The ABCs of MLM
The multilevel marketing trend continues to flourish. But is it smart business?
Clothing from LuLaRoe, a direct sales company.
Go online and do an Internet search about multilevel marketing. What you’ll encounter is the real-world ambivalence that characterizes the industry. Information abounds both extolling its virtues and decrying its evils. So, where does the truth lie?
Some 20 million Americans are involved in network (aka multilevel, or MLM) marketing, according to the most recent Direct Selling Association statistics, with 3.5 million of that group living in the Northeastern US. It stands to reason, then, that most Westchester residents have come into contact with someone selling not only, say, cosmetics, skincare, or supplements but also an associated “business opportunity.” This leveraging is the hallmark of the network-marketing industry, which generates billions of dollars annually. But is the industry’s outlook really as rosy as that must-have blush your barre-class buddy insists you try?
By definition, MLMs are companies that don’t hire and train a sales force in the traditional sense. Participants buy into or “invest” in a particular company, becoming sellers who can then boost their incomes by recruiting others to do the same. This perpetual recruitment forms a chain, or network, that is known as a downline. Commissions are generally earned from all sales and recruitments in one’s downline, making it desirable for participants to build a large sales team. This essentially independent sales force is just one way the business model lowers company overhead, as training and employee-benefit costs are drastically reduced. Expenses associated with traditional advertising and in-store retailing are largely avoided, as well, as the network moves product by word-of-mouth and “legwork.”
Joanna Rajendran, Arbonne consultant
This business model is not new but has evolved over the years, incorporating new modes of communication and commerce. Unlike yesterday’s traveling salesman or doorbell-ringing cosmetics vendor, legwork today is a more virtual endeavor. Direct selling is now conducted largely online, often fueled by savvy use of social media. In-person meetings and events with product sampling certainly still exist, but customers are now most often directed to a website to make their purchases, with a code to input that credits a particular salesperson. Packing and shipping are often facilitated by the company, not the sales force, cutting down on large inventory-buying requirements.
Working within this streamlined framework, many local participants claim to have turned network marketing into a profitable venture. Yoga teacher and Arbonne consultant Joanna Rajendran of Hartsdale has nothing but good things to say about her experiences with this high-end beauty brand. Through hard work and a belief in the essential value of the products, Rajendran says she has risen well though the rungs of Arbonne’s compensation-plan ladder, earning a white Mercedes and a considerable salary in the process.
“There’s real consumership; the products are incredible. People buy them, and when they continue to buy them, you continue to earn an income,” Rajendran explains. She is able to do all of this, including building a close-knit team, and still “be the mom who can attend all the dance recitals and read books at preschool,” she says.
Kim Giannelli, a LuLaRoe consultant from Bronxville, with her inventory.
Schedule flexibility is just one reason MLM is attractive to many of its proponents and likely a contributing factor to why 77.4% of its workforce is female. A professional dancer who also works in public relations, Kim Giannelli of Bronxville is bolstering her income by selling LuLaRoe clothing. This company does require a considerable merchandise buy-in to get started, Giannelli points out, but says the hard work required “to basically run my own clothing store” is paying off. She holds sales in the form of “pop-up parties,” either at a physical location, most often a private home, or a virtual gathering at a designated time when the merchandise is pictured on a Facebook page that Gianelli painstakingly populates with inventory photos.
Meanwhile, Tanya Norris of White Plains was a Rodan + Fields customer before she became a consultant for the popular skincare line. After its products helped her overcome persistent acne, she became motivated to assist others with similar skin problems. “The company’s dedication to product innovation through research and development gives the brand real marketplace value,” Norris points out, though she is quick to add that success in network marketing requires personal dedication. “The business is not for everyone. People think this is a quick thing — that you have a product; you’re going to sell it and become a bazillionaire, but it doesn’t work that way. It takes time, and there is an art to this. You have to listen to people, their backstories, their concerns.”
