You’ve been seeing ads in your news feeds for months now about these great leggings, essential oils, and beauty products all your friends suddenly seem to be using. Your friends love the products. You could use the extra income. Direct Sales would let you stay home and spend more time with your kids, or maybe just make a little extra money on top of your day job to afford a big family vacation or kitchen remodel.
You’re optimistic, but skeptical. So you do your homework and read income disclosure statements from some of the direct sales companies you remember from all those Facebook party invitations. You find that in 2016, top earners at LuLaRoe made over $200,000 per month in bonus payments. YoungLiving’s top distributors averaged just over $150,000 per month in income. Even the most modest of top consultant earnings – Jamberry’s $40,000 per month – has you thinking less about one nice vacation and more about vacation homes.
But this can’t be right. How can selling leggings from home make you as much money in one month as many doctors earn in one year? A LuLaRoe consultant making $200,000 per month would bring home more than $2 million per year. That’s professional football money. You reasonably think that hey, even if you never reach the top few levels, you could probably become an average consultant. You decide to look beyond the income statements to see what actual consultants are saying. It’s hard to stay skeptical with hashtags like #becauseofjamberry or #myMKlife or #thatlularoelife, which show consultants buying vacations, cars, and houses, all while being able to stay home with their children. You have children! You have an Instagram account! You could be one of those women!
What is a Multilevel Marketing Company?
Direct Sales. Multilevel Marketing. Pyramid Scheme. The terminology surrounding these sorts of companies is a confusing mix of creative branding and legal designations. Understanding the basic structure of each business is essential, though, as it can help you decide whether the benefits of joining outweigh the costs.
A company using a “Direct Sales” approach sells directly to consumers. Instead of purchasing items through stores, customers purchase directly from the company, usually through salespeople who earn a commission based on what they sell. A company using a “Multilevel Marketing” approach also engages in direct sales to customers. Workers at MLMs go by many different titles. At Team Beachbody, they are “coaches.” At It Works, Young Living, and other brands with dubious health claims, they are “distributors.” LuLaRoe has “Independent Retailers.” Jamberry and many other fashion and beauty brands have “consultants.”
In MLMs, the commission structure happens at multiple levels. That means that a portion of all of the sales made by your “downline” – the people you recruit, the people your recruits recruit, the people your recruits’ recruits recruit, and so on – go to you. The same is true for your “upline.” The person who recruited you, and the person who recruited your recruiter, and all the people above them all receive a portion of your sales.
Many MLMs are criticized for being pyramid schemes, but there is an important legal distinction between the two. A pyramid scheme is an illegal business. The structure of the pyramid scheme looks just like an MLM, but there is absolutely no product being sold to customers. Instead, it’s just money being sent up the pyramid.
Because there is at least a product being sold outside of the company, an MLM is legal. But the sales structure, as John Oliver explains in a “Last Week Tonight” segment, presents a simple and inescapable math problem. If a business model is based on you recruiting five people, who each recruit five people, and each of those five people recruit five people and so on, you’re quickly going to run out of customers. In 14 cycles. “And that,” Oliver quips, “is assuming that everyone on earth wants to be a protein shake distributor.”
What will you likely earn?
If you were reading the income disclosure statements of the various MLMs in order to determine whether or not they are legitimate business opportunities, you might be surprised that MLMs are not legally required to produce these documents. The income disclosure statements are marketing documents, designed to get you to buy that starter package. They are only legal documents insofar as each of them contains a disclaimer informing prospective consultants that individual results may vary.
That doesn’t mean these documents aren’t helpful. Reading between the lines makes it easy to see that most consultants will never come close to even the most modest of bonus levels. Jamberry’s income disclosure statement, for example, suggests there isn’t much money to be had in selling nail wraps. 12.44 percent of the company’s consultants received no income in 2015. Another 61.25 percent of its consultants earned an average of $219 per month. That number is low, but might seem tempting to a mom looking to make a little extra money on the side.
