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‘Multilevel marketing’ schemes like Herbalife, Amway and Juice Plus are bullshit and here’s why

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Multilevel marketing schemes like Amway, Herbalife and Juice Plus are bullshit You probably know someone (or multiple people if you’re particularly unlucky) who has tried to sell you so-called “multilevel marketing” products such as Herbalife, Amway, Juice Plus, Avon, Mona Vie, Vemma or Arbonne.

If you’re even more unlucky, they’ve tried to recruit you to sell the product, too, waxing poetic about the amazing quality of the products, big discounts, easy money, blah blah blah.

There are lots of annoying things about this: high-pressure sales pitches, attempts to monetize their relationship with you, appeals at get-togethers and on social media. But the most annoying thing of all may be that, even after badgering everyone they know to buy a bunch of stuff they don’t really want, your friend or relative will probably never make a dime off it.

What is multilevel marketing anyway?

Also known as “network marketing” or “direct marketing,” multilevel marketing is a retail scheme where “distributors” are recruited to sell a company’s products to retail customers, but also to a network of other distributors they themselves recruit. It looks kinda like this:

Multi-level marketing schemes like Herbalife, Nu Skin, Arbonne, Primerica and USANA are bullshitYou’ll notice that there’s a distinct pyramid shape to MLM businesses. In fact, the only real difference between a pyramid scheme and multi-level marketing is that MLM companies have to have a product they’re selling to retail customers outside the network, and many MLM companies have been prosecuted for not meeting that threshold.

But despite their resemblance to a notorious form of fraud, they’re a huge business in the U.S. and around the world, with many large and established companies and smaller ones coming online all the time, says William Keep, professor of marketing and dean of the business school at The College of New Jersey.

Although data is hard to come by, “I’ve seen estimates as high as 1,200 multilevel marketing companies operating in the United States,” Keep says.

What they sell

MLM companies typically sell consumable products like nutritional supplements and moisturizers, says Jon Taylor, a consumer advocate and founder of the Consumer Awareness Institute.

“Most of these companies sell what I call ‘pills, potions and lotions,’” says Taylor. “They can get some kind of exotic ingredient from some tropical rainforest in the Amazon or somewhere and say this will cure or prevent virtually any disease under the sun. They hire some nutritionists or doctors to claim that there are some unique properties in these products, and then they sell it.”

Unfortunately, few of those claims hold up to independent scrutiny, Taylor says.

“When scientists that are not paid by the industry look at these products they’re usually no more than what you can buy at a supermarket for a fifth of the price,” Taylor says.

Why you’re really, really unlikely to make money

Despite what they’re told to get them in, very few of the people who participate in these schemes make money, and those that do are mostly the ones at the top of the pyramid.

How do we know this? It’s all in disclosures put out by the companies themselves, says Keep.

Keep cites Herbalife, which is a pretty typical multilevel marketing company, except that it’s gigantic and public. That means that it has to disclose details that other private MLM companies don’t, giving us a window into how they operate.

If you become one of the nearly half million Herbalife distributors, in the U.S. alone (as of 2012), here are the “opportunities” you get (and why they’re pretty much bullshit):

1. Buying the MLM company’s products at “wholesale” prices

Normally, when you think “wholesale,” you think of a company selling you products in bulk without a big markup. But the “wholesale” prices Herbalife distributors pay for the product are high enough that the company makes an 80 percent gross profit margin, according to their annual financial statement for 2012. What that means in non-financial-ese is that for every $1 a distributor pays them for health shakes and vitamin pills, only 20 cents goes into making the actual product.

For a point of comparison, Procter & Gamble, a huge multinational company that markets several brands of nutritional supplements as well as a zillion household staples, had a gross profit margin of about 50 percent last year, meaning that for every $1 they make in revenue, 50 cents goes into making products.

2. Reselling the product to retail customers

MLM companies say that distributors can make lots of money selling their products to retail consumers with a substantial markup. Unfortunately, at the prices that MLM companies charge, it’s often hard to find people willing to buy them, especially over the long term, says Taylor.

“They charge a lot of money in order to cover a hierarchy of distributors — many levels of people,” Taylor says. “The products you get from multilevel marketing companies cost five to six times as much as those you can get at GNC or any supermarket.”

Because of that, and the questionable effectiveness of these products, “there’s very little actual customer base,” for most MLM companies, Taylor says.

3. Reselling product to your “downline” distributors

Recruiting other distributors (known collectively as your “downline”) means supplying them with product, and if you sell enough product, the MLM company rewards you with cash they sometimes call “royalty overrides.”

Unfortunately, any downline distributors you manage to recruit aren’t likely to be there very long, Keep says.

“In many multilevel marketing companies, 80 percent to 90 percent of the new recruits will leave every year,” says William Keep, professor of marketing and dean of the business school at The College of New Jersey.

