Trickle-Up Economics

Is America’s Love Affair With Multilevel Marketing Coming To An End?

The Boca Raton Observer/August 22, 2019

By John Blosser

Avon calling! 

That now-iconic phrase – usually chirped by an impeccably made-up woman on your doorstep with a slew of cosmetics to sell – has been firmly imprinted in the American psyche. At a time in the 20th century when most women were expected to be homemakers, Avon, considered the first multilevel marketing company in the United States, offered women the chance to run their own businesses and make extra cash while still tending to their families.

It seemed too good to be true. And, like many things in life, it often was.

Companies based on multilevel marketing (MLM) – also known as network marketing, pyramid selling and referral marketing – have long been promoted as “get rich quick” plans, an exciting way for the average person to grab their piece of the American dream while working at home, part-time, with little effort or investment.

But this idealized image is quickly eroding, and the bitter truth is emerging that precious few distributors make any money at all. In fact, experts say, the vast majority lose money – some to the point of devastating bankruptcy.

Today’s MLMs – the most prominent of which include Mary Kay, Herbalife, Amway, Younique and LuLaRoe – are anxious to sign you up as a distributor of their products and a recruiter to bring others into the game. Recruitment videos feature smiling distributors on exotic vacations, driving luxury cars, living in fabulous mansions and wading in money – all thanks to their success with MLM. Company pep rallies are like mega-church services, with charismatic executives exhorting their underlings to “sell, sell, sell” and “recruit, recruit, recruit.”

Whether they’re peddling makeup, weight loss supplements, colorful leggings or health remedies, all MLMs follow the same marketing plan: Distributors recruit more distributors and make bigger profits from recruiting than from direct selling, while all must buy products to remain in the program. With distributors growing their “downline,” those they recruit, and passing profits to their “upline,” those who recruited them, this ensures that those at the very top get rich while everyone else makes little or goes broke – what some might call a classic pyramid scheme.

And it’s big business. The Direct Selling Association (DSA) today represents 122 direct selling companies, according to Direct selling companies – many of which are MLMs – brought in $35.4 billion in sales in 2018, a 1.3 percent increase over the previous year, according to DSA. One million full-time and 5.2 million part-time direct sellers (75 percent of which are women) service more than 36.6 million customers yearly.

DSA President Joseph Mariano, while noting the existence of “a small group of bad actors” in the direct selling universe, insists that “not only are we currently robust, but the future is robust for direct selling as a model.” Direct selling, he says, is “healthy, vibrant and as much a part of the American marketplace as it has ever been.”

However, some MLMs have been combating negative press and legal woes. In 2016, the Federal Trade Commission (FTC) hit Herbalife with a complaint, resulting in a settlement that required the company to restructure its business operations and pay $200 million to compensate consumers.

And Washington State Attorney General Bob Ferguson recently filed a lawsuit against leggings-peddling giant LuLaRoe. In a prepared statement, he said that the company “tricked consumers into buying into its pyramid scheme with deceptive claims of high profits and refunds for unsold merchandise. Instead, many Washingtonians lost money and were left with piles of unsold merchandise and broken promises from LuLaRoe. It’s time to hold LuLaRoe accountable for its deception.”

Boynton Beach resident Marian Nava knows that all too well. She was a LuLaRoe distributor from 2016 to 2019. The experience cost her more than $7,000 and left her with thousands of dollars in merchandise she cannot sell.

“Every month, in order to stay active, I had to order or sell a certain amount,” she says. “They oversaturated the market with distributors, and their quality control was becoming worse and worse. They promised to buy back merchandise I could not sell at 85 percent of what I paid for it, but, eventually, they said they would not take it back, and I was stuck with it. I’ve been trading some of it for dance lessons or giving it to auctions at my child’s school. It’s a pyramid scheme.”

Of course, some distributors do make money – like Laura McDermott of Coconut Creek. The college professor and published poet became a distributor for Color Street in 2017, selling press-on nail polish strips. She has made enough working part-time to pay off home repairs and medical bills. 

