Lyoness: Are they a Scam?

Before you think about commenting, please please please read the entire article, especially if you are or are thinking of becoming a Lyoness Premium Member. While my writing is slanted, even jaded at times, against Lyoness the arguments presented are my personal analysis of the matter and how I approach any and all business/money making proposals. I would hope that anyone looking to pursue any business endeavor to apply the same level of rigor before taking any of your own money and putting it in the pockets of someone else.

 

Who/What is Lyoness

Lyoness advertizes itself as a shopping community, providing cash back on purchases at participating vendors. They claim to have over 2 million members across the world who can receive rebates at a claimed 20,000 vendors. In addition to the shopping network, a claimed non-profit Lyoness Child & Family Foundation receives a portion of the income to help children around the world fight hunger and abuse.

The Lyoness program is broken into two tracks, the first being in the form of a discount card where between 1% and 6% of your purchase (depends on the vendor) is returned to you in the form of cash where this percentage goes up depending on the number of people that join your direct network. The second track is more extreme in that rather than racking up cash back through purchases, a one time gift card purchase (cough cough fee) of roughly $3,000 will allow you up to $25,000 in future payments granting you the title of "Premium Member" assuming you are able to recruit the required number of additional "Premium Members" yourself. There are additional tiers that scale at a similar rate depending on how active you are.

 

Why I care about Lyoness, MLM scams, and Ponzi schemes

Not all that long ago (2 years ago) I had received a call from a childhood friend who had gotten my number somehow. He cut the small talk to 2 or 3 life updates and went right into sales pitch mode talking about this "awesome program that allows you to make tons of cash...you just need to recruit people to sell the products in addition to selling it yourself." After talking to him a bit and explaining the business model to him, my friend saw the light and stopped participating the "program" for more legitimate business opportunities. Hence, started my crusade against all bottom feeding organizations with shady, unsustainable business models.

Fast forward to a few months ago, I was providing advice to a younger member of a online car forum that I am an active member for a career advice in what direction to head in. Nothing too crazy, just some background on what worked for me and advice I had been provided/learned along the way. Almost instantly one of the European members sent me this private message:

I read the message in disbelief - shaking my head and feeling bad for the rest of the general population. How is it in this day and age would anyone be 'convinced' by any of these statements, that boiler plate pyramid scheme lingo could still gather the attention of the masses and swoon them into submission without questioning the facts or doing any sort of research on their own. I'll have to man up and do the investigation myself and present the evidence in a holistic and unbiased manner to get anyone to listen to me. As our conversation ensued, he reviled that he was talking about Lyoness.

 

Scam litmus test - Google?

If you need to actually ask the question "is such and such a scam," that should be your first red flag, one easily ignored which for our purposes we will do as well. The easiest thing you can do to see if something is legitimate or not is to take the company or product name, type that into Google, and append "scam" to the end of your search term. Sounds simple right? 

BAM! Instant results but nothing conclusive. Few blogs saying Lyoness is a scam. Few news articles out of the EU claiming that Lyoness is nothing more than a Ponzi scheme (with a bunch of "Premium Members" posting and stating otherwise).

Maybe Google isn't the best way to base a decision since results can be manipulated and adding the "scam" search term focuses in on only the negative aspect of anything. What Google is amazing for however is understanding the landscape of what you're researching or investigating. A quick analysis of the results will surface three types of people writing about Lyoness (more on this later): those that are already in the program, those claiming it to be a scam, and finally "review" websites with nothing but glowing reviews of how awesome the program is.

 

Maybe WHOIS results can help?

Ok, ok, I'm a technology freak and know a decent amount about the web. Every domain name (company.com) has to maintain a set of information called the registrant information - basic info about how to contact the owner of the web site and where the site is based out of. Here is the results for Lyoness.net:

Ok it's not all that weird for a company to be owned by another company, United Trade Mark Limited, especially for taxation purposes. What is a bit curious is that the companies, both Lyoness and United Trade Mark Limited, is registered in Malta, a country which has a history of not extraditing nationals to other countries even under mountains of evidence and an extradition policy in place. As of 2009, there has been an explicit extradition policy in place with the US but this policy has never been tested. Something to note but maybe nothing more than that - although it is a bit curious when Malta has a 35% income tax rate. Granted there are some benefits to being an international holding company which I was unable to fully confirm which may lower the tax burden.

The address provided in Valletta, Malta seems to be much more residential than that of a bustling, multi-million dollar holding company based on Google Maps and pictures uploaded in that area. Maybe they are just going for the homely look and feel? You be the judge there.