4. “Royalties” and “bonuses” directly from the MLM for meeting certain sales goals

MLM distributors who get a big enough downline (and maybe even some actual retail sales) may sell enough product on a regular enough basis to be eligible to receive cash bonuses from the company. But not many do, Keep says.

“There are lots of people in those downlines who never qualify for earnings,” Keep says.

According to its financial statements, Herbalife paid $1.4 billion in royalties worldwide in 2012.

That sounds great and all, but only a tiny percentage of distributors actually end up making what most people would consider a living off of such payments, Taylor says.

“The only way you survive in one of these schemes is recruiting people into a large downline, and there’s a significant pay to play feature which means you have to buy product every month to qualify for commissions or advancement,” Taylor says. “The vast majority of the money goes to a handful of people at the top.”

Here’s a breakdown of who gets what at Herbalife.

Of course, you can be sure that the CEOs and owners of these companies get paid pretty well. Herbalife CEO Michael O. Johnson made $10.3 million in 2012 alone.

Significant costs put sellers in the red

Making matters worse, many MLM distributors have some pretty steep costs that these paltry payoffs don’t begin to cover. With no data to go on about how likely they are to succeed in their area, and even how much competition there is from other sellers, they’re often deep in the red before they realize they’re not ever going to make money on the scheme.

“You go in there very earnestly saying, ‘OK, low barriers to entry, it only costs me X amount of money to get in, maybe I’ll spend a little bit more money on this training,’” Keep says. “And now I’m like $1,000 or $2,000 into the hole, and I have no way to know whether 1,000 people in my geographic area are also trying to do the same thing I am, or two people are. And it is not to the advantage of the company to tell you.”

How it’s presented and how to say no

So if being an MLM distributor pays so badly, why do so many people do it? MLM companies claim that most distributors join up for the product discounts, the same way you would join a shopping club like Costco.

“Approximately 70 percent of Herbalife members join to get a product discount and have no intention of trying to make any money,” says a spokesman from Herbalife. “There are many reasons people may not renew their membership – they receive the discount through another distributor, they have achieved their short term product results, such as losing weight for a special event, or income goals, such as earning enough to pay for a family holiday – and it is a willful misrepresentation to suggest that each of those is in some way a ‘failure.’”

But the high rate of turnover among distributors suggests that’s not the case, Keep says.

Instead, Keep chalks it up in part to big promises from the companies themselves and from other MLM distributors looking to build their own downline.

So-called “lifestyle videos,” depicting successful distributors enjoying a life of luxury are a mainstay of the industry, he says.

“There’s Jim and Jane standing next to their Ferrari on the shore in Hawaii near their beach home, and he was a plumber three years ago,” Keep says. “You see these sorts of rags-to-riches stories but we never really know how they got there.”

If someone tries to pressure you to become an MLM distributor, the easiest defense is asking how much they’ve actually made, after expenses, on the scheme, says Taylor.

“The smart thing to do would be to ask to see their tax return,” Taylor says. “And say ‘I’ll talk to you if you can show me you produced a profit last year,’ and that would be the end of it.”

What do you think? Do you have any experience with multilevel marketing? How did it go for you?

Update: I got a response from Herbalife, which I’ve included above.

(Photo by King Tyrone / CC BY)

{ 21 comments, please add your thoughts now! }

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21 Responses to “‘Multilevel marketing’ schemes like Herbalife, Amway and Juice Plus are bullshit and here’s why”

  1. I had lunch the other day with a friend because I wanted to bounce a new business idea off him. I started out, as anyone would, by laying out the circumstances that would make this venture needed and successful.

    Pete generally is a supportive kind of guy, the type you love having as a friend and a sounding board.

    But he attacked everything I said, and I had the devil of a time even completing my sentences. Surprised at his hostility, I just plowed right on, until I told him what the venture was.

    Then he changed completely, and went back to his usual self. As we got up from lunch, he said, with a smile: “When you called and said you wanted to run an idea for a business by me… you have no idea how relieved I am it wasn’t Amway!”

    How many friendships have been polluted, if not ruined, by MLM’ers who followed the advice of their “masters:” prey on your network of family and friends!

  2. NJB says:

    Few years ago, acquaintance casually emailed that spouse just got back from “speaking to 10,000 people.” I emailed back, “Ok, I’ll bite, what was it?” and found out spouse is a big hitter with Herbalife (has the white Mercedes; ipso facto, HL must be a great deal!). When I said I’d never do MLM, my acquaintance grew greatly offended. We don’t communicate anymore (no loss there).

    I researched the MLMscam Money Merge Account a few years back and found good info here, at Bargaineering, and at pyramidschemealert-dot-com. Stay away and don’t buy the overpriced junk or the sales pitch!

