Multilevel Marketing

Multilevel Marketing Profit from your Family, Friends and Church Connections

 

Pyramid Stenar by Lars larsson http://www.flickr.com/photos/friutbildning The taller a pyramid is the larger the base needs to be for support.

Multi-Level-Marketing, Multi-Level Sales, Network Marketing, Party Sales, Direct Sales

These sales system promoters have been using different names to avoid the term Multi-Level-Marketing.  We have put together a list of companies that are considered to be in this category by most people.  It doesn’t mean they are all rip-off companies; and you shouldn’t believe 100% of whatever you read about these companies be it good or bad.  We just wanted to let you know what’s being said on the net and in the press so you can make an informed decision.

A pyramid is a good illustration of how these multi-level-marketing schemes (MLM) work.  The people at the top who have recruited sales people under them, take a small cut of each sale.  As these sales people find more sales people, they get a cut of those sales.   It’s true that if you are a very good salesperson you can make money for sales of the product, but to be really successful, you need to have a lot of sales people under you.  That’s why these organizations are always recruiting more and more salespeople.   Most salespeople give up.  These companies sell dreams to people who need to make money, and the dreams do not come true for a vast majority of people.  Most of these companies use the term distributors to describe people selling their product because salespeople are independent contractors who are not required to be paid minimum wage, require employment taxes, or insurance.

If you have been to a “meeting” and walked away pumped up after talking to an ordinary person who is now making tons of money, you have probably just been invited to participate in a multi-level-marketing business.  And if you need to make an “investment” in the business for your future, you are most likely at a multi-level-marketing scheme.  If you came out thinking that you need to “earn what you deserve” or ” spend more time with your family,” be careful.

Unless you are one of the lucky few who makes it to the top, don’t count on this type of business to become your primary source of income.  The people who succeed tend to be very gregarious, and have a large network in place to work off of–an large extended family, church group, fellow employees …  To be blunt, you need people who will buy from you because the feel sorry for you; and buying stuff at high prices is more socially acceptable than just handing you cash.

Most people loose money with MLM schemes or just give up.  There is no way to know for sure what your chances of success are because no one keeps  a comprehensive track record of the people who give up.  The percentage of people who loose money ranges from over 90% to less than half depending on which study you look at and what marketing programs are included.  The less than half estimate was produced by the Direct Selling Association.  You should read this page mlm-truth.com, this article by the FTC,  and investigate the company with the FTC  before you invest any money.   Also figure out what these products cost to you, and price similar products on the internet and at warehouse stores like CostCo or Amazon.com.  They will tell you that their products are some how special and or of super-high quality so you cannot compare.  But if they were so great, why wouldn’t they sell in stores rather than have a high commission sales force?  

These are some of the most popular home sales companies in Orange County.  We are not saying they are good or bad, just providing information we found in the press and online.

Amway

http://www.amway.com  This is one of the best known door to door multi-level-marketing  companies. (Wikipedia)  Each sales person is an independent contractor.  The business is often connected with Christians in their motivation, recruitment,  and political outlook.  Their website states that you can get started for as little as $150; and that they have a 90 day money back guarantee.   According to a study by http://www.skepdic.com/mlm.html around 2000 the average Amway rep spent around $1,000 on products and only took in $700.  Some people have complained that it is hard to make money with the products because your cost after shipping is too high.  It’s not possible to mark these products up enough to compensate your for your time.

Part of the problem with evaluating complaints about this company, and all MLM companies to some extent,  is that much of the stuff on the internet is basically complaints about actions of un-ethical distributors whom recruits felt ripped them off.  It’s hard to generalize and say they whole company is bad based on anecdotal evidence.  Expectations tend to be inflated, so people feel ripped-off.  As one of the biggest sales company you would expect this, so it’s hard to find the info you need on the internet.  But there is no government or private body that takes a scientific survey.

