QuestNet/GoldQuest: The good and the bad
March 8, 2006
I’ve never belonged to QuestNet, GoldQuest, or any similar organization, and I have no financial stake in their success or failure. However, at least 6 people have approached me about these companies during my last two weeks in Ethiopia, including close friends, so I’ve done some reading about the advantages and disadvantages of joining. Here are my conclusions.
You can also read this document online, making the links easier to follow:
A. The good
1. Some participants will make money.
The nature of these companies is that older members are rewarded by profits from sales to newer members. If you work hard, sell skillfully, and are one of the early joiners in your region, you may indeed make a profit.
2. You can learn salesmanship – a useful business skill.
The company will provide you with extensive materials teaching you how to persuade others to join. Indeed, the whole existence of these companies is based on their expertise in persuasion, and as many of you have seen, their representatives can indeed be very convincing. Of course the techniques of persuasion can be very useful in business and many other areas of life, so even if you lose money at least you may develop a useful skill.
3. You, and Ethiopia, will gain a deeper understanding of the expression “There’s no such thing as a free lunch.”
This may sound like I’m mocking Ethiopians, but I’m not. Systems like these come to every country. The first time they come, they bankrupt large numbers of people. Afterwards people tend to be more careful. So maybe this experience will act like an inoculation, protecting against worse episodes in the future. Of course I hope not too many people will be hurt by the inoculation.
B. The bad
1. The great majority of participants will lose money.
Unfortunately, if you work hard, sell skillfully, but are late to join, it’s practically impossible to make enough sales to make a profit.
In my analysis I have the advantage of a computer science education which taught me about trees. One interesting property of binary trees is that the number of nodes with two children is always less than half the total number of nodes. Examples:
# with 2 children: 2 # with 2 children: 4 # with 2 children: 7
Total # nodes: 5 Total # nodes: 11 Total # nodes: 15
So, no matter how many people join, more than half of them will lose money. In practice, in these organizations it’s not enough to have only two other people beneath you – to make a profit you need more. So the number of people profiting is actually far fewer than half.
Anyway you don’t need to study computer science to see that most participants lose money. You can just read about the many other countries where these systems have already bankrupted large numbers of people: Sri Lanka, Nepal, Bhutan, the Philippines, etc. See the links below.
2. These systems are a massive net loss for Ethiopia.
It’s clear from the way the money is awarded that, the higher you are in the tree, the more money you make. So a large proportion of the profits flows to those who started these organizations, who are in other countries. The net loss for Ethiopia is obvious from the most conspicuous international transactions at the moment, which involve people bringing worthless “e‑cards” into the country and in exchange taking out bundles of cash.
3. Time spent on these systems distracts people from productive work.
Of course people are free to spend their personal time and money as they choose. However, from a broader point of view, a society suffers when smart, hardworking citizens leave school or quit their jobs to devote themselves to unproductive work.
You may ask: why is work for these companies not “productive work”?
This is a fair and subtle question. Here’s how I see it. “Productive work” is effort which satisfies someone else’s pre-existing desire or need. A street sweeper leaves the street cleaner for those who walk it. A taxi driver helps people get where they want to go. A computer programmer causes a computer system to behave as a user requires. Even a prostitute can very easily defend her work as satisfying a desire.
But the only benefit produced by these companies, aside from the indirect benefit of sales training, is that a minority of their members make profits – and these profits simply come straight from the pockets of the majority, who lose out. No other service is provided. They’re just a complicated way of shoveling money from one person’s pocket into another, with the biggest recipients sitting in other countries.
4. These systems encourage you to think of friends and relatives as potential sales targets, rather than as people you respect and love.
This is what I most dislike about these companies.
If you haven’t already, you will probably soon encounter the phenomenon of the friend/relative who suddenly can’t shut up about how great this company is and how dumb you are for not joining. Now, it’s a feature of capitalist society that we are surrounded by unpleasant people working hard to convince us to buy things we don’t want. But it’s very sad when the person pushing you used to be your friend.
To me, the greatest tragedy in other countries hit by these systems – greater even than the bankruptcies and the suicides – has been the large numbers of former friends who end up bitterly divided when one or both go broke. As one Sri Lankan man said (just before the pyramid there did indeed collapse): “How will I face my colleagues and friends whom I persuaded to invest in the firm if this scheme collapses, as I hear it has in other countries?”
See recommendation #2 at the end.
C. Some responses I’ve received so far, and my replies
1. “These companies are productive: by cutting out middlemen between manufacturers and buyers, they sell goods more efficiently.”
