Opportunity, or scam? Inside the world of multi-level marketing companies

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If you’re connected to social media, you’ve probably seen the posts:

People on your friends list marketing shakes, insurance, body wraps, essential oils, make-up … and more.
But is it really worth that pricey starter kit to “own your own business?”

“Our third daughter was stillborn, and our fourth daughter passed away at two days old suddenly from VLCAD. And I kind of went through a depression for awhile, and a friend of mine had a party,” said Stephanie Newberry.

A party for leggings. That’s how it all started for her and her family.

“Everybody got to be – at least – what felt like friends for quite some time. So, it kind of was a nice community.”

What began as a social hobby soon became something more.

“It was nice because we had clothes that felt nice, you felt good for the first time in a long time, and that was the original part when I got into it,” Newberry explained. “And then we went from there to selling — because why not?”

Stephanie then began selling leggings after she became what’s known as an “independent consultant” for a direct selling company; otherwise known as a multi-level marketing business, or “MLM.”

The Better Business Bureau recognizes direct sales companies as legitimate businesses, but their website warns to exercise caution.

“This is an actual thing. This is an actual business,” said Oana Schneider with the Tri-State BBB.
If you’re on social media, chances are you’ve encountered these companies, even if you didn’t know it.

Suddenly, that old acquaintance from high school that you haven’t talked to in year is in your inbox, talking about Scentsy, Doterra, LulaRoe, Beach Body, or Monat.

Multi-level marketing companies work like this:

Consultants sell the business’s products independently.

Their income includes commissions not only from their own sales, but sales made by people they recruit to their team.

These recruits are often called “downlines.”

Because of this model, it’s no surprise that MLMs are often compared to pyramid schemes.

“In a pyramid scheme, you are promised to get paid based on the number of people that you bring in,” explains Schneider.

The presence of a product is the biggest difference between an MLM company and a pyramid scheme. But the product can often become the problem.

“We had $18,000 dollars worth of inventory. That’s about 11 hundred pieces,” said Newberry.

Schneider says that’s where many of the BBB’s complaints against these companies start.

“The complaints that we get from people are ‘I bought a lot of inventory — and now I don’t know what to do with it.'”

In some of these companies, distributors are encouraged to buy …buy… buy… by their recruiter.

“They would say everybody should at least once a week placing an order – if not twice a week,” says Newberry.

The Direct Selling Association, which represents some MLM companies, requires its members to have buyback policies to allow consultants to sell back unsold product.
 
That doesn’t mean non-member companies offer the same options.

In September 2017, the company Stephanie sold for abruptly changed its buyback policy, leaving some consultants stuck with mountains of inventory and debt, including the Newberrys.

“We were actually aiming to get out under the 100% buyback. We had everything all set to submit, Incidentally, the day they revoked it. My husband got home from deployment that day.”

In fact, that change had devastating consequences for for Stephanie and her family.

“We were going to, you know…get rid…give it all back. And put that towards a down payment on a house. And of course then….That kind of took those plans away. Pushed us back by about two years buying a house.”

Other questionable practices by some of these companies include inflated income claims. Direct Selling Association President Joseph Mariano says his organization’s code of ethics bans that for member companies.

“There are operations out there not only in direct selling, but otherwise, that overpromise income, and make earning representations that are not substantiated.”

But with the help of social media, distributors can make it seem like they  are living the high life.

“It wasn’t what people were touting. A lot of people did post their bonus checks. They’re not supposed to.”

When in reality, the truth can be much different.

“Most people getting involved in direct selling only earn a modest amount of money, a very modest amount of money,” says Mariano.

The DSA does not disclose the median average income for direct sales consultants. However, when we looked at income statements from separate companies, the numbers were low.

78% of distributors for one popular wellness company averaged $51 a month in 2016.

A disclaimer states that that does not include profit because expenses, sometimes pricey starter kits or inventory, are not factored into that amount.

Other companies income statements looked similar.

“Most people are not working at this full time, they don’t want to work at this full time, it’s supplemental to their other activities,” says Mariano.

Backlash against these types of companies and their business practices isn’t hard to find on social media.

But despite the negativity, some former consultants say they do have fond memories and successes with their companies.

“I did get a lot of financial stability from the business. There’s a lot of women who are able to make supplemental income by selling something they already believe in,” says former consultant Samantha Kern.

She says her experience also gave her the opportunity to be a positive role model for her daughter.

She is now an independent stylist for her own online retail store.

The Newberrys have moved on, but like so many others, they still struggle under the weight of unwanted inventory.

“We sold about 2/3 of it, we sold about $12,000 off. But we only got five or six grand for it. And we did that garage-sale style.”

Stephanie says for her, there is no going back.

“I would never do it again. I wouldn’t do any MLM again.”

The company that Kern and Newberry sold for — Lularoe– is facing mounting legal problems.

Washington State’s Attorney General filed a lawsuit against Lularoe, accusing the company of “unfair and deceptive” claims.

The lawsuit asserts that Lularoe is a pyramid scheme.

For the latest breaking news and stories from across the Tri-State, follow Eyewitness News on Facebook and Twitter.
(This story was originally published on February 27, 2019)

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