IP: Rexall's rotten eCommerce example

[David Farber <dave@farber.net>]

>Date: Wed, 21 Mar 2001 18:52:58 -0800
>From: Harry Saal <Harry@saal.org>
>Reply-To: Harry Saal <Harry@saal.org>
>
>Here is a piece by David Strom, which deserves broader
>distribution, IMHO.
>
>-------- Original Message --------
>Subject: [Web Informant] #241, 21 March 19, 2001: Rexall's rotten 
>eCommerce example
>Date: Wed, 21 Mar 2001 15:09:58 -0500
>From: Web Informant <informant@pez.oreillynet.com>
>Reply-To: David Strom <david@strom.com>
>
>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:
>http://www.ftc.gov/bcp/conline/pubs/alerts/pyrdalrt.htm
>
>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:
>https://www.rexall.com/present/forms/
>
>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.
>
>Entire contents copyright 2001 by David Strom, Inc.
>David Strom, david@strom.com, +1 (516) 944-3407
>938 Port Washington Blvd., Port Washington NY 11050
>Web Informant is (r) registered trademark with the
>U.S. Patent and Trademark Office.
>ISSN #1524-6353 registered with U.S. Library of Congress.



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