Oh, this post might be damaging, so as usual, I'd do a disclaimer. I have no intention of, as one'd put it, "spoiling the market", so to the best of my ability, I'll leave acronyms as acronyms, such that only those involved to some degree can understand.
About a month ago, a good friend of mine asked me to join a MLM company, the name of which I shall not disclose. They offer an extremely attractive package for us to market - an attraction I soon found to be mathematically infeasible, coupled with glaring issues with their business plan that somehow no one noticed. Here I attach my "thesis", so to speak, which was meant to explain my decision and partly, to get my friends to reconsider becoming more involved in this business.
The GP Impossibility Theorem
Much less a theorem than a set of logical questions and conclusions made based on given facts and conservative assumptions that, in all futility, attempts to salvage the impossibility.
Disclaimer:
This write-up serves to portray the author’s personal questions and issues with the system. All information presented as factual are correct (at least, claimed to be correct by the company’s managers) as of 27th Aug 2007. This article does not, however, constitute an attempt to defame and/or malign the company in question, and beyond all certainty, a cause of action for libel against the author is a no go. Written from the perspective as a now non-functional member of the organization, this serves both as an explanation for the author leaving this seemingly lucrative trade and as a call for existing members to take a step back and consider carefully what they are promoting, and the possible ramifications on their relations with their clients.
First, the facts:
An individual GP account costs $11520, and the CRP, although factually isn't guaranteed, is presented with a strong implication that it is. CRP “promises” $19200 over approximately 17 months, under a scheme of profit sharing out of what appears to be corporate gratitude.
It follows that if we take $1100 as the benchmark payout (the oft presented range being $1100 - $1200, fluctuations accorded to “profit levels”), $19200 is disbursed over 18 months.
Monthly monetary injections can then be averaged out at $11520 / 18 months = $640 per month. (Total outlay / total time = mean rate of monetary input – for calculation purposes)
To be able to pay out "returns" so readily, the company must be turning a pure profit of
$1100 / $640 = 171.875% per month (mean per-month profits / mean per-month outlay)
Final fact: Company claims that most profits come from emall, which they expect will do better than eBay. eBay's annual profit for 2006 was USD$297.2mil, with total sales of USD$4.6bn. (Public Record. No such information for EGA companies exists at this point in time. Source: http://www.theregister.co.uk/2006/01/19/ebay_results/)
So, the assumptions:
Downplaying the popularity and price of GPs, and ignoring the 12,000 units sold in Genting ‘07, we assume over the last 10 months from Aug 06 - Jun 07, 5000 GPs on average were sold per month at a mean price (aggregating price increases over time) of $10,000 per GP.
Total outlay by the public would value 10 x 5000 x $10,000 = $500,000,000 SGD. $500mil.
Next, the calculations:
Having downplayed the payouts per month to the lower limit of the projected range and calculated the required profit to be 171.875%, we then calculate with relative ease the total profits directed into GP payouts.
$500,000,000 * 1.71875 = $859,375,000. $859.375 mil
Assuming 50% of total profits returned as dividend-like annuities to GPs, total profits = $859,375,000 * 2 = $1,718,750,000. $1.71875 bn
Returning to the assertion that most of the profits come from emall, we conservatively take 50% from emall and 50% from the rest of EGA (which we will not look at due to lack of information on their part).
Total profits from emall = $859.375 mil.
Using eBay's 2006 profit margin as a guideline, and knowing for a fact that profits (USD$297.4 mil) make up a fraction of total sales (USD$4.7 bn), we find that for eBay, this fraction is
$297.2 mil / $4.6 bn
= 6.4608695652173913043478260869565 %. Approx 6.46%
Assuming emall is as efficient as eBay, even though it's only been around a fraction of the time, we then take SGD$859.375mil / 0.0646 = SGD$13,303 mil = SGD$13.303 bn.
Since ebay figures are declared in USD, emall sales in USD = SGD$13.597 / 1.6 = USD$8.498bn. (Assuming exchange rate of SGD$1.60 = USD$1 – another generous assumption)
Projected annual emall sales = USD$8.498bn / 10 * 12 = USD$10.1976bn
$10.1976bn / $4.6bn = 2.216x eBay's annual sales.
The possibility of such humongous sales figures is beyond my discernment, but it starts to worry when we look at the prospect of an entity like emall turning sales profits almost equaling a quarter of a developing country’s GDP. USD$10.197bn approximately works out to be a quarter of
Figures quoted from wikipedia.
In addition, all EGA companies, especially SSE, are Pte. Ltd. – Private companies limited by shares, with the recent exception of EmCom.
"Limited by shares" means that the company has shareholders, and that the liability of the shareholders to creditors of the company is limited to the capital originally invested, i.e. the nominal value of the shares and any premium paid in return for the issue of the shares by the company. A shareholder's personal assets are thereby protected in the event of the company's insolvency, but money invested in the company will be lost.
http://en.wikipedia.org/wiki/Private_limited_company_by_shares
So, the issues:
1. Each GP includes 14,400 mall points for expenditure on emall, points purchased within the initial cost of a GP. So-called "sales" on emall would then be sales made in terms of mallpoints. Just like redemption of loyalty points at petrol stations don't constitute a sale (since points were sold at the onset), emall transactions in points don't constitute the supposed sale. How do profits appear then?
