A few months back, I got an email from Martin Kratz who said that he's with an MLM called Ignite. The email went a little like this:
"I've been doing Ignite for about 1.5 years and have enjoyed their compensation, discounts, and great customer service. Since mlm's are something that I see you covering, I thought I would message you to see if it might be of interest to you and your wife.
I have never done an MLM before now, and really like how its put together.
When you have a few moments (about 13), the above website is my Ignite Homesite. Please take a look at the video titled 'Ignite Business Plan' and let me know your thoughts."
I looked at his website. The MLM is Ignite, powered by Stream Energy. Stream Energy is an energy company and Ignite is the MLM brand that pushes it. The first thing that I noticed is that they do business in about a half dozen states. I quickly responded back that not only does it not include my state, it doesn't include a state in New England. So I couldn't be a customer and the vast majority of people I know couldn't be either.
Martin Kratz wouldn't be deterred by this:
"Some of the most successful people involed couldn't be a customer...it's not about what you do, it's what you start...
Look up Randy & Marcie Hedge (DeQueen, AR)"
I looked them up and found they are the 4th highest people in the entire organization and the only one in the top 10 that isn't from the state of Texas. In fact, there are 27 people/couples on that Presidential Directors page and 23 are from Texas. The other three (who are not from Texas or named Hedge) are also in states where you can be a customer of Stream Energy.
At this point I decided to play Devil's Advocate and be a bit of a jackhole. I asked if they were the typical case... i.e. this is what people should expect when they join Ignite. The response was, "...they are simply an example of someone, like yourself that could not be a customer. But saw the cost/benefit of becoming and associate and doing the business."
Then I explained why I asked if they were typical. The FTC requires endorsers to pick typical cases or very clearly disclose what the typical case is:
"Testimonials claiming specific results usually will be interpreted to mean that the endorser’s experience is what others can expect. Statements like 'Results not typical' or 'Individual results may vary' won’t change that interpretation. That leaves advertisers with two choices:
- Have adequate proof to back up the claim that the results shown in the
ad are typical, or
- Clearly and conspicuously disclose the generally expected performance
in the circumstances shown in the ad"
My hope here was to educate Kratz that he can't be pitching the Ignite business opportunity by highlighting the very, very few people at the top or the one case where someone living in a Stream Energy is at the top of the pyramid. I'm not sure I broke through to him.
What is a Pyramid Scheme vs. an MLM?
I realized that my FTC endorsement guidelines might fall on deaf ears, so I sent Mr. Kratz another question, "I saw a PDF of Ignite's Business Plan. It appears as to be a pyramid scheme. Don't you agree?"
He certainly didn't agree:
"I don't agree it's a pyramid scheme, they are illegal. Plus a pyramid is when only the people at the top make money and when a company makes more $ from people 'signing up' then they do from an actual product or service, and lastly, in a pyramid, you can't pass/surpass the person above you. None of these things happen in ignite.
And if you think about it, every 'traditional business' out there could be considered a pyramid...how many janitors, make more then the CEO at a company? :)"
Before we get into the issue that I found with Ignite appearing to be a pyramid scheme, I'd like to address the lack of education that goes on in these organizations. They spend all the time trying to maximize profits, which means having a script or sales plan available for every circumstance. Very few, ever really understand the core business.
I give him credit on two points:
- "Pyramid schemes are illegal"
- "... Plus a pyramid is when only the people at the top make money and when a company makes more $ from people 'signing up' then they do from an actual product or service... "
He was wrong about "you can't pass/surpass the person above you." More than a few MLMs (Fortune Hi-Tech Marketing for example) have been shut down where you can surpass the person above you. This is not a test that any court or the FTC uses in determining a pyramid scheme.
Then he followed it up with the "Corporate America is a Pyramid Scheme" Myth about the janitors and CEOs. A pyramid scheme requires recruiting to make your money back. He confused it with a simple hierarchical organization. I've literally run into hundreds of MLMers who make this mistake. (That's why I have an article written and prepared for such a response).
These are things that MLMers tell other MLMers to convince people who haven't done the research to know better.
Before I get to what I feel is the incriminating evidence in the official PDF, I want to touch on another point that Kratz made: "Plus a pyramid is when only the people at the top make money..."
Income distribution at Ignite
As I'm writing this article (February 18, 2014), Ignite last published their Income Disclosure Statement (IDS) from 2012. Have a look and see if it looks like only the people at the top make money. Let me help guide you through this statistical minefield.
The people who earned an income as a Qualified Director or above are included in the income report. Those who couldn't reach that level appear to be excluded. It is extraordinarily difficult to recruit people into MLM giving the information available, and a vast majority are people at the bottom who haven't qualified for anything. For example, when I analyzed the MonaVie, they excluded 87% of their distributors, because they didn't meet their minimum requirements.
That said, let's dig into the report. Qualified Directors (again, just a subset who met Ignite's qualifications for this report) getting an income of, on average, $104.37 a year. That's 84.66% of these people who qualified.
That leaves 15.34% of the people who qualified for the report getting an income of $104.37 on average. We'll get back these to 15.34% in a minute...
Let's focus on the 84.66%. According to the Ignite Business Plan, these people paid a one-time fee of $329 ($299 in Maryland) for tools, training, and support. So in three years (on average), these people will still lose $15 for their hard work. The PDF doesn't go into details about the tools, training, and support that the $329 gets you. In fact, the support and training in an MLM organization should come from the upline. These "top of the pyramid" people are paid extremely well for it, so why should Ignite "double charge" you for it? My thought is... "because they can."
