MLMs and the promise of wealth from your dining room table

What do Avon, Tupperware, Doterra, and Arbonne have in common? They are all businesses in New Zealand that utilise multi-level marketing (MLM) strategies. If you aren't familiar with the names or the products, ranging from hair care and makeup to herbal supplements, you might at least have come across the sales and recruitment gimmicks they employ. Maybe your Mom was a frequent invitee or hostess for a friend's sex toy party (Pure Romance) or cooking utensil business (Pampered Chef); maybe your favourite Uncle loved to talk about the conventions and seminars he was attending (Amway). Regardless, the fact remains that they are a controversial marketing model that exploits millions of people worldwide with promises of financial freedom that are only available to those who are placed at the tippy top of the MLMs' pyramid-like structures.

The core of these operations is a non-salaried workforce (called Independent contractors or distributors) who earn commissions through two revenue streams: one being the products they sell themselves to customers, and the second from bonuses accrued from products purchased/sold by their recruits (often called their “downline”). The latter, for the majority of MLMs, will be the bigger income stream of the two - and it's where one will find the most controversial practices. A common practice is front- or inventory-loading, whereby the independent contractor pays up front for inventory or “start-up kits” as a means to buy into the MLM's ranking scheme. However, these products are often overpriced compared to market value, so the real earning power is getting members into your downline to buy those products and start-up kits to rank-up, thereby artificially bolstering your own commissions and rank. Another tactic is auto-shipping, where a customer is enrolled into a subscription programme to receive regular product deliveries and credit card charges; these enrolments may be further incentivised for the contractor to increase their rank, but it is not uncommon for customers to be subscribed without their knowledge or permission.

If the flow of money here sounds a bit pyramidal in its shape, you wouldn't be far off the mark. While not all MLMs are pyramid schemes, the United States Federal Trade Commission's (FTC) position means there are decidedly few that fall in that category: If the MLM is not a pyramid scheme, it will pay you based on your sales to retail customers, without having to recruit new distributors.

A common argument is that MLMs are not pyramid schemes because they sell products; pyramid schemes only promise money in exchange for recruiting others, but have no product to sell. The FTC takes a dim view of this. To wit:

“The promoters of a pyramid scheme may try to recruit you with pitches about what you'll earn. They may say you can change your life — quit your job and even get rich — by selling the company's products. That's a lie. Your income would be based mostly on how many people you recruit, not how much product you sell. Pyramid schemes are set up to encourage everyone to keep recruiting people to keep a constant stream of new distributors — and their money — flowing into the business.”

The NZ Commerce Commission appears to be considerably more flexible, stating:

_No, there are a number of multi-level marketing schemes operating in New Zealand which are not pyramid selling schemes. With multi-level marketing schemes salespeople are expected to sell products directly to consumers. They are separately incentivised to recruit others as fellow salespeople. Participants earn commission from selling products, whereas pyramid selling involves participants earning money solely or primarily by introducing other people into the scheme.

In a multi-level marketing scheme, income expectation is limited by the number of sales, not by the number of new sales representatives. Customers of multi-level marketing companies can buy the goods or services they offer without joining the scheme. Multi-level marketing also usually involves commercially viable products (for example clothing, jewellery, cosmetics, health products, cleaning products and cookware) which present genuine business and income-earning opportunities through sales to clients._

So, why do MLMs still proliferate and prosper?

This is a complex question that ties in the legal permissiveness of the MLM model, the ramifications of the pandemic, the populations that MLMs target, and the strategies used to keep them there.

In the United States, an MLM can be considered legitimate and not a pyramid scheme if at least 70% of all goods sold are purchased by non-distributors. However, this can be difficult to investigate due to the inventory-loading discussed earlier. Some distributors also utilise dummy accounts registered under the name of naive family or friends, thereby falsely presenting them as customers while artificially maintaining their ranks on their MLM's compensation plan.

In NZ, MLMs are not prohibited by the Fair Trade Act, but there are protections for some MLM customers through the Consumer Guarantees act. If you purchase an MLM item that is not as advertised, especially from a party plan MLM, you do have recourse.

One would think that the pandemic would be the death knell of MLMs, but that would only be true if you thought MLMs were stuck in the dark ages of catalogues and door-to-door sales. But, at least for the successful distributors, the pandemic has been a boon time on multiple levels. Distributors for MLMs like Arbonne and doTerra make health claims that their products are effective in protecting or boosting immunity against the coronavirus, pulling in a consumer base that is scared of the unknown. Others are attracted to the promise of a guaranteed income from working from home in a time where jobs in many industries are disappearing or being furloughed. Social media has also been a boon for the more tech-savvy MLMs as Facebook, Instagram, and TikTok allowed devotees unfettered and uninterrupted bandwidth to talk up the benefits of their business and show-off all the wealth and consumer goods they have courtesy of their essential oils or buttery-soft leggings. Influencers with pre-existing and large followings were desirable recruits themselves, due to their wide reach; even with a modest goal of converting 1% of their following into their downline, influences with followings in the 10s or 100s of thousands could start earning sizable commissions on the basis of a selfie or two. The hipness of MLMs is further embedded by some crafty evasion of the MLM label through terms such as direct-selling, influencer-marketing or affiliate-marketing.

A representative's sphere of influence is no longer limited to a couple of neighbourhood blocks, but instead can be global in scope.

However, there is a dark side to this pandemic gold rush. The fact remains that a large portion of distributors will only earn annual incomes in the double or triple digits. The key document to look for with any MLM is the Income Disclosure statement. Consider this one published by Arbonne for the NZ market. 47% of independent consultants at the lowest rank in the compensation scheme earned an average of $229 per year, with the Top 25 average being $1,801 per annum and the lowest 25 being $5 per annum. Even the next level up is hardly enticing, with an average annual earnings of $2,037 per year.

In the United States, however, loyalty to an MLM has been fatal for many. Attendees at a Paparazzi Accessories (jewellery MLM) convention fell victim to a super spreader event - something that the company itself has not fully addressed to this day.

On the cultural side of things, MLMs and their products are heavily marketed to women. In NZ, the Direct Selling Association of NZ reports that at least 71.5% of the MLM salesforce in NZ is female, while a strong male presence is observed internationally. This is not accidental. Again, the promise of flexible work arrangements and a sisterhood strongly appeals to women, often mothers, who are isolated socially or restricted from re-entering the workforce due to costs of childcare, etc.

As we talked about in Episode 4 of the Yeah…Nah podcast, a strong presence of MLMs in Utah can be attributed to both the lax legal requirements as well as a captive market of connected, educated women with large families who aren't able to take on traditional careers at this time in their life, but still want to financially contribute. Gimmicks like parties (i.e. Tupperware), conventions (Amway), or some combination of the two (LulaRoe) lean on those insecurities with the promise of a new sisterhood of ambitious women who are cheering on your success. And, if you read Mark's contribution about the BITE model, that sisterhood will be all too ready to step in to replace the nay-sayers in your life who don't support your new business.

Over the next few weeks, I'll be looking at several MLMs that are active in NZ and abroad. I will be deconstructing their compensation plans, their products, their social media presence, and what happens to the distributors that don't succeed, or who decided to turn away from the business. Hopefully, this project can arm New Zealand Skeptics with information that they can use to dissuade friends and family from signing-up with these money pits.