  3. Cathy Bulman says:

    I must be one of those very unlucky people because I’ve had people try to recruit me for Avon, Amway and Shaklee. I never have bitten on any of these scams, but it sure gets old. I wish there could be legislation to out law these types of companies.

  4. Health Plus fitness Systems says:

    Hello I think you are a hater and your article has some truths to it so what do you propose people to do mr. know it all hater do you have a better way for people to start there own business inexpensively and have the last great tax shelters I dont like people like you who are totally BIASED AND REPORT LIES BECAUSE THEY ARE HATERS GET A LIFE AND WRITE ABOUT ROCKY HORROR MOVIES .

    • John says:

      OMG that is hilarious. I seriously thought this comment was a joke but I think it might not be :-)

  5. BARRY says:

    Just out of college in early seventies, I was selling business equipment and a customer tried to get me into a MLM…I bought a little and sold it to my mother’s friends but didn’t make much. They wanted you to buy a garage full of soap and such. Most of the people who bought into this couldn’t sell dollars at six for a quarter so I would find them after they had the soap for a few years and would buy it for 5 or 10 cents on the dollar then resell it cheap at flea markets, I made money but not by joining the MLM.

  6. ChrisCD says:

    Good intentions gone awry.

    On the surface MLMs sound very attractive, but you hit the mail on the head. The bonus structures force the products to be over priced and/or minimum amounts needed to buy every month unsustainable.

    Take Monavie, 1 bottle is about $40 (unless you buy like 6 to 12 cases). At Costco practically the same stuff is like $12.99 or something.

    It is a shame really that one can’t find a way to do it right. :O)

  7. Mark Ross says:

    I think these companies should be shut down. They’re not helping people get rich but they are only helping them get poorer. Although, most will say that they are not scams. I still want to refer to these companies as scammers who only want to get their revenue up without giving others any useful benefits.

  8. m white says:

    I believe the companies in your article may be just as you describe. However,please take the time to review the Watkins business. This company has been in business for about 150 years.They were one of the first companies to look for nature products, and are a leader in natures today. Their products are fairly priced, my wife and I are pleased with them and although we have not worked the business much, we have met many successful members who have made money. As I know of ,no members are asked to buy large inventory or pressure others to join. As far as the success or failure rate, when compared to any business venture the failure rate is about the same. Most people who go into business, fail. That is just the risk of business , that is true if you invest 100 or 100000!

    • John says:

      The problem isn’t that no one makes money. The problem is that the amounts made are generally minuscule for the amount of work/effort/investment put into the business… MLM is a strategy companies use to expand their network of customers at a lower cost base than what can be obtained through traditional product marketing. They essentially “buy” the individual’s network and trust for a cheaper price than what could be achieved through traditional routes. For every reason listed in this article and more, MLMs will always fail the vast majority of “investors”.

  9. Huskervball says:

    I sold vitamin supplements and cosemetics through Neo Life. I did that for about three years and then sold my business.

    My experience was very positive. The training I received was all free (except for travel costs). I learned that I am a salesperson and a leader.

    I did not have a bad experience. Now, I am/was convinced that the product was superior. I was convinced that the company wanted me to succeed.

  10. Emelle says:

    A former MLM’er stated MLM’s are “bleeding;” no one is signing up and participants are leaving due to the economy- its the 1st thing cut to save money.

    Also, remember Amway. They went to court in the ’50s. The Supreme Court said their business model, though appearing illegal, was legitimate. NOW they are doing what they said wasn’t intended- they are advertising; something that wasn’t supposed to be done in order to save costs. It was to have been interpersonal marketing. Guess that didn’t work.

  11. Michael B says:

    There are really two issues: How good the product really is and how the multi-tiered system pays its participants. Your information is good to know, but paints everyone with a broad brush. Is it possible that there are good products and distribution networks worth considering? I’m thinking of Usana and Shaklee, but lean toward Usana for product quality (“prescription grade”). The problem with vitamins is they are not regulated by the FDA and often cannot support claims with clinical trials.

  12. As someone who’s been in the banking and finance profession since 1996, I’m not sure I see the difference between how Network Marketing is structured and say, things like Real Estate. We all know people who paid big bucks to get a real estate license and are now doing something else. They didn’t produce any money in real estate. A large percentage of the money flows up to the real estate broker, and the broker actively recruits new agents. I have seen the same thing with insurance agents.
    I was a stock broker for a decade – PaineWebber, Merril Lynch et al have a business model that predicts only five or six brokers out of 150 are expected to still be there after 36 months. Their actual business plan predicts that 70% will quit in 6-9 months.
    The big difference is that no one does stories on these industries I listed above.
    I validate that some people have had bad experiences in Network Marketing. I also validate that people like Madoff have caused bad experiences in the financial profession. Based on Mark Ross’s rules, the brokerage houses should be shut down too. But I understand that Mr. Bell is building page views. So I acknowledge his right to give his conjecture. Now, if you’ll excuse me, High School has been marketed as “The best years of your life” for decades. My wife had very bad experiences in high school so I need to go blog about why high school is BS.