The single most curious bit about the website's registration record is that it's in the name of the CEO and owner of Lyoness, Hubert Freidl. Kind of weird that his name would be put on the registration information rather than the legal entity which owns the domain (which is common practice to protect the owner). What's even more curious is that the company was founded in Austria but has its holding company in Malta? I'm sure there is a good tax reason that is escaping me here.

Another oddity which I came across is that the Lyoness servers are based in Liechtenstein. Little weird that the servers would be hosted in another country in the EU but not unheard of, especially since historically Liechtenstein has had such strong data protection laws and is centrally located. The curious bit that I found is the domains that are hosted on the same server:

cashback.net
lyoness-child-and-family-foundation.com
lyoness-child-and-family-foundation.org
lyoness-foundation.com
lyoness-foundation.org
lyoness.com
lyoness.info
lyoness.us
lyonesschildandfamilyfoundation.com
lyonesschildandfamilyfoundation.org
lyonessfoundation.org

Pretty even split between the money making sites and the supposed non-profit which is the foundation - something to keep in mind for the section talking about the foundation.

Wait a second there almost forgot to point out that there is a reference to an .ag domain for the name servers? Yup that's right, the name servers are setup in Antigua and Barbuda. Odd choice to go that road when your primary business is in Europe. Antigua and Barbuda has been known for it's shell companies and is the head quarters for a number of hedge funds and other large value financial firms.

In the IT world, typically you try and consolidate your infrastructure to a single location to make it easier to manage. If I were to play the devil's advocate I would argue that having computer systems across multiple legal entities (read countries with strong data privacy and security laws that historically don't cooperate with other countries) I would say they are trying to hide something, or at least make the truth more difficult to obtain. But since that's all speculation, I'm sure there is a perfectly reasonable explanation for it as well. (Oh, I forgot to mention that the founder of Lyoness, Hurbert Feridl, made his money in the technology space - maybe he just prefers all the extra paper work?).

 

Can we talk about the business model?

So my use of the internet to poke holes in Lyoness was far from conclusive maybe a detailed analysis of the operating model will draw some attention to how the company makes its money and 'pays' its members - maybe that will turn some heads?

 

Discount Cards (Warning numbers and Economics content)

Lyoness touts itself as a grassroots, social shopping network granting you cash back on purchases made in network. The argument made by Lyoness is that you need to purchase goods to live, so why not purchase the good(s) through their network and receive some money back - you were going to buy it anyway?

On the surface it sounds like a great thing for consumers - money back on every purchase made is money in the bank literally but is it sustainable?

 

Merchants and why they join

Before we can talk about if it's 'good' for consumers or sustainable we need to look at the fixed costs in joining the Lyoness network as a vendor and what it might represent. (Note that these are for online vendors only since that's all that is available through the website to outsiders) On average there is a $1,068 one time setup fee and an $26 a month network fee (only applicable if your storefront makes 10 transactions through Lyoness a month).

In addition to fixed setup and monthly fees, "a customary 6% commission" (it's not clear just how high this can actually go) is assessed on purchases which are made by Lyoness Loyalty Members meaning that the price of the good was effectively discounted by 6% to sell more of the product. Small price to pay for a vendor or merchant for closing the deal on potential fringe customers (those which might have not bought the product without the discount).

I've always been fascinated by the economic concept which is price elasticity of demand, being the tendency to sell more of a given product the cheaper it is (over generalization but gets the point across) which is the foundation Lyoness discount cards are based on. An aspect which is often overlooked however is that the price benefit (read, lower price) is only "available" to Lyoness loyalty members and the MSRP or base price remains constant - in layman's terms, a $100 pie is still a $100 pie regardless if purchased through a Lyoness vendor or not.

Continuing the pie example, let's say a given store sells 10 of these pies to Lyoness members, resulting in $60 in commission for Lyoness (remember the 6% commission?). The $60 in commission and additional $26 in fees go towards the cash back which the members receive each month. Sweet! (pun intended) Ok so now we know where the "cash" in the cash back card actually comes from - right from the pockets of the vendor. Interesting.

You could argue that a vendor who participates in the Lyoness Loyalty Program will receive more sales than that of a non-member due to the "2 million user" base plastered all over their website which is attributed to a simple concept in economics called the fungibility of goods, that is the ability for one good to be swapped out for another. How many different tablet pc's are on the market right now? As a consumer you have a choice in what you buy and if there are two identical items but one is priced cheaper, economics and common sense would dictate that you would choose the cheaper vendor (Lyoness' Merchant Network).

Pricing of a product in economics is a hot subject and well outside the scope of this discussion but what is a universal fact of business is that no legitimate business will ever sell an item at or below the cost of the item plus their operating margin (how much they paid for the product plus how much running the business costs). Maybe it's common sense but it's something that needs to be pointed out. Using my pie example, it would not be good business for it to cost me $101 to make the pie only to sell it for $100, effectively loosing 1% or more on the sale (remember there are credit card transaction fees etc).

