TOP
Image Alt

Utah Business

MLM tends to grow fast in environments where people feel strong ties to each other, because of trust or commonly held beliefs—which can contribute to poor decision making and perhaps outright fraud.

Only 6% of MLM consultants sell full-time

Kirk Jowers admits quite readily that when he was first offered an executive position at doTERRA, he had concerns about taking the job. The company was, after all, engaged in multi-level marketing, which Jowers suspected had a bad reputation for a reason.

After becoming the company’s vice president of corporate relations and European markets, Jowers had a change of heart. Multi-level marketing, he says, is changing for the better—but some companies are adapting better than others.

Just as retail has struggled in recent years, multi-level marketing is also experiencing a slowdown. Some companies, including doTERRA, have continued to enjoy substantial growth—but mostly, Jowers says, because they have changed the way they think about how multi-level marketing firms ought to behave. 

But bad actors—companies that often put their sales consultants in untenable and financial situations—do exist, Jowers says, and the difference is becoming increasingly stark. Sales consultants are increasingly informed and less financially dependent, allowing them to vote with their feet, and slowing sales may have trapped some companies in a cycle that continuously undermines their own consultants.

According to the Direct Selling Association, MLMs saw an average growth rate of 1.3 percent last year—though industry-wide sales have remained relatively flat around $35 million a year, says association COO Adolfo Franco. “Last year’s sales picked up a little bit, but overall there has not been the growth that we have seen in the past,” says Franco.

Multi-level marketing companies promise part-time work that will bring in lots of money. But is it too good to be true?

Part-time work?

Multiple factors are forcing direct selling to evolve and adapt to a modern retail landscape, but Franco and others in the industry believe the primary challenge for today’s MLMs is full-time employment.

The fact is, Franco says, that the majority of direct sales consultants work part-time, seeking supplementary income. Of the 16.5 million people the Direct Selling Association estimates become involved in an MLM, only a million will sell full-time. So when the economy is doing well and most Americans see little reason to bring in supplemental income, MLMs tend to suffer.

ADVERTISEMENT

Retail, which often relies on seasonal work to boost sales, sees a similar trend, says Franco. Though direct sales were once primarily a means of reaching far-flung or otherwise difficult-to-access customer populations, today, these populations can order—and compare prices and specifications—online as easily as everyone else. This forces companies that once focused on the social aspect of the business to drive sales and compete using the same raw metrics as everyone else—the quality of the product and the price.

Yet, the internet has also given rise to new outlets for direct sales, as well, says Franco. Facebook, in particular, has enabled sellers to reach more customers and fulfill orders faster. Social media sales, says Franco, are particularly attractive to young customers.

Utah, says Franco, has been a leader in terms of innovative MLMs. Utah was already regarded as an industry hub because of the large number of MLM firms headquartered here, which Franco attributes to cultural aspects such as Utah’s emphasis on family and community relationships. But the emergence of the Silicon Slopes tech scene―which happens to share the same neighborhood as most of Utah’s major MLMs―has propelled creative solutions and led to many Utah-based firms bucking broader direct sales trends, though the state remains a smaller industry player in terms of overall sales. 

While top states like Texas and California each drive more than $4 billion in direct sales annually, Utah brings in under a half billion, according to the Direct Selling Association.

But does it make money?

While Utah firms may be doing better-than-average, researchers like Stacie Bosley, an associate professor of economics at Hamline University, worry about the individual consultants. Multi-level marketing, she agrees, tends to grow fastest in “environments where people feel strong ties to each other, because of trust or commonly held beliefs”—which her research indicates can contribute to poor decision making and perhaps outright fraud.

Bosely says she views MLMs from both sides of the issues—on one hand, she says, she sees that direct selling can serve a genuine retail purpose. On the other, it’s not always clear that the arrangement benefits the consultants recruited to distribute the products.

A 2017 study by the AARP Foundation determined that only about a quarter of MLM participants actually make a profit for their efforts, and more than half of those will make less than $5,000. While there is something to be said of consultants who sign up without taking their own skillset into account, Bosley, who studies the psychology of MLM participation, points to signs that some companies may be taking advantage of their distributors—starting with the notion that prior experience is unnecessary.