It gets worse... a lot worse
The business plan has an Ignite eSuite package of $24.95 (let's call it $25) a month. That's $300 a year... very close to 3x more than these distributors make in a year. It is "optional", but it sounds like the one I wrote in detail about in my ViSalus article. Essentially they charge you for:
- "A replicated website branded with your personal information" - In other words something similar to Facebook where you have no control of the presentation and, in most cases the information. You can sign up for a Tumblr account and get a "replicated website branded with your personal information" for free. In fairness, Ignite is going to spend a small amount of money to tailor the experience its audience, but think about it... Should every Ignite distributor pay this continuous monthly fee to help them sell Ignite's product? As Harper's Magazine said, "They couldn’t have it all because Mary Kay’s business model (like that of any multilevel-marketing enterprise) is designed primarily to profit from, rather than enrich, its workforce."
- "Success on Demand, a motivational online publication" - This would be comical if it didn't harm Ignite distributors. Even ViSalus gives the physical magazine to its distributors. You should click on that article to read on how the magazine is about pushing MLMs and getting kickbacks from MLM companies. It looks like Ignite saved a few dollars and negotiated an "online version" vs. a print version. Either way, the magazine promotes MLM (and is paid to do so) and hides its MLM affiliation with the generic and legitimate sounding "Success" name.
- A "Message of the Month" audio CD from "top money earners and top executives of the company" - I'm a little surprised they actually ship a CD vs. a downloadable MP3 or a podcast. Once again, Ignite is going to charge you for to hear from people in your upline and the company executives? Shouldn't this be free?
- The "Power Center" back office system - From the brochure: "You can see how many associates you have, how many customers they have, even what level they’re on and you can view your commissions right in your Ignite Power Center." So in other words, if you want to see how your business is doing... how much you are earning... you need to buy this "optional" package.
It's been well-documented that over 99% of MLM distributors lose money. The first thing that the company (or the upline distributors) is going to say to someone losing money who isn't buying the "optional" package is... "Well that's part your problem right there. You don't have the company website or business analytics." Now you know why I put "optional" in quotes.
The end result is that it seems to cost $300 a year, to earn, for an overwhelming majority of the people, $104.37, a year. And you pay $329 to get in on this "deal."
Now Kratz was saying that in pyramid schemes only the people at the top make money. Admittedly not "only" people at the top make money, but the definition of "top" is arbitrary. The Executive Director level is the only one on that income disclosure statement that pays a living wage... and it consists of 0.18% of people who qualified to be included in the report. That's 18 people out of 10,000... not very good odds. One of those people earn as little as $3,292.20 a year. So even if you beat the overwhelming odds, it isn't like you can count on that much money.
One person earns as much as $2,495,151.88 according to the report. So you have the overwhelming majority of the people earning $104.37 a year (and almost certainly spending $300 a year) and one individual earning nearly 2.5 million. It certainly looks like those at the top make the money, doesn't it?
But is Ignite a Pyramid Scheme?
No single person can answer that question. It's for the courts to decide, which can take a decade depending on if the FTC feels like doing its job to protect consumers. The problem is that by the time you get an answer, it is already too late.
Fortunately, the FTC does give some guidance:
"Not all multilevel marketing plans are legitimate. If the money you make is based on your sales to the public, it may be a legitimate multilevel marketing plan. If the money you make is based on the number of people you recruit and your sales to them, it’s not. It’s a pyramid scheme. Pyramid schemes are illegal, and the vast majority of participants lose money."
What I found in the official Ignite business plan is what lead me to ask Mr. Kratz about it being a pyramid scheme. On page 18 of the brochure (page 37 of the PDF), the company writes:
"So, let’s look at how Ignite pays you Residual Income as you build your organization. Ignite pays you fifty cents for each of your personal customers. That’s $5 every month for 10 customers. No one is going to retire on $5 a month, but this business isn’t about you personally trying to gather hundreds or thousands of customers yourself; it’s about building a team. Watch what happens when you do that. On the first level, you’re paid twenty-five cents per customer, per month. On the second level, it’s 50 cents per customer. On the third, it’s 75 cents per customer, and on the fourth level it’s $1.00 per customer per month. We can all agree that on levels one through four, that is not a large organization in network marketing. But with those customers in place, that creates a residual income of over $1,000 per month. That is significant residual income!"
In my opinion Ignite couldn't be any more of a pyramid scheme if they literally wrote in their brochure, "Ignite is a pyramid scheme." They are telling you that the money you earn for sales yourself is peanuts and that you should recruit people and make sales to them to earn big money.
At 50 cents a customer you'd have to recruit 50 customers just to pay off the "optional" Ignite eSuite package. After that you'd still have to sell a lot of customers to get back the $329 enrollment fee.
While the $1000 per month ($12,000 per year) in four levels sounds tempting, from the income disclosure statement it doesn't happen very often. Why? Because it is mathematically impossible. In their example they show you at the top with a
pyramid "team" of 81 people each with 10 customers. Mathematically, every person can't have a team of 81 people.
I explained this all to Mr. Kratz and he sent the following image with the message "check this out":
He was still confusing pyramid schemes with hierarchical organizations. I responded by saying, "That graph seems to designed to purposely create confusion between legal hierarchical organizations and illegal pyramid schemes. It doesn't address seem to address any of the points about Ignite being an illegal pyramid scheme according to the FTC guidelines."
That's the last I heard from Martin Kratz. I'll send this article to him when it's published and hope to save him.
Update: I didn't realize that Ignite/Stream already has a pending lawsuit against it charging it for "racketeering." My favorite part of the article matches my own finding:
"The lawyer suing Stream and Ignite points to a $329 entry fee to join the sales program and a $29 monthly fee to host a sales website. He says many never make their money back. He cites dozens of sales recruitment meetings in the lawsuit where promises of great wealth were made to hopeful participants."
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