  13. Sam says:

    I don’t disagree with the general sentiment of the article. I have had the opportunity to take a look at a lot of MLM companies and I think there are few that really do work for those who can sell. Had a friend who is an awesome salesman who got into one MLM and was able to succeed to a high level. He put the hours he worked in the year to the money he made and he said he could have worked at minimum wage for what he did. I personally only have gotten into ones which I do believe the product is viable. I had visalus checked out by an independent person who analyzes food for a living and she gave it thumbs up. Frankly, I buy it because it tastes good. It helped me loose 50 lbs and brought my cholesterol and other numbers down. If someone asks, I promote it but otherwise, I am just happy it works for me. But there are a lot of MLM’s that I walked away from a presentation thinking NO Way. So I wouldn’t throw away an opportunity that may come your way before taking a look at it but I would take a long good look at it and the most important thing is that you don’t get into it just for the money. You have to believe in the product first and use it. Then if you never make any money, life is still good.

  14. Marvin says:

    I was previously in an MLM a few years and did make a reasonable amount of money – some from selling the product as well as having a decent (20 or so) amount of recruits (downlines). It was good for a few years but eventually the product was no longer as good as it was when I started so I stopped after that.

    Pros:
    - Made probably half of my full-time income yearly so in addition to my full time income, was a lot of extra money.
    - Learned about products that I still use to this day on my own
    - Learned how to be a leader
    - I made a lot of friends that are no longer doing MLMs that I still talk to.

    Cons:
    - Most of the people I got in the business did not make much money.
    - I did alienate a few friends.
    - It takes a lot of work and time to recruit, learn about their products and to teach your team to make money in the business. Most people don’t have time for this with a full-time job, family, etc.

    So yes, you can make good money and hopefully the product is good. In the end though, it’s not for most people.

    One piece of advice if one of your friends or family does invite you to listen to their presentation for a new business opportunity (if you are NOT interested): don’t be mad, don’t be offended, just say you aren’t interested and don’t have time. It’s not worth burning bridges when it’s really easy to just be polite and say no.

  15. Claes Bell says:

    Hi guys,

    Thanks for all the great comments here. It was really interesting to hear from folks who’ve had real-life experiences with MLM, good or bad. First off, my objective in writing the piece wasn’t to attack MLM participants themselves other than to point out that being pitched MLM products from friends and family is annoying as heck; it was to let people know how very high the odds are stacked against them making money in MLM schemes, and how misaligned the incentives are.

    Kendall, no one doubts that sales (real estate, stocks, cars, or whatever) is a profession with high attrition — it’s harder than most think, and people often do it as a side business that they eventually leave.

    But MLM is a world away from how real estate is done, where I sell houses other people own and get a percentage of each sale I make. If I was going to do real estate MLM-style, I would have to buy not just one house but many houses from the real estate broker at a huge markup based on the belief I would still make money selling them. Then I would have to sell the houses (hopefully for more than I bought them for), and if I sold enough, maybe get a little bit of a kickback amounting to a few percentage points from the real estate firm. The real money I would make would be from recruiting other real estate brokers to buy overpriced houses from me, and then I would get to keep their commissions. That doesn’t sound much like how real estate works, because if it were, there would be no real estate agents.

  16. Herbalifer says:

    A few comments about Herbalife:
    (1) You don’t get paid for recruiting
    (2) You do get paid if your downline buys product from you to sell
    (3) If your downline cannot sell product and returns it (you can return product for up to a year and postage is paid for you) you do not get paid anything for selling that product to your downline
    (4) There is a lot of turnover, BUT
    (5) RETURNS ARE EXTREMELY LOW, AROUND 1%.

    The only conclusion that can be made from the above facts is that in Herbalife you are NOT paid to recruit. The return policy takes care of this issue. Thus it is not an illegal pyramid scheme. This is exactly the conclusion that the Belgian Court arrived at somewhat recently.

  17. Lily says:

    A friend did Mary Kay for a while–or it might have been Avon. Honestly, I can’t tell the difference. All I know is that she got stuck with a lot of product she’d bought to sell to customers, because the company no longer supported it in their catalogs–and no one told her that when they encouraged her to buy a roomful of stuff. I’ve been to parties for four different products, all run by women who were stay-at-home-moms trying to earn a little money while not upsetting their family’s schedules. I think these network marketing companies take cruel advantage of women who don’t feel they have a lot of choices.

  18. Kalos says:

    This is all BS pure Scams.. If you wanna make money F/$:&;$;@ get a Real Job or start your own!!! Don’t sale for anybody..


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