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WTF is multi-level marketing?

What to watch out for if you’re thinking of getting into the ethically-questionable world of multi-level marketing

Multi-level-marketing

Kait Gray-Jones is unapologetic about living the life of her dreams. In the next year, she plans to start a family with her new husband and sees herself running a lucrative business from home without missing a single moment of her kid’s life. Unlike most people in their early thirties, she may never have to choose between free time and making money ever again.

In her twenties, Gray-Jones studied musical theatre and performed across North America. She says she did pretty much “anything an actor does on the side to survive,” mainly restaurant jobs and nannying. That all changed when a fellow actor introduced her to Arbonne, a multi-level marketing (MLM) company that sells everything from skincare products to protein powder.

MLM is a controversial marketing strategy with two aims: selling products and recruiting people to sell products. The compensation plan often looks like a pyramid with one person at the top and many people working below them.  If you’re at the bottom of the pyramid, you have an incentive to recruit people below you who will then recruit people below them. The more products you push through your pyramid, the more money you make.

These companies are often criticized harshly for being unethical and have faced lawsuits that have called the business model into question. In fact, because of the controversy surrounding how they operate, MLM companies tend to be very guarded in what information they make public. Last summer, I worked for Arbonne, and found that MLM can actually be a viable option for people who don’t have the capital, business acumen or time to start their own businesses.

Gray-Jones was skeptical of Arbonne at first. She watched her friend from the sidelines for almost six months before asking to hear more about the business. Today, six years later, she says she earns up to $6,000 CAD per month and is on her way to owning a white Mercedes Benz, paid for the by the company. She describes the female-dominated industry as “a little bubble of beauty and empowerment.” She loves the people she works with. She works from home and sets her own hours. If she reaches the top level of the company, she could start earning a six-figure salary and then some.

Gray-Jones earns her paycheque in a few different ways. She tells people about Arbonne’s products and receives a commission whenever her recommendation results in a sale. But the crux of the business model is recruiting other people to join the company.

This is how Arbonne consultants claim to have “time freedom” – they get paid off of the efforts of their whole “team” rather than trading their time for money.  “It’s better to make 1% off a hundred people’s efforts than 100% off your own efforts” is a saying that often gets repeated  inside the company.

Gray-Jones currently has 10 people on her team that she has personally recruited. Out of that number, she says approximately four are actively recruiting other people to join the company and have so far recruited a total of 48 people. Gray-Jones makes a profit of between 6 and 14 percent on all products being pushed through her entire organization.

If her team sells about $75,000 worth of product over two months or about $95,000 worth of product over three months, Gray-Jones will be promoted to the next level of the company. She can also earn monthly cash bonuses and all-expenses-paid trips to places like the Riviera Maya in Mexico.

These kinds of perks may seem extravagant, but they’re not that difficult to understand; you sell lots of product, you get rewarded. But recruiting others to make more money is a red flag that many people associate with pyramid schemes. In fact, John Oliver recently delivered a scathing takedown of MLM companies on his show Last Week Tonight, calling them “fucking awful.”

There is a lot of misunderstanding in the industry because it’s easy for pyramid schemes to masquerade as MLM companies, says Joseph Mariano, president of the U.S. Direct Selling Association, a group that represents the industry. MLM companies veer into pyramid scheme territory when they focus more on recruitment than selling products, he says. “They may pay lip service to products, but it’s really about recruiting people.”

Herbalife Ltd., a Cayman Islands-based nutrition and weight management company, recently agreed to pay $200 million USD in a settlement with the U.S. Federal Trade Commission (FTC) and overhaul its compensation plan. The company is required to “fundamentally restructure its business so that participants are rewarded for what they sell, not how many people they recruit,” said the FTC in a statement.

There are four ways to make sure an MLM company isn’t a pyramid scheme, says Daryl Koehn, the Managing Director of the Institute for Business and Professional Ethics at DePaul University in Chicago. You should be able to get numbers on the company’s retail sales, they should have a buy-back policy that allows independent contractors to return unsold inventory if they quit, they should have really low upfront fees to join the company, and they should offer free training, she says.

Arbonne fulfills all of these requirements. But last September, the company’s Business Ethics Standards Team set out new guidelines to make sure consultants don’t make the company sound like a pyramid scheme.

Common phrases such as, “free cars,” “I just made 5K in one month” and “you only have to work five hours per week” are now considered “trigger phrases” that could get the company into trouble.

Arbonne also reminded its consultants that encouraging new recruits to buy large amounts of product when they join the company is against the law. Arbonne says the only fee that is required to join the company is the $95 “Consultant Starter Kit” fee. If new consultants choose to order more product beyond that, it should be totally up to them.

While this kind of messaging goes a long way to make Arbonne legal in the eyes of the Canadian government, it’s up to consultants to play by the rules.

“There is a potential for things to go awry when you have a huge salesforce that you don’t control as much as you would when everyone comes to the same retail location,” says Mariano.  Even if a very small percentage of independent consultants misrepresent the industry, it can leave a bad taste in people’s mouths, he says.

Because MLM transactions take place in people’s homes, cafes, and other non-traditional retail spaces, they have the potential to become “socially ambiguous,” says Koehn. This can create ethical grey zones that could damage relationships, she says.

Koehn is also concerned about the nutrition products that MLM companies like Arbonne are offering. It’s hard to misrepresent the effects of lipstick, she says. “It either looks good on you or it doesn’t.” But Koehn wonders what qualifies Arbonne consultants to recommend products like vitamins, meal replacements and colon cleansing pills. It’s a tricky area where consultants could make extravagant claims about the health benefits of a product, she says.

Simone (not her real name),  a Toronto artist who works multiple jobs to make ends meet, found out how messy MLM could be when she joined Arbonne in 2012. She says she was “strongly encouraged” to order $1500 in products when she joined the company even though she couldn’t afford it. She was still paying off the products when she quit five months later. She says she still carries some resentment toward the friend who signed her up, although they’re still on good terms.

Arbonne’s buy-back policy wasn’t available to her because the products weren’t resaleable and she wasn’t aware that Arbonne had such a policy.

Simone started to feel uncomfortable after she attended an event hosted at the home of a consultant who had reached the top of the company. She says she was trained to “say whatever she needed to say to get people to come to her spa parties.” This type of training goes against Arbonne’s policies, which “do not condone deceptive…practices of any kind.” But Simone says she felt obliged to pressure her family and friends to hear her sales pitch.

Gray-Jones says almost everyone she talks to has had a bad experience with someone in MLM who didn’t run their business professionally. Yet, she doesn’t blame the industry for consultants’ missteps. Like any industry, she says, “there will be people who are good at what they do and people who are bad at what they do.”

Chantale Oliveira, an Arbonne consultant who has reached the top level of the company, says her job isn’t to persuade anyone to join the business, “it’s to educate them.” She says the stigma surrounding the industry is largely due to lack of understanding and encourages everyone to do their research before they join an MLM company, she says.

“It’s not whether MLM is a viable solution, it’s whether MLM is a viable solution for you,” she says.

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