, ,

In multilevel marketing (MLM) sales structures, the sales consultants affiliated with the company purchase products at a wholesale price, then seek to charge retail prices for the inventory that they have bought. The history of this sales approach is long and varied, embodied in such famous brands as Mary Kay Cosmetics, Amway, and Pampered Chef, as well as more recent entries like LuLaRoe, doTerra, and Tastefully Simple. According to proponents, MLM offers substantial opportunity to earn profits, as well as a flexible work schedule that can be a great benefit to parents of young children or full-time employees looking to earn more money on the side.

But for critics, MLM is indistinguishable from pyramid schemes, illegal tactics that rely on recruiting a constantly expanding group of investors, who pay to join and commit to inducing others to do so. In a pyramid scheme, the profits earned from these recruitments then go to earlier investors, such that those at the top of the pyramid might earn vast amounts, whereas those at the bottom likely suffer losses, because the model ultimately is unviable. There simply is not an unlimited pool of investors that can support the pyramid indefinitely.

Although MLMs arguably differ from pyramid schemes, continued evidence from recent events in the MLM industry suggest that the lines often get crossed. For example, vendors for the LuLaRoe clothing company were seemingly everywhere in the mid- to late 2010s. Approximately 77,000 consultants had joined, purchasing vast stocks of stretchy leggings, soft dresses, and comfortably loose tops. The company reported $2.3 billion in sales. But those numbers have dropped dramatically, such that more than half of the consultants have separated from the firm, noting that they never made any profits, and even lost money—an outcome they also say was virtually inevitable, because of the way the system was structured.

In particular, consultants joining LuLaRoe are required to purchase, at a minimum, 248 pieces of clothing included in a $5000 initial order kit. To earn bonus incentives, they also have to buy additional monthly specials. Then they are responsible for their operating costs, such as renting booths at local craft fairs, buying hangers and clothing racks, or maintaining a website to reach online customers.

Beyond selling the clothing, the consultants are pushed to recruit other sellers. For each new consultant they attract, they earn a commission, as well as a percentage of that new consultant’s sales. But this push by the company to get consultants to attract others to join means that the sellers are encouraging new competitors to enter the market and potentially take away some of their own sales. Once a market for the product becomes saturated with sellers, it is unlikely that anyone can sell enough to make a profit.

In addition to leaving the firm, many consultants have initiated lawsuits, alleging that LuLaRoe cheated them. In Washington State, a class-action lawsuit also accuses the company of deceptive practices.

LuLaRoe is just one example, and the business model continues to spread to various product sectors. An estimated one in six U.S. households participates in MLM. Furthermore, the Federal Trade Commission does not impose a definitive rule for distinguishing between illegal pyramid schemes and MLM, so companies continue to seek success and profits by leveraging the benefits of a vast army of enthusiastic consultants selling their products.

Source: Lisette Voytko, “Herbalife, Younique, LuLaRoe, and Other MLMs Are Suddenly Under Fire,” Forbes, November 9, 2019; Gaby Del Valle, “Multilevel Marketing Companies Say They Can Make You Rich. Here’s How Much 7 Sellers Actually Earned,” Vox, October 22, 2018; Chavie Lieber, “More than 100 LuLaRoe Sellers Have Filed for Bankruptcy,” Vox, April 30, 2019; Hayley Peterson, “LuLaRoe Is Facing Mounting Debt, Layoffs, and an Exodus of Top Sellers, and Sources Say the $2.3 Billion Legging Empire Could Be Imploding,” Business Insider, November 20, 2018