Lies, Damned Lies, and Multi-Level Marketing
This article is a reprint of Wise Bread's contribution to OPEN Forum from American Express -- where small business owners can get advice from experts and share tips with each other.
Mark Twain wrote in 1909, "There are three kinds of lies: lies, damned lies, and statistics." He could easily have been writing about multi-level marketing (MLM), although the schemes didn't become popular until almost 40 years later.
Questionable statistics are used by MLM companies to hoodwink legions of would-be entrepreneurs who want to believe they can attain the lifestyle the companies promise. As a result, there are few areas outside of politics and religion where so much emotion is backed by so little reality.
A couple of years ago I wrote a blog post titled "Mary Kay, Amway and Other Scams." I pointed out that home-business opportunities often sound great on the surface, but I also warned there are few MLMers who can prove they’ve made more money than they spent.
Minutes after the post hit the Internet, the first comment arrived, dripping with sarcasm. "Pardon me...maybe you need to do more research," wrote the commenter, and to prove her point she claimed Mary Kay had been the best selling cosmetics brand for 12 years in a row.
Lies, damn lies. A quick web search found recent industry information that showed they were the 14th largest beauty manufacturer, behind #5 Avon — another MLM company.* No doubt, someone at Mary Kay found a way to define a narrow market segment where they could claim they were #1.
Another true believer wrote, "I don’t know how all of that pyramid stuff works and I must say I am not concerned." In other words, "Don’t confuse me with statistics."
Wouldn’t you think she’d be interested to know if Mary Kay distributors make any money?
U.S. law doesn’t require Mary Kay, a private company, to make financial information available except for tax purposes. And despite continuing criticism, they refuse to reveal what a typical "fashion consultant" makes.
However, Mark Kay is required to report such information in Canada, and those numbers are revealing.
In 2009, out of almost 29,675 devotees, only 1,878 earned more than $100. What's more, based on company information supplied to the FTC (PDF), turnover is 85% in Canada and almost 70% in the U.S. Not a very promising "opportunity," especially when you consider that even telesales — known for unusually high turnover — has annual turnover rates around 42% (PDF). (The national turnover average for all non-farm jobs is just 3.3% according to the Bureau of Labor Statistics.)
Mary Kay isn't the only company prospering from offers of false hope. Avon, Amway, and Mary Kay are among the largest multi-level marketers, but there are lots of smaller companies that prey on unsuspecting people by encouraging them to buy, oops I mean sell, everything from beverages to sex toys.
Unfortunately, probably because of the recession and layoffs, more people are falling for the schemes. According to the Direct Sales Association, in 2009 there were about 16.1 million people involved, an increase of 6.6% from the year before. Sales for the same period were, by they way, down 4.3%. More people making less money, in other words.
But 16 million people can't be wrong, can they? Think again.
Amway, with a worldwide sales force of more than three million people in 2006, made $6.4 billion. But according to a British government investigation, that year only 10% of Amway distributors made more money that they spent, and over 90% sold nothing. Zip.
MonaVie workers, distributing a fruit juice concoction at $40 a pop, don't make money either. Less than one percent qualified for commissions in 2007, and less than a tenth of 1% of the distributors made more than $100 a week according to the company's own Income Disclosure Statement (PDF). The company, on the other hand, made over three-quarters of a billion dollars.
According to their Income Disclosure Policy, "MonaVie’s corporate ethics compel us to do not merely what is legally required, but rather, to conduct the absolute best business practices (sic)."
One example of their exemplary business practices is they define those in the MonaVie pyramid who don't make any money as retail customers, not failed sales recruits. And that allows them to deny they’re a pyramid scheme.
How? In 1979, the Federal Trade Commission (FTC) tried to draw a line between legitimate and fraudulent pyramids in a regulatory action against Amway. The baddies, they decided, are the ones that focus on creating a "downline," recruiting (and making their money on start-up inventory purchases). In other words, they make money when you convince your friends, family, and total strangers to be a part of your pyramid.
The companies that are acceptable, said the FTC, are ones that focus on selling consumer goods to retail customers.
Unfortunately, the FTC didn't define "retail." So by redefining failures as customers, MonaVie is able to skate around the regs.
Another case involves a MLM outfit called Fortune Hi-tech Marketing (FHTM). The Montana Commissioner of Securities and Insurance issued a cease and desist order (PDF) because FHTM made money selling bogus $299 "licenses" in a pyramid scheme, while 30% of their distributors made nothing. And a third of those who did make something made less than $93 a month before costs.
FHTM settled the case for over a million dollars in restitution and penalties, but according to USA Today they're still under investigation by the Attorneys General of Texas, Kentucky, North Dakota, North Carolina, Missouri, South Carolina, Illinois, and Florida.
Many people who are attracted to multi-level marketing "opportunities," it seems, don't have any idea what is required to run a business, or what it takes to make a profit. Or even what "profit" means. In fact, some don’t care.
As one of the Mary Kay defenders wrote in response to my blog post, "…it seems that all you are doing is pulling up stupid paper reports! Not all companies are all about the paper side of it." Right, those damn statistics.
And there's the clue to the truth about why so many people believe the lies, damned multi-level marketing lies, and their bogus statistics.
Another commenter elaborated, "Mk (sic) isn’t about the money to me, its (sic) about encouragement, and confidence, and to never have to feel insignificant." Still another wrote, "... you really need to be a 'CHICK' to understand the 'girl power' this amazing company seems to offer it’s (sic) consultants. I guess that’s the lure of MK for a lot of gals… we offer HOPE to women that might not have anything else positive in their life (sic)."
Big business for the companies, billions of dollars, actually. Hope — at a price — for their distributors, and very little else. All based on lies, damned lies, and statistics.
*2010 Beauty Biz Top 100, WWD magazine, Conde Nast Publications, August 13, 2010: p21.
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