Avon and Mary Kay

Avon avon.com and Mary Kay www.marykay.com are two companies that focus on one thing: makeup.  This is a high margin product that women pay a lot of money for at a department store.  They also can buy similar stuff at a drug store for much less.  Avon is a Multi-Level-Sales organization while Mary Kay is a direct sales organization.  (See FN1 Below)  We did not find any data on success rates for these companies–Please see comment about Avon below.  But they both Mary-Kay may require at least a few hundred dollars to get started, and you will have to justify a higher markup to your customers that they see in many local stores.  But we are basically clueless about this product line.  If you have any experience, let us know so we can share what you have learned.  (One of those venting websites for Mary Kay is http://www.pinktruth.com.  You might want to take a look at what others are saying.  It also has info on returning the starter kit.)

Reader Comment

Avon does not costs hundreds of dollars to start. I started selling about 6 months ago and only paid $15 dollars. That paid for my registration along with a kit with 2 full size products, brochures and samples. They recently changed it so you can choose your kit with the cheapest at $25 and the others at $50 and $100.

Like I said you choose which kit you want (the more expensive with more products) and they come with products so you get way more than it would costs to buy separately. That is the only fee you ever pay and shipping is fixed according to your order amount. Currently $6 shipping costs for an order size up to $399.99. I have researched quite a few different MLMs and Avon seems to be the cheapest in pretty much all aspects (which is why I joined).

Avon mainly focus on makeup but also skin care for men and women, some clothing, kids toys and clothes/shoes, and quite a few home items as well. They are all fairly affordable and cheaper than the drugstore if you are using your representative prices.

As far as I have seen everyone is realistic about what is expected to be earned and no one has been all “It’s magic, be rich in 2 months” sort of thing that I have seen with other MLMs. Everyone always says it takes a lot of work and yes, you can make a lot of money, but yes it will take a long time. ***I do not work for New Avon company but I am an Independent Representative and this is for general information purposes only. Any other information can be obatined at www.avon.com**** I just want the correct information out there.

Cutco

This is run by the multi-level-marketing company Vector Marketing (wikipedia)  They are know for recruiting college students to sell their products.  Students are told that they can make a lot of money per hour selling consumer goods.  Students attend a free training session/motivational seminar under the assumption that they are getting a hourly  job, but they to invest in (make deposit for) a sample knife set to get started and they are actually independent contractors.  (st article)  Many sell a couple of sets to their parents and grandma then give up because most consumers are shocked at the prices.   As with other types of sales business, you should be aware that there have been unhappy sales people (they tend to vent on this site), and there have been a some people who have been successful.  Also, most agree that the knives are a good quality product; but the problem is that they are hard to sell because of their high price.

Herbalife aka IncomeAtHomeUsa

This company has been around for a while www.herbalife.com  And you can see their name on the jerseies of our local football team.  They sell products that support a healthy lifestyle such as nutritional products like protein shakes, digestive aids, energy drinks, and skin care products.

Their business has been growing locally among Hispanics in Orange County.   As with Nu Skin, this company has been in the news lately because hedge fund manager David Einhorn has been taking it down.  According to a May 12, 2012 Barron’s Article Where Beauty is Skin Deep ” summarized regulatory filings indicate that for Herbalife and Nu Skin and concluded that, “The companies’ reports, summarizing their distributors’ compensation, aren’t as lucid as they should be, and the multi-level marketing industry has been known to tout the riches enjoyed by just a few of their top distributors rather than the experience of the great majority. Careful analysis of Herbalife and Nu Skin numbers…suggests that over 90% of their U.S. distributors make no profit. ”  And they found based on SEC filings that ” [t]he numbers are better at Herbalife [than for Nu Skin], but still daunting: About 1,200 made it into the 0.2% sliver [sales level] that got more than $100,000 in commissions.”  According to an article on Wikipedia a 2011 press release said that they have been trying to change their business practices.  And to be fair, they do not make any guarantees that you will earn a given amount of money if you get involved with their system.  But in late 2012, another short seller, Bill Ackman, also has claimed this company is a pyramid scheme.  According to his firm’s research, “(s)ince its founding in  1980 …some 1.9 million salespeople have failed to make any money selling Herbalife products, costing them roughly $2,000 each in the process for supplies, training and dales leads, for a total loss of $3.8 billion over that time.”  The company says that he has things all wrong and made many mistakes and misstatements at the conference they are talking about in this bloomberg video.