Of course there is a profit margin, the difference between how much the product is sold for and the cost of making the product, which is exists for every product. Depending on the product being sold, you can expect a markup of anywhere between 15% and 50% or in the case of some electronic goods in the hundreds of percents before you as a consumer even see the pricing for a product. If you think that your local retail store is losing money when they have a 50% off sale you are out of your mind - they are still making quite a bit of money off of you even at the discounted rate.

As a business, I'm looking to maximize my profits. If I have to discount my products in order to sell them so be it, especially if that discount is only 6%  compared to my 40% profit margin that I'm sitting on right now. That's the allure of Lyoness for all businesses, that 6% commission is worth the 'extra' sales only if my profit margins are greater than 6% (anything less and I'd lose money). Even with the fixed costs, as long as I can offset those with a minimal number of transactions through Lyoness' network it's a worthwhile endeavor for me as a business owner.

In every single internet post I have seen supporting Lyoness, big names like Walmart, Porsche, and others are paraded around as some badge of acceptance, that "why would big names like these join Lyoness if it were a scam?" The answer: there is no negative reason for a merchant to not sign up as a Lyoness vendor because as outlined above, the only risk to them is the initial setup fee. These organizations don't care where the sales come from as long as there is a sufficient profit to be made. Heck if I had any sort of consumer product and lacked a soul, I'd sign up to sell my products through them as well - well maybe if I didn't have such a good understanding of where their money comes from.

Wait, I thought that this was a post about why Lyoness is bad - you just worked through why a company would join the network - now I'm all confused? I wish it were that simple and I'm getting to that - just remember, they money has to come from somewhere - where specifically? The 6% commission on the sale.

 

So where is the money made exactly?

Through recruiting people to use the network of course. Oh, I thought I could just use Lyoness to get a discount a certain vendors. Well you can, but then you're not "enjoying the full benefit of Lyoness" and they are taking anywhere between 4-5% of the purchase from you - remember they get 6% commission regardless.

Yes, as a Lyoness member you are encouraged to recruit other people to use Lyoness and in return you get a .5% additional cashback amount for your direct recruits and their immediate recruits. Why? So you can make money off of their purchases. Here is an example take directly from the recruiting brochure:

• You recruit 10 people
• Each of those recruit 5 additional people
• Assume each spends $600 a month at Lyoness vendors

You end up with 60 people in your "Lifeline" (Lyoness term). All together you have 61 people (you gotta use it too buddy!) spending $600 a month, so roughly  $36,600 a month in revenue floating through Lyoness. Well since Lyoness facilitated the transactions they are taking $2,196 in commission and that's the only money they have to pay out all the peons in the system. Let's look at the lowest level, those who get just the 2% cash back on their purchases because they couldn't recruit any of their friends see $12 ($600 * 2%) in cash back for their month's worth of purchasing. One level up, the 5 friend scenario each see $27 in cash back ($600 * 4.5%) and the grand master himself sees $192 in cash back ($600 * 32% ...60 'friends' in all). Let's add up the numbers...

50 people getting $12 = $600
10 people getting $27 = $270
1 person getting $197 = $197
-------------------------------------
Grand total payouts result in $1,067 potentially paid out to people each month. So really at the end of the day, excluding the 'loyalty commission', Lyoness just made  ~$1,129 for doing nothing but moving money around. At this point in time I'd like to direct you to this wonderful Wikipedia article swapping out the phrase "one time payment" for "purchase from a Lyoness Loyalty Vendor" and you can see what I'm getting at.

 

Patented Accounting System

Patented Accounting System? Residual Income? Accounting Units? These are all terms which Lyoness places around the payout system to entice users to spend money in the network rather than outside it. These terms may sound official or related in some way to real accounting terms but reality and fact show differently.

Let me first start out by stating that neither Lyoness nor its holding company own ANY patents outside of a handful of trade marks. Patents in the US and the EU are public record meaning you can go and read the detailed documents of how it works in order to prevent derivative works from coming onto the market.

The term accounting unit is nothing more than a representation for the amount of money you have spent/generated through Lyoness. Every $75 in cash back received generates an accounting unit or another way of putting it is that you need to directly spend atleast $3,750 ($75 / 2%) at 2% cash back vendors to generate a single unit or your direct/second level friends need to spend $15,000 ($75 / .5%) in network. The real gotcha is that the money needs to be spent in the right way for the accounting unit to 'complete' itself and the pay outs on an accounting unit show just how much money needs to be pumped into the system to get anything out of it(taken directly from the brochure again):

The over/under number represents how may completed accounting units are required to receive that tier's payout. So 3/3 means a total of 6 accounting units generated, three direct and three indirect, or in real cost terms Lyoness pays you $12 once an additional $90,000 has been pumped through your network - how kind of them. Looking for turning your $75 into $675? That's only going to cost you and your network a cool $1,050,000. Talk about life long income...just not for you.