“Overall, I’m happy,” she says. “I’ve made friends out of frequent customers and reconnected with old high school and college friends who are now customers.”

However, many more are like New Jersey resident Jen Down, who, after two years, ended up with $7,000 in Younique products and $30,000 in LuLaRoe products that she couldn’t sell. Her marriage and mental health suffered, and she finally quit. 

“I got sucked into the cult,” she says. “It ruined my life.”

A 2018 AARP Foundation study, “Multilevel Marketing: The Research, Risks and Rewards,” found that, of the 20 million people involved in MLMs, 47 percent lost money and 27 percent made no money at all. And it noted that, of the 25 percent who made a profit, the majority made less than $5,000. In addition, 41 percent of respondents claimed they were misled about their chances of achieving financial success.

“People are taking out loans and mortgaging their houses to buy inventory,” says Christina Hinks, a former LuLaRoe distributor in McHenry, Illinois, who writes an anti-MLM blog. “The motto is ‘Buy more to sell more,’ but it really doesn’t work that way. I have a friend who has $30,000 worth of inventory in her garage right now. So, I quit the life to expose the fraud.”

The cult-like nature of many MLMs has also come under fire, noting their emphasis on charismatic leaders, an “insider” language and demands for complete loyalty. In fact, some LuLaRoe distributors have disclosed that they were pressured to undergo weight loss surgery (in Mexico, no less) to present a better face for the company.

Cult expert Rick Alan Ross – author of “Cults Inside Out,” founder of the Cult Education Institute and an experienced deprogrammer – told Vice News: “I receive complaints on a regular basis about the destructive nature of MLMs. They hurt families and relationships, destroy people financially and really do a great deal of harm.” 

Another complaint of distributors is that MLMs oversaturate markets by recruiting too many distributors, and their sales subsequently suffer.

“When you have Susan, Sarah, Amy and Anna all on the same block, and they all have $20,000 worth of inventory, nobody’s selling anything,” Hinks says.

Low-to-middle-class housewives have traditionally been the primary target of MLMs, which promise to end their social isolation, allow them to stay home with their kids and make extra cash at the same time. But, in recent years, the companies have begun targeting other groups, including the Hispanic community, church congregations and college students. Truth in Advertising, a pro-consumer watchdog group, found that 40 percent of college students had been approached by MLM recruiters, according to a study.

As Americans wise up to the risks of MLMs, many companies are moving overseas to infiltrate new markets, says Dr. Cheryl Burke Jarvis, professor and chair of the department of marketing at Florida Atlantic University in Boca Raton.

The DSA’s Mariano sees it another way, calling this trend normal global expansion: “International growth, like many businesses, has been an aspect of the growth of the industry.”

However, Dr. Jarvis says: “Many MLMs are really walking the line between MLMs and pyramids.

These fraudulent companies are going after emerging markets like crazy. They are pouring millions of dollars into emerging markets that have never seen MLMs before and don’t have any laws in place [to protect their citizens].”

So how can you tell the difference between a legitimate business opportunity and an MLM? Ask the right questions, Ross said.

“Are you really selling the product, or are you selling the plan? That’s one of the tipoffs. The focus of the MLM is not the product line, although they have a product line to avoid legal issues. The real money is selling the plan, signing up distributors and getting those distributors to do the same. Does Ford depend on its employees to buy its product?”

The FTC issued this warning: “Not all multilevel marketing plans are legitimate. Some MLM companies tout luxurious lifestyles and suggest you’ll earn enough money to quit your job or meaningfully supplement your income. But are their claims for real? Be wary and ask for written information about how much money most people make (after deducting their expenses). Also, if anyone suggests recruiting is the real way to make money, know this: MLMs that survive on recruiting new participants rather than retail sales are pyramid schemes. Pyramid schemes are illegal, and the vast majority of participants lose money.” 

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