From what we understand, they have re-branded themselves as IncomeAtHomeUSA–maybe because of the bad press Einhorn has generated.  We don’t know the details because their website does not explain how it works or even how you get the income to come into your home.  They have spent a ton of money getting mostly conservative talk show hosts to personally recommend the system–again without telling you how you how the income comes to be at your home.  (This is the same lot that personally recommends those highly marked up gold coins, so you might take their advice with a grain of salt.)  This guy had a not so good experience and wanted to share his feelings on youtube.  (video)

Herbalife is going beyond selling vitamins out of the trunk of a car.  They are setting up “Herbalife Nutrition Centers/Clubs” in retail and office space.  These are not set up by the company, but by distributors who need to recruit more distributors.  They do have a good rating with the BBB and FTC from what we have heard.  Herbalife executives have responded to charges by Ackman by stating that the presentation referenced in the Bloomberg video, “was a malicious attack on our business model based largely on outdated, distorted and inaccurate information  We operate at the highest ethical and quality standards, and our management and board are constantly reviewing our business practices aan products…. we are not an Illegal Pyramid Scheme”  FN2


ABC US News | ABC Business News This video originally aired on Nightline will show after a commercial.  We do not get compensated for the commercial.

Potential associates should take these accusations in mind; but also remember that nothing has been proven in a court of law.

Nu Skin

http://www.nuskin.com/content/nuskin/en_US/home.html  They sell cosmetic products that include skin cream, anti-aging creams, shampoos …

This one has been the news lately because Hedge Fund manager David Einhorn has been talking down their shares, and the founder is going through a divorce situation.  Granted that they may have a financial incentive to do so.  According to a June 4, 2012 Barron’s Article Some Blemishes on a Beauty Business, “Like other multilevel sales operations, Nu Skin Exhorts distributors to recruit others who will, in turn recruit recruits devoted to ordering the company products.  However, as we reported in our earlier story, regulatory filings indicate that most distributors never make a profit. ”  And Barron’s found by looking through SEC filings that “only 451, or about 0.2% of U.S. distributors, are in the sliver that averaged more than $15,000 in commissions last year, according to Nu Skin’s compensation summary.”

Tupperware

http://order.tupperware.com/coe/app/tup_opportunity.opportunity  This is one of the most well known company for having it’s salespeople host parties.  They make food storage containers, and other kitichenware.  According to their website, the basic start up kit costs $120.  We looked on-line and could not find as much negative stuff about this company as the other companies.  We did come across their Income Disclosure Form from 2009.  You can see on this form that most people participating did not make big bucks, and that about 42% of the people involved in the company did not achieve the goal of selling $500 in four months.  It is hard to say what the drop out rate is; as the people classified as inactive might be a different group of people every reporting period while the group of active people might be pretty much the same group.  If this is the case, it would be an underestimate to assume the failure rate is only 42%.  The average earnings of a active participant was $1267.90/year.  Note that this was found by other people on the Tupperware website, and could not find any other income disclosure documents/explanations.

Regulations

If you are considered an “independent business” that distributes products from the companies above, you will have to abide by the same regulations as any other business.  That said, most local and state government agencies don’t go after small businesses like these as most participants don’t make a lot of money, and they are not in the business for a very long time.

If you do make money you will be required to file an IRS Tax Form– Schedule C with your federal tax form; and this will be reflected in your state tax form.  Be sure to keep a log of the miles you drive, all expenses you have with the business, and the cost of your inventory.

Technically, you will need to have a city business permit even if you are operating this business out of your home.  Getting one is not a big deal unless you have a lot of sales meetings at your home, in which case there might be a zoning issue.   And unless the company you work for pays sales tax into the state on your behalf, you will also need to get a resell permit from the Franchise Tax Board.  The resell license allows you to pay sales tax to the state.  Information on how to get these government permits is about 1/2 way down on this page.