 

Why are discount/loyalty programs bad for you as a consumer?

The greater the benefit the membership provides in the form of a discount the greater the tax on non-participants (people pay more for not being part of the club). As more and more people join the 'club' the total operating margins of the organization offering the discount will decrease by approximately the same amount - if you offer everyone in a club a discount of 2% but everyone already belongs to the club, your new MSRP is effectively 2% lower than it was.

A natural reaction for an organization to cope with the reduced revenue would be to increase the cost of the product by exactly the same amount to offset the reduced earnings - that way their margins stay the same - so now your product costs 2% more than it originally did and you're in exactly the same situation you were before, just now you're spending more money and breaking even after it's all done.

In the case of Lyoness the price change would eventually be more drastic, after all 6% is a hefty amount in some consumer good markets. You are probably sitting there thinking "yea, but if I hustle I can get ahead and get an even bigger discount at the end of the day by recruiting more and more people." I totally agree with you but at the same time you are heading to the situation described above quicker.

Another thing which should be pointed out is that the cash back is exactly that, cash given back to you after the transaction has occurred. Basically you are providing a free loan to the company pushing the paper for that dollar amount until it is deposited in your bank account. Sure it may feel nice to spend money and then get money directly deposited into your account in the form of cash, but a more effective use of your money would be in the form of a direct discount at checkout. Oh right, that wouldn't make Lyoness any money and that's why it doesn't happen!

Sometimes I get too "big pictured..."

 

A non-profit?

I told you I'd get back to the non-profit issue eventually. I have had a hard time confirming if the Lyoness Child and Family Fund even does anything related to helping people. Not to be skeptical but there are no independent audits of the organization in how the funds are spent or allocated or really anything more than artificial press releases that they have done anything more than fund raising events. Not a single financial statement, or spending document is available anywhere - a bit suspect in my book!

A Swiss article that I read had the same concerns that I have which have been left unanswered. Maybe I shouldn't be so skeptical of an organization which "helps" people, but given that their parent company makes money through people spending money I wouldn't be surprised if an audit by an outside organization found some 'accounting irregularities'.

One more thing to note goes back to the server configuration being hosted on the same server. In the US there would be a questionable conflict of interest in running non-profit servers on the same hardware as a for-profit business specifically in how the expenses are recorded. Maybe the EU is a little more relaxed?

 

Rant reviews galore! Let me in!

It's actually pretty hard to find a negative review of Lyoness on the internet. I find that a bit discerning since every Fortune 500 organization has a slew of hate talk on the internet. Could a company which rips off consumers so blatantly (see above) have such a great system that next to no one has anything bad to say? Actually that's a lie, there are plenty of people explaining how it's a form of Ponzi scheme - maybe that's how you got to this page?

 

Oh but Lyoness has certifications!

And they all are a joke. Lyoness made a huge deal out of it getting ISO 9001:2008 certification. Any one which has gone through any ISO certification knows that the business is not the one being certified but the underlying business process. This means that as long as you have extensive documentation on what to do when xyz occurs you can be certified regardless of the process itself. I can write up documentation on how to go number 2 in the bathroom everyday but just because the process can be ISO certified does not mean it does not stink from here until tomorrow.

Of course they received the TUV certification...because the TUV certification means that as an organization they do not represent a health hazard. I would hope that an organization which doesn't actually have a product and does nothing more but artificially moves money around is not a hazard to anyone health. Seems to be a weird certification for a company to go an get unless they have a hard time gaining credibility.

Before using certifications as an argument for "this is a legit company" you should look into what those certifications mean and the requirements to get said certification.

Anything too good to be true, actually is

I've heard time and time again that Lyoness is a viable business model utilizing existing global consumption as a viable business model to live off of, something which is too good to be true. The numbers speak a lot louder than any testimonial or sales pitch ever could. Sure you can make some money and game the system, but you just made someone else 10X that much money. When times are tough, as is the situation in the global economy right now after all, people will look to cut corners where ever they can. If that means looking at the micro picture and taking a small discount now and screwing themselves over down the line by all means.

I'm not saying you can't make money off of using the system but what I am saying is that through using Lyoness, an organization which provides nothing more than a minimal discount on a product/service, you are taking money directly out of the pockets of merchants - you know, the ones contributing to society through offering the product or service...