“LuLaRich” docuseries highlights struggles of MLM regulation, oversight
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“LuLaRich” docuseries highlights struggles of MLM regulation, oversight
Amazon’s “LuLaRich” docuseries was shocking to many who had never before seen the inner workings of a multi-level marketing company. The show, released last month, centered on MLM clothing company LuLaRoe, which settled with Washington State for more than $4 million this past February following a consumer protection lawsuit.
The series delved into how many women lost money putting faith in a company that, as Rolling Stone puts it, was “something dangerously close to a cult.”
For industry advocates, it was an example of how unfettered growth and inexperience can lead to the demise of a business and harm consumers. For some currently or formerly in MLMs, it may have looked all too familiar.
In recent years, MLM sales relative to retail sales were largely on the decline.
Then came the pandemic. As millions of people became furloughed or unemployed and stuck at home, MLMs saw an opportunity to grow their companies and multiply the number of distributors. Data from the Direct Selling Association — a trade association that represents direct-selling companies and MLMs — shows that the number of direct sellers in the United States jumped to 7.7 million in 2020, up 13.2% from the year before.
All of this comes as consumer rights activists are calling for increased regulation of MLMs.
Legal … but moneymaking?
Companies that operate as MLMs are legal. The companies, sometimes calling themselves direct-selling companies or network-marketing companies, operate by employing contractors who sell products directly to customers. Those same distributors typically recruit new contractors underneath them, earning commissions on those sales.
Many MLMs have established themselves in American popular culture. Think Avon, Mary Kay and Herbalife.
When taken at face value, the offerings of MLMs can be enticing: Be your own boss! Work from home! Determine your own hours! Data on success rates for distributors or consultants are far less rosy. One 2018 report by the AARP showed that 73% of MLM participants lost or made no money.
A 2011 report by the Consumer Awareness Institute was even more bleak. It found that MLM business failures were far greater than for other small businesses; an estimated 99.6% of MLM distributors never made a profit.
The gray space between MLMs and pyramid schemes
“It is possible for a company to be both an MLM or direct-selling company and to be a pyramid scheme,” said Kati Daffan, assistant director of marketing practices at the FTC.
The business models and structures can be nearly identical; the language and tactics for sales and recruitment are largely the same. Even on the website of the FTC, the government agency responsible for enforcing MLM regulation compliance, the two share a webpage.
“For a networking company trying to stay on the correct side of legal and illegal, the primary focus needs to be on the products, making sure it is selling real, tangible products for a reasonable price to people in the retail marketplace who are buying those products to consume them,” said Larry Steinberg, a Los Angeles-based attorney specializing in network marketing and chair of the Multilevel Marketing Industry Group at the Buchalter law firm.
“There are some who can earn a large amount of income, but most people, on average, are earning enough to help them out with a vacation, with tuition payments.”
— Joseph Mariano, president and CEO of the Direct Selling Association
The FTC is pretty blunt in offering a word of caution to those considering joining an MLM: “Most people who join legitimate MLMs make little or no money. Some of them lose money. In some cases, people believe they’ve joined a legitimate MLM, but it turns out to be an illegal pyramid scheme that steals everything they invest and leaves them deeply in debt.”
Joseph Mariano, president and CEO of the Direct Selling Association, said that, per DSA data, many people in MLM companies make small sums.
“The association understands and is proud of the fact that most people in direct selling are earning very modest amounts of income. There are some who can earn a large amount of income, but most people, on average, are earning enough to help them out with a vacation, with tuition payments,” he said.
Mariano added that most data sets regarding MLMs don’t distinguish between consultants who actually aim to sell products and recruit people from people who buy in a wholesale fashion, to get products for themselves at discounted rates.
Oversight and regulation
The FTC is responsible for the enforcement of existing regulations that apply to MLMs and pyramid schemes. “I do sometimes see a misunderstanding that we’re regulating every single MLM out there, which is not how it works,” the FTC’s Daffan said.
Simply put, the FTC, which operates on a complaint-driven, case-by-case basis, does not have the time or resources to investigate every MLM; they investigate the companies that cause “the greatest harm to consumers,” Daffan said.
Lobbying and past commission rulings have played a significant role in shaping the present enforcement of regulations. For example, in 1979, the FTC found that Amway — the largest MLM in the world — was not, in fact, operating as a pyramid scheme and had safeguards in place to protect consumers from the harms of a pyramid scheme.
Consequently, other MLM companies were able to replicate such protections. As revealed in subsequent court filings, however, those safeguards do not wholly protect consumers from the harms of pyramid schemes.
As an organization, the Direct Selling Association has advocated for self-regulation and has a code of ethics that all member organizations must abide by, which includes guidelines on return policies and product claims. The organization has also worked at the state and federal level to clearly delineate pyramid schemes from MLMs, DSA’s Mariano said.
“When we have advocated for clear standards, we’ve usually done that in conjunction with law enforcement and with the support of law enforcement,” he said.
Past FTC commissioners have noted the importance of both self- and governmental regulations for industries generally. The FTC also has a Business Opportunity Rule, which mandates transparency from company owners about the risk of certain business ventures.
The MLM industry lobbied members of Congress to write letters to the FTC asking that MLMs be excluded from the rule. While some MLMs are presently covered under the BOR, not all are, Daffan said. Some currently at the FTC, like Commissioner Rohit Chopra, have advocated for expansions of the rule to include all MLMs.
Among the thorniest 21st century developments for MLMs is the use of social media for selling products and recruiting consultants. While it’s the responsibility of an MLM’s corporate office to discipline distributors who make false or misleading claims about products or compensation, such enforcement can be extremely difficult.