If you look at the data a little closer, you’ll see a problem. Of the over 80,000 consultants averaging $219 per month, the “high” earners made $3,980, while the “low” earners made $1. Jamberry does not disclose how many of those consultants were closer to $4,000 and how many were closer to $1. There is no way to determine how many people were on which end of that spectrum. Furthermore, the charts represent income, not profit, as they do not include the expenses accrued by consultants.
Do you have to spend money to make money?
Those expenses are an important consideration if you’re considering selling for an MLM. As an employee of a business, you’re usually given the tools you need to succeed on the job, from pens to a workstation to a computer to corporate training. As a solo entrepreneur, you have to sort all of those things out for yourself, which makes you think about the cost of post-it notes much differently.
As a member of an MLM, you’re neither employee nor entrepreneur. You don’t get the built-in tools to help you succeed at your job, nor do you get the freedom to make decisions about your business and what works for you.
It’s difficult to get an accurate sense of the startup costs from the companies themselves, which tend to downplay the initial “investment” in favor of the possible returns. But there are plenty of former consultants, and even a few current ones, sharing their experiences online. Bottlesoup runs down the particulars at Jamberry. That startup cost of $99 excludes a hefty shipping fee. That money doesn’t make you a completely independent seller. You’ll be using company-issued marketing materials, business cards (that you pay for), and catalogs (that you pay for and which expire in a few months). At least at Jamberry you don’t have to stock inventory. That’s a different story at LuLaRoe, for which you’ll need to spend about $5,000 for initial inventory. PinkTruth reports that, unlike a solo entrepreneur, you cannot select the colors or patterns of that inventory.
What is the product?
This seems like an easy question. You’re selling makeup, or supplements, or essential oils, or leggings. Right?
In its income disclosure statement, LuLaRoe boasts the 2016 average annual bonus of $2,064.77. To prospective retailers, that amount sounds promising. But further in the statement, LuLaRoe reports that 72.63 percent of its retailers were “ineligible,” because they had not signed up other retailers. In other words, nearly three-quarters of LuLaRoe’s retailers are not receiving bonuses. It sounds an awful lot like those bonuses come as a result of signing up other people to sell LuLaRoe.
For many MLMs, the merchandise is a secondary product. The real product is the distributors.
What does success at an MLM look like?
Perhaps you have read all of this and are still confident that the MLM you want to join will be different. You already know you won’t be at the bottom. You’re you! People will notice your drive and enthusiasm and your friends and family will for sure want to buy lots of whatever you’re selling. And lots of people will want to sell it along with you, so you’ll build a long downline and with it, enough for whatever future you’re dreaming of: paid bills, more kids, your dream home.
But what about the rest of your downline?
Many MLMs use the term “sisterhood” to describe their communities of consultants. But if you rise to the top of one of these companies, it’s likely because you’re stepping on the backs of thousands – maybe tens of thousands – of those sisters, who will see no return on their investment. In many cases, these are women who took out loans to cover the cost of startup inventory that they were unable to sell.
It’s probably not your dream to build a successful company that hurts most of its users.
What you should be selling
Not everyone wants to go into business 100 percent for themselves. Startups are an enormous amount of work, and many of them do not succeed. MLMs seem like a great way to try out entrepreneurship with lower start-up costs and already-established brands. But selling for these companies is unlikely to give you financial freedom. It requires you to cede creative control to the parent company.
Even if you are among the rare consultants who do succeed, you’ll have done so at the personal expense of your fellow workers.
Fortunately, an MLM is not the only middle ground between working for a company and having your own business. Instead of selling someone else’s products on the internet, consider selling your own. Can you take gorgeous portrait photos? Set up a website and start advertising in your town. Do you make jewelry? Etsy can help you reach a wide audience of prospective buyers. Are you a writer with a unique perspective on parenting? Parent.co will pay you for your writing and help get your message to more parents. You might not make football money in your first year, but you’ll be creating something that brings value to you and to your customers.