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:
You’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.