“Most MLMs pitch themselves as a universal opportunity,” she says. “That’s one of the most attractive features of it; that there are no prerequisite skills to be successful. You’re told that financial outcomes are likely to be quite grand and that achieving it is based on factors that defy normal retail economics.”

That is, assuming that the MLM shares any accurate financial information at all. Bolsey has found many firms to be less than transparent about their compensation structure, leaving it up to recruits to ask probing questions—often of family or friends—about their costs and earnings potential while participating. Recruitment for some companies may rely on the recruit’s imagination to fill in the details, which may result in people signing up for the wrong reasons.

“As an economist, I often feel like if people have full information, and it’s not an illegal structure, then it’s a judgement that the individual has to make,” Bolsey says. “We make risky choices in our lives all the time. But so often, the individual doesn’t have the right information rolling in, and it’s also colored by relationships. To what degree do people process this as a rational decision-maker, when the person recruiting me is someone that I know?”

“MLM tends to grow fast in environments where people feel strong ties to each other, because of trust or commonly held beliefs—which can contribute to poor decision making and perhaps outright fraud.”

A new life?

Bolsey’s research suggests that MLM consultants often base their decision to join not on business principles, but on emotional logic. Many consultants, she says, sign up because they feel “stuck” in life and imagine the MLM will provide some sort of transformative experience. During economic downturns, this sense of immobility might stem from labor dynamics. But demographically, MLM participants are more likely to be female, and typically have a higher level of education than the general population. Seniors, young adults, and stay-at-home parents seem especially drawn to MLMs.

Many MLMs also fail to provide training on how to retail the product, and may engage in behaviors that undermine their own sales consultants.  When retail demand for a product begins to wane, Bosley says, some firms offer additional incentives to sellers who recruit additional consultants in hopes of reversing the trend. But in the long run, she says, this saturates the market and makes turning a profit and meeting sales goals even more difficult. This may at least partially explain why the top factors in direct selling success are the size of the consultant’s existing social network, and the timing of market entry—early adopts are often the only participants to report earnings.

ADVERTISEMENT

This latter trend, in particular, has led to run-ins with federal regulators for some multi-level marketing firms, particularly when the Federal Trade Commission believes the company has crossed the line between offering a legitimate retail opportunity and constructing a pyramid scheme. While this isn’t the only legal challenge MLMs frequently encounter—multi-level marketing firms also run into trouble with product claims and false claims about the earnings potential of consultants—the question of whether an MLM offers a legitimate product or is simply a pyramid scheme remains the largest concern, says Bolsey.

Franco says the Direct Selling Association agrees with the FTC’s position that compensation should be based on sales, not on recruitment. Crossing the line into pyramid scheme territory is grounds for expulsion from the association. But he says the lack of clarity around some enforcement actions has created a sense of unease in the industry about the extent to which recruitment efforts are allowed alongside sales compensation.

“We want individuals to promote the products to their customers,” he says, “and if people are interested in becoming direct sellers, we don’t think there’s anything wrong with encouraging them.”

One of the things that gets lost in the conversation, he says, is that direct sales consultants pursue this line of work deliberately, seeking additional income or a more flexible work situation. “Our companies are proud of the fact that this creates a level of flexibility in terms of time, creates opportunity for people who have to stay home, and for people who have an interest in having their own business,” he says. “It has wonderful opportunities for people who believe in the products, and can become a joyful endeavor that gives them an opportunity to be more in charge of their lives than in another setting.”

“Most MLMs pitch themselves as a universal opportunity. That’s the most attractive feature of them—there are no prerequisite skills to be successful. You’re told financial outcomes are likely to be quite grand and that achieving goals is based on factors that defy normal retail economics.”

But according to AARP’s 2017 study, a desire for independence wasn’t the top reason why sales consultants said they signed up for an MLM.  While that may be part of the appeal, 90 percent said they primarily signed up to earn money or perks― like a new car or a vacation. Three quarters had no prior sales experience, and in focus groups, AARP’s researchers found that some people had little or no interest in the product they were supposed to be selling. 

As a result, four in ten quit after less than a year, citing either their failure to turn