Are Multilevel-Marketing Companies Essentially Just “Chain Fraud”?

Multilevel-marketing (MLM) – also known as direct selling or network selling – is the system of retail in which individuals act as a parent company’s sales team to sell its consumer products to friends, family, and their greater networks and social circles. Unlike a traditional salesperson’s commissioned salary, compensation for these distributors comes in the form of the profit from successfully sold merchandise. If a company functions off of a multilevel compensation plan, a consultant is paid based on product sales in addition to their “downline,” the group of people the consultant has recruited.

MLM is not a new business concept; it dates back decades to the dawn of Tupperware (MLM strategy is partly to thank for the product’s sweeping success) and other companies including cosmetics brands Avon and Mary Kay. Second-wave MLMs have arisen and undergone a slight rebranding through distinguishing themselves with calculated use of Facebook and other social media platforms. Among this generation of companies includes the highly popular women’s clothing line LuLaRoe – one of the largest U.S. MLMs, as it grossed $1 billion in sales over the past four years since its creation. MLMs like LuLaRoe prosper in suburban and rural parts of America, where access to malls or more traditional retailers may be lacking, and consumer products purchased through a friend or contact may be more convenient. Among the 1.64 million inhabitants of Manhattan, 10 are LuLaRoe distributors, whereas in the 82,000-strong city of St. George, Utah, 12 residents are distributors. According to the Direct Selling Association, 20.5 million people were involved in direct sales in 2016 alone.

The body positive language and imagery of MLMs like LuLaRoe inspires women to buy into the business plan and become consultants for the promise of economic independence and female empowerment, as well as the accompanying sense of community and belonging.

MLMs are undoubtedly well liked and well trusted by its average consumer, but the Federal Trade Commission (FTC) warns the public of its potential ploys, “Not all multilevel marketing plans are legitimate…If the money you make is based on the number of people you recruit and your sales to them, it’s probably not. It could be a pyramid scheme. Pyramid schemes are illegal, and the vast majority of participants lose money.” The FTC defines pyramid schemes as tactics that “promise consumers or investors large profits based primarily on recruiting others to join their program.”

LuLaRoe requires its distributors to purchase a minimum of 33 pieces per month to remain active. Paying off initial fees of say, $5,000, would take under three months, if a consultant sold 30 pairs of leggings a week. For LuLaRoe and the majority of MLMs, being successful goes beyond selling the items themselves. Bringing in the biggest profit comes from recruiting sellers. LuLaRoe distributors received a 3-5 percent commission on their downline – the inventory bought by the new consultants they enlisted.

According to a FTC study, less than 1 percent of MLM consultants profit. This study, The Case (for and) against Multi-level Marketing summarizes,

Our studies, along with those done by other independent analysts (not connected to the MLM industry), clearly prove that MLM as a business model – with its endless chain of recruitment of participants as primary customers – is flawed, unfair, and deceptive. Worldwide feedback suggests it is also extremely viral, predatory and harmful to many participants. This conclusion does not apply just to a specific MLM company, but to the entire MLM industry. It is a systemic problem.”

Over 98 percent of those who join these companies lost more money than they made. The line between an MLM company and a pyramid scheme may be blurry. Over a span of 4 years, a whopping 88 percent never regained the company’s enrollment fees, and 94 percent of people did not renew their membership after their first year.

As quoted and published in a Quartz article, “The number of people who actually succeed at that is very small… And some do – people will get up on stage and wave checks around, but they represent a fraction of 1%,” according to attorney Douglas M. Brooks, who represents targets of pyramid schemes. The FTC’s statistics reveal that a majority of participants overwhelmingly do not find success with MLM companies, underlining the key criticisms of their business model.

Universally speaking, speculators partly understand the rising popularity of MLMs as a result and byproduct of the disenfranchisement of rural and suburban America, due to the concentration of economic opportunity placed in urban America.

Many, however, contest that these companies provide a different, perhaps more inclusive mode of business and retail, and an opportunity for those who to participate in an industry once believed impenetrable. There are few formal complaints to the FTC about MLM companies. The FTC received 3 million complaints in 2016, and less than 0.05 percent of those involved multilevel-marketing businesses. Nevertheless, considering the known data around MLM distributor financial difficulties, consumers, beware of the risk likely to be run.

Read more here – “Legit business opportunity — or pyramid scheme? Six signs to watch out for if you’re presented with a multilevel marketing job,” (Colleen McKown, CNBC)

Image Copyright: PhotographerStock Photo, License Summary.

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