2. Assuming everything on emall's sold for cash, can it hit a total value of $8.498bn (even for the 10 months in question)? Taking the most expensive items spotted - hand phones - that are going at somewhere around the equivalent of $800 SGD, a total of 10,622,500 hand phones would have to be sold (at full profit to emall - we all know online commerce platforms take but a fraction of sales so let's not go into those figures.)
For reference, eBay’s fees can be found here: http://pages.ebay.com/help/sell/fees.html
3. With expenditures like EPV and EmCom projects in
4. In addition, most EGA companies are Pte. Ltd companies - Privately owned, limited liability. Paid up capital, according to ACRA, is $150,000 - grossly insufficient. Court action brought against the company would only bring a limited amount of damages, way smaller than its total liabilities (since e-points are supposedly readily liquid CASH, with a real cash value).
Conservatively speaking, maximum legal liability / true liability
= $150,000 / $859,375,000,000 * 100 = 0.00001745%.
Let’s not go there - too small.
5. Basic economics, or rather, common sense dictates that Total Revenue = Total Cost + Total Profit. It follows that total profit CANNOT be greater than total revenue. So 172% return as "profits" in the GP is mathematically infeasible.
6. In addition, if most of the customers of EGA are SSE members holding GPs, the bulk of revenue must, therefore, come from GP sales. 172% returns, based on the conjecture that e-points are a form of electronic credit and the substantial evidence pointing to a lack of physical cash backing up each e-point, would constitute something closer to a falsified payment.
7. Escalating month-on-month sales, although seemingly good news for merchants, are pointing to a disaster. While all transactions are technically legal, legal doesn’t equate to right. For as long as monthly sales exceed the preceding month, payouts are essentially secured (barring large scale liquidation). While this is true, when the limit is reached, what then? The technicalities of the system essentially make it a money game, made legal through dummy transactions.
8. Sustainability of the company is built on faith. For as long as liquidation of e-points remains a small proportion of total e-points erased (managers’ re-entry erodes their account balance and the company’s short-term liability; managers closing deals for cash serves the same purpose) or external cash inflow through new members injecting money into the system, the company is seemingly fulfilling its obligations by crediting electronic balances to accounts each month – no real money is paid out until liquidation occurs. Given how members are discouraged psychologically by the 0.5% admin charge, liquidation is low. Money in > Money out, business goes on. Of course, this does not constitute a challenge to prove me wrong by liquidating 100%, although it’d be interesting. Inability to pay up reinforces points 4 and 6.
9. Regarding the issue of whether CRP is guaranteed, there have been several citations of payouts being discretionary and not guaranteed. Evidence, however, does not point to that being made clear during sales pitches. The general implication, when stories of 70, 80 GPs being closed are told, is that CRP is made out to be guaranteed. A utilitarian attitude towards what the GP entails, with only the slightest hint of speculation, would never rationalize purchasing 70 x 4yrs = 280 years of 2100mins/month of talk time. Clearly, the speculation involved is strong, and indeed, without being fairly convinced payouts for CRP are minimally guaranteed, no rational person would play around with the required outlay – 70 GPs cost at least $700, 000, a figure smaller than reality would permit given their escalating cost.
10. The aims of the company put forth to questioning clients regarding the motive behind a huge payout, most ostensibly to expand consumer awareness of the services provided and creating a consumer base, are also contradictory. Setting a high unit cost does not encourage purchase (only possibly made up for by an implicit promise of monetary gain), and allowing huge purchases per client only serves to deplete the (seemingly unlimited, but portrayed otherwise, hence this assertion) stock of GPs, depriving other willing customers of this limited package. As it is, no one is deprived, which once again puts the true supply of GPs under scrutiny – infinite supply, constituting a scam?
Prologue
Seemingly glaring inconsistencies that no one bothered to raise have been put into light. Why, one may ask. Perhaps the answer lies in how the management pushes members into sales and away from considering the nature of the good (or in this case, package) they are selling by constantly asking them to believe in the company, the president and the system. Indeed, more time is spent igniting desires for money than a true understanding of the product, understandably so, given that careful thought detached from the burning desire for high income would lead, quite readily, to the questions and implications raised above. No accusations will be made on my part; simply questions that I hope will be answered in an acceptable and mathematically feasible manner. Transparency is clearly lacking, leading to me wondering if the gold studded environment in which deals are made everyday is, in reality, just glittering gold paint. Many more issues regarding the non-usage of other means of advance funding like banks, IPOs and other monetary instruments can be raised, but will only serve to complicate the fundamental issues – after all, how is it acceptable for a supposedly successful company to not have these instruments at its disposal?
The perspectives portrayed here are probably superficial – there may be more than meets the eye, but as it is, the lack of transparency leaves me unable to see any merit in the company’s business plan. Indeed, it bothers me more that even such a superficial analysis can turn up this many factual inconsistencies. In a hierarchy where those higher up are responsible for those below them, we see a clear and glaring need for accountability – both on the part of the company and the merchants who catalyzed the transactions. It may very well be no fault of individuals, but when it comes to the crunch, everyone gets hit at the same time. Being accountable for one’s bigger clients who sank more into this plan might turn out to be harder than just saying, “Well, you chose to take the risk – now you bear the cost”, especially when more often than not, close friends and family make up our first client pool. Trust, once lost, loathes returning.
I once heard this argument: “How can this be a scam? If the company really has the money to pay so many people to come here and act, company must be quite rich!”
To this, I now reply: “Not necessarily, as long as these actors BELIEVE they’re being paid.”