“You can stop companies from lying, but it’s harder to stop people from lying,” said Bill Keep, a marketing professor at the College of New Jersey. “In multilevel marketing, there are tens of thousands of people, a dispersed force of independent representatives, who have in their best interests to be less than truthful … and who have virtually no accountability.”
MLM’s mass appeal and the #BossBabe phenomenon
Multi-level marketing companies have deep roots in the U.S. The DSA estimates that there were 7.7 million direct sellers in 2020. The 2018 AARP report estimated that one in 13 Americans had been involved in an MLM company at some point.
According to Stacie Bosley, a behavioral economist at Hamline University, MLMs fill a distinct gap in the market.
“At the end of the day, it’s a business opportunity,” she said. “If the gap you’re trying to seek is financial, maybe you feel you can’t achieve that through something that’s more traditional in the labor market, right? Maybe because you have constraints, like in-home child care, or other things that might constrain your ability to participate in traditional labor market activities.”
These constraints have led to the often gendered dynamics of these companies.
The DSA reports that three of every four direct sellers are women. Past MLMs have successfully recruited and advertised to men. Vemma, which was later found to be operating as an illegal pyramid scheme, targeted college-aged men to sell and distribute energy drinks. But Bosley said traditional sales tactics employed by distributors are traditionally seen as feminine activities.
“Based on some of the products that are often sold in MLMs, the fact that it requires person-to-person selling, sometimes in a party-like environment just often might be more attractive also to women,” she said.
Consultants for companies selling products marketed toward women frequently co-opt empowering, feminist rhetoric to convince friends and acquaintances to join the company — just like many in LuLaRoe did. Many MLM companies also recognize the untapped salesforce of stay-at-home mothers, advertising the chance to earn supplemental income to support their families and provide a sense of community and belonging in what can often be isolating circumstances.
Gaining — and losing — a sense of community
Grace LaConte, a business analyst and consultant based in Vancouver, Washington, writes about and researches multi-level marketing companies — and speaks from experience.
While at college in Chicago, a woman she thought was her friend recruited LaConte to sell beauty products, convincing her that her skills would be perfectly transferable to that of a salesperson. “It was almost like someone courting me. It wasn’t romantic whatsoever, but there was a component of someone chasing someone else who’s new,” LaConte said.
“All the friendship, all the accolades, all the support — it disappeared.”
— Grace LaConte, business analyst and former MLM participant
Focusing much of her time on sales, LaConte eventually became a top seller at the company one month. Because of LaConte’s success, her friend was able to level up. And after that? “She got three people under her, so she got a promotion, and then I really never heard from her again,” LaConte said. “All the friendship, all the accolades, all the support — it disappeared.”
In MLMs, recruiters will often advertise not only the chance to be a self-starter and entrepreneur but also the entrance into an exclusive sense of community. “LuLaRich” showed how LuLaRoe wooed consultants with splashy conventions featuring celebrity appearances; at one point, the company even chartered a cruise ship for consultants.
An MLM mentality
Though that sense of interconnectedness can be heartening in the moment, hindsight can sometimes reveal less community and more cultishness.
LaConte compared it to a lottery mentality. Someone has to win the lottery, right? Why not me? Pepper that luck with the notion that, if you work hard enough, you can be one of the few that really makes it.
“It’s just an interesting combination of both the meritocracy and the communal experience, right?” Hamline’s Bosley said. “You can set yourself apart by being at the top of the hierarchy, but we can all win together, too. So, there’s a way in which that sort of package suggests you can rise and rise with, as well.”
Though, of course, the boot-strap, American dream-sort of drive to climb the ranks of any MLM only works if the company actually works successfully for its employees.
“There is no reason for [direct-selling] companies to be promising that you’ll get rich quick,” Mariano said. And evidence largely backs the belief that the vast majority of people involved in MLMs won’t get rich, period.
However, the same vein of thought — that you can make it because you work hard enough — can be flipped on its head: If you don’t earn much money or actually lose some, your heart wasn’t in the company, you simply didn’t work hard enough.
Kati Daffan noted that the FTC receives fewer pyramid scheme complaints than people may assume, perhaps because of the stigma of financial hardship.
And when fewer victims file complaints at a complaint-driven enforcement organization, less action is taken against companies that harm consumers. And so the cycle continues.
A LuLaRoe legacy?
Bosley hopes that increasingly honest conversations will be had about companies that take advantage of consultants and consumers.
“When we see images of people who are portrayed as winners in this environment, right, our brain then starts to calibrate, ‘What are my chances of also achieving some positive reward from this engagement?’” she said. “Take the Powerball, the millions of people, or however many, who participate, I don’t see images of all the people who didn’t win, right? If I did, that my brain could calibrate the probability of winning more accurately.”
Facebook groups have also popped up amplifying the perspective of those who feel they’ve been scammed by MLMs.
Mariano at the DSA says that he is also supportive of such open dialogues, “because it gives us the opportunity to talk about some of the features that distinguish legitimate direct-selling companies from pyramid schemes, and also the appropriate activities from inappropriate activities in a direct-selling context,” he said.
As for LaConte, if she could go back in time she said she would ask herself to reconsider joining any MLM company.
Sure, she grew up attending houseware parties and was familiar with the symbols of success for those in MLMs. But LaConte has a hard time reconciling the successes of a limited few with the financial and social tolls taken on those around them.
“When I see the [Mary Kay] pink Cadillac, the quintessential, ‘I’ve made it in this company,’” LaConte said, “I always think of the hundreds of people who may have been taken advantage of to get there.”
Correction: (Oct. 8, 2021): In a previous version of this article, one instance of Kati Daffan’s name included a typo. The text has been updated.
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