don't have this expertise to understand what they are getting involved in. Now, while there is nothing wrong with this from a business perspective, I don't endorse this method as a way to show eCommerce leadership by your company.

Finally, the program is pervasive. The company claims over 35,000 IBOs -- that means that chances are just about anyone you are going to try to sell their products to has already got their own distribution network and commission structure to deal with. That is another problem with most MLMs and pyramids: by the time you hear about this great "opportunity," chances are all of your friends have too.

It is a shame that Rexall is doing this, because this could sour many people's initial experience with eCommerce, let alone get them into deep financial trouble. It is also yet another indication that eCommerce has gone mainstream. With opportunities such as Rexall's, people can quickly lose money fast over the Internet. Rexall has a rotten idea, and I hope others realize it for what it is. And I wish that there were someway to prevent companies from joining MLMs and affiliate programs, because the two combined are nothing but trouble.

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David Strom
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