Also, if you are giving medical advice.  For instance if you are asking people that if they have a set of symptoms, advising them on what medical conditions they have, and selling them products that will treat their condition you may need to have a license from the California State Medical Board .  Each charge of practicing medicine without a license is punishable by up to a year in jail and up to a $10,000 fine.  In the past nutrition stores have been charged with this. LA Times Article  Do not use any language that will convey the message you are a doctor such as “cure” “prescription” or “drug” “medical product”  If someone does tell you they have medical problems, tell them they need to contact a medical doctor.  Ask your sales trainer how to avoid this charge.  Usually they have you say something vague like “although is is not approved by the FDA as a cure to  any condition, this product may have helped some people who had conditions similar to yours.”

When do Multi-Level-Marketing plans become pyramid  schemes?

Since most of these systems cross state lines, the Federal Trade Commission regulates what claims they can make.  A pyramid scheme is illegal, but hard to define legally.  The FTC defines a pyramid scheme in this context as a company that functions as follows:  They promise consumers or investors large profits based primarily on recruiting others to join their program, not based on profits from any real investment or real sale of goods to the public. Some schemes may purport to sell a product, but they often simply use the product to hide their pyramid structure. There are two tell-tale signs that a product is simply being used to disguise a pyramid scheme: inventory loading and a lack of retail sales. Inventory loading occurs when a company’s incentive program forces recruits to buy more products than they could ever sell, often at inflated prices. If this occurs throughout the company’s distribution system, the people at the top of the pyramid reap substantial profits, even though little or no product moves to market. The people at the bottom make excessive payments for inventory that simply accumulates in their basements. A lack of retail sales is also a red flag that a pyramid exists. Many pyramid schemes will claim that their product is selling like hot cakes. However, on closer examination, the sales occur only between people inside the pyramid structure or to new recruits joining the structure, not to consumers out in the general public. Website speech

You can assume the companies above have been vetted by the FTC and do not charge enough to be considered pyramid schemes.  But if you feel that you have been a a part of such a scheme, help everyone else out.  File a complaint with the FTC If the company that you feel ripped you off is local and only operated in California, contact the California Attorney General’s office.

FN1  According to a letter Mary Kay wrote to the FTC, “[a]ll Independent Beauty Consultants purchase their products and inventory directly from Mary Kay a t the same wholesale price. There are no levels of wholesalers between the Company and the consumer, therefore all members of the independent sales force purchase Mary Kay products directly from the Company at the same published wholesale prices for resale to consumers of their choice at retail prices they set.”

FN2 Quotes are from a Dec 21, 2012 Wall Street Journal Article Hedge-Fund Manager Presses Case Against Herbalife 

 

© 2012-2013 OCBusinessStartUp.com

3 Comments

  1. Can you please comment on MonaVie products? how many percents of people signed up make any money?

    • Greetings JK,

      I stumbled across this article on Wikipedia. https://en.wikipedia.org/wiki/MonaVie
      I am not sure when I have seen an Wikipedia article so focused on the point of view that a product is not a good investment. It looks like a small percentage of people actually make money; although the statistics might be skewed by the fact that some folks are becoming distributors for the discount. Based on this article, I would not have high expectations doing better than than breaking even.

  2. Before, I start I want to point out that you did ask to be corrected.

    Avon does not costs hundreds of dollars to start. I started selling about 6 months ago and only paid $15 dollars. That paid for my registration along with a kit with 2 full size products, brochures and samples. They recently changed it so you can choose your kit with the cheapest at $25 and the others at 50 and 100. Like I said you choose which kit you want (the more expensive with more products) and they come with products so you get way more than it would costs to buy seperately. That is the only fee you ever pay and shipping is fixed according to your order amount. Currently $6 shipping costs for an order size up to $399.99. I have researched quite a few different MLMs and Avon seems to be the cheapest in pretty much all aspects (which is why I joined).

    It does mainly focus on makeup but also skin care for men and women, some clothing, kids toys and clothes/shoes, and quite a few home items as well. They are all fairly afforedable and cheaper than the drugstore if you are using your representative prices.

    As far as I have seen everyone is realistic about what is expected to be earned and no one has been all “It’s magic, be rich in 2 months” sort of thing that I have seen with other MLMs. Everyone always says it takes a lot of work and yes, you can make a lot of money, but yes it will take a long time.

    ***I do not work for New Avon company but I am an Independent Representative and this is for general information purposes only. Any other information can be obatined at http://www.avon.com****

    I just want the correct information out there.

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