If she believes that Rodan + Fields is a good fit for an individual, she’ll inform them about the products, and/or the business opportunity. And it does appear to be quite the business: Rodan + Fields was founded in 2002 by dermatologists Kathy Fields and Katie Rodan, the team behind Proactiv, the well-known infomercial anti-acne brand now owned primarily by Nestle. Initially selling R + F to Estee Lauder, the pair bought the company back in 2007, to pursue the direct-selling model. The move has helped place both its founders on Forbes 2016 list of America’s Richest Self-Made Women, sharing the 26th spot, each with a net worth of $550 million (right behind Madonna at no. 25).
So, there is money to be made in network marketing. But to say simply that “it’s not easy money” is a bit of an understatement. While success stories are out there (and are an essential component of the MLM business plan), it is equally important to note that, statistically, the majority earn very little; some even lose money, according to William Keep, School of Business dean at The College of New Jersey and network-marketing expert who has testified on the subject for the SEC. Keep adds that hard economic data is often difficult to obtain from MLMs, which leaves the potential employee or investor basing a financial decision on predominantly “unknowable” information.
A related undisclosed “high-earner persistence” is a major downside of MLMs, according to Keep, as a small number of the individuals at the top continue to earn the most money, while the larger number of people paying to enter the company fail to move up the chain, despite claims that the advancement potential is all but limitless.
Small top, large base — sound familiar? Truth is, many MLM companies have been accused of being pyramid schemes, which basically refers to an enterprise through which money is generated by the perpetual recruiting of new members who pay to join a “sales force” that is motivated to recruit others and to purchase products to meet quotas and earn commissions, rather than to sell to outsiders. High levels of internal consumption of products with little real-market value is a key indicator of an illegitimate MLM and a practice that has been under intense scrutiny by the FTC.
Well-publicized cases against Herbalife and the Vemma Nutrition Company were recently in the news, bringing attention to the issue and sending a message to other MLMs to clean up their acts. FTC chair Edith Ramirez, a known MLM opponent, summed up the agency’s position in a strongly worded speech she delivered to the Direct Selling Association at the organization’s Business and Policy Conference last October. Her main points stated that legitimate firms must avoid “misrepresentations” of potential business opportunities and be driven by “real sales to real customers,” meaning, verifiable and profitable retail transactions that form the basis for compensation to individuals completely outside of the company, frequently referred to as end-users. (Ramirez, an Obama appointee, stepped down from her post in February.)
Misrepresentations of income prospects “could be ameliorated by the industry itself,” points out David Glazer, adjunct professor at Manhattanville College and marketing department chair at Berkeley College School of Business, by taking a page from the tightly regulated financial and insurance industries. Such “companies must educate personnel about what can and cannot be said in recruiting situations. If they turn a blind eye, there [need to be] consequences.”
Buyer (and seller) Beware?
Due diligence is the proverbial bottom line for anyone considering network marketing as a career move, points out Sylvia Herzog, program director at the Women’s Enterprise Development Center in White Plains, a nonprofit organization dedicated to helping entrepreneurs succeed in the Lower and Mid-Hudson Valley. She advises that prior to investing time and money into a particular company, “determine that the product it is selling has clear benefits, and find out what percentage of sales are actually made to end-users. If the company cannot give you that information, beware.” Check online reviews and company ratings with the Better Business Bureau, Herzog adds, and “have an attorney or accountant review any contracts, to make sure you have a clear understanding of all commitments, fees, and earning opportunities.”
Keep adds that because MLMs depend so heavily on peer-group connections, companies offering high-end products, such as expensive skincare, would likely perceive Westchester County as an ideal marketplace. But even though the county’s affluence would appear advantageous, Keep says that residents here may not be pursuing MLM as primary family income, adding that “the bulk” of the industry worldwide targets individuals who are “desperate to improve their situations.”
So while the rule of caveat emptor would seem to apply to the world known as network marketing, it appears that the concept of caveat venditor does, too, in that both buyers and sellers must be cautious, especially when the distinction between the two gets blurred.
Gale Ritterhoff is a freelance writer based in Katonah who is a frequent contributor to 914INC. and Westchester Magazine.