It’s true that cutting out middlemen can result in a more efficient business model. For example, Dell in the US is famous for selling high-quality computers directly to consumers. This allows them to charge lower prices than many competitors, because the competitors sell through stores which charge an extra commission.
However, there are two big problems with applying this argument to QuestNet etc.
First, these companies are full of middlemen! Every time you sell one of their products, a large part of the price is going to people above you in the pyramid. A person between the buyer and the manufacturer, who takes a portion of the sale price, is by definition a middleman.
Second, the easiest way to judge whether a distribution mechanism is efficient is to look at the bottom line: the price. Dell succeeded not because people admired its clever business model, but because they liked the low prices it charged for good products. Any time a company tells you it has a new way to sell something, just take the item they’re selling to Merkato, see how much people will pay for it there, and then compare to the price the company is charging.
In the case of, for example, the QuestNet watches, the price the company asks is far above what anyone would pay for such a watch in Merkato or anywhere else. (We will soon find out exactly how little those watches are really worth, because if the trend here follows previous countries, people will soon be desperately trying to resell them.)
2. “Aside from whether you approve of them, do you know if these companies are legal?”
I’ve read that they’ve been made illegal in some other countries, including Nepal and Bhutan (see links below). I’ve heard different claims about Ethiopia. The thing is, I don’t care too much. Even in the world’s most responsible countries there will be things which are legal but not right, or illegal but right. Governments will never be in a position to make all our decisions for us.
3. “Ethiopia doesn’t have to lose. We can actually benefit, by recruiting new members from other countries.”
In principle this is true, but in practice it’s extremely unlikely that enough new members will be found elsewhere to balance the losses here. You will find people in most other countries more skeptical about these schemes. Every other country I’ve read of that has been entered by them has suffered a large loss.
Anyway, the issue goes beyond patriotism. In any pyramid scheme, the majority are losers and a handful of con men win big. If Ethiopia somehow manages to turn a profit at the expense of a bunch of suckers in, say, Bangladesh, my sympathy will be with the Bangladeshis.
4. “Not all network marketing/multi-level marketing companies are scams.”
This is true. For example, in the US, Tupperware has historically used a somewhat similar scheme to sell its products. (See the Wikipedia articles on “Multi-level marketing” and “Pyramid scheme”, linked below.)
The difference, once again, is price. Tupperware containers are popular for their own merits and are bought by non-members who consider them a good deal. These non-member customers are why Tupperware has existed for decades without collapsing.
However, as far as I know none of the companies using these techniques in Ethiopia operate like Tupperware. Instead, they sell products pretty much entirely to their own members. No non-member would consider paying the prices they charge. What they’re really selling is membership, and when they run out of people who want to buy that, those who joined last will find that what they bought was worthless.
5. “Jacob, you obviously don’t know much about the company I’m with. What you said above doesn’t apply to my company at all.”
It’s true that I haven’t gone through all the materials for the different companies operating here. In fact I’m still pretty ignorant about them. If something I wrote doesn’t seem right or fair, please email me (firstname.lastname@example.org) to correct me. I promise I will consider and reply to what you say. I also am still learning about this subject.
6. “Do you have any links with information about these companies?”
Sure. Here are a few:
Ethiopian Reporter article about GoldQuest:
detailed argument between people for and against GoldQuest, including many good
links by a passionate critic named Python (not me!):
Details about Sri Lanka’s disastrous experience with GoldQuest:
some related subjects:
http://en.wikipedia.org/wiki/Economy_of_Albania (search for “pyramid” – yikes!)
· Or, do your own online survey by Googling “goldquest” (or “goldquest pyramid”, etc).
As you can see, the issue is hotly debated, and the results could be serious both for many individuals and for the country. In the end, at least until the government strongly intervenes, each person will have to make his or her own decision. So here are my three recommendations to everyone concerned:
· Don’t just believe anything anyone tells you, including me! Think for yourself. As I’ve said elsewhere, at this point in history there is no excuse for being uninformed if you have access to the Internet. And anyone considering paying a 6000-birr membership fee should be willing to first invest 20 or 30 birr in research at an Internet cafe.
· Whatever you conclude, be sincere. Discuss pros and cons openly with others, so you can all be better informed. If you ever find yourself deceiving a friend just to make some money, something has gone very wrong.
· Only risk money you can afford to lose! And whatever you do, don’t borrow money to join!! Even if you think it’s the greatest idea in history, it should be obvious to you that some sensible people think it’s risky. Hundreds of people in other countries have committed suicide when pyramid schemes they had invested everything in collapsed (see the Wikipedia links above). Don’t risk putting yourself in that position. Let’s make sure that, if things don’t work out, we’ll be able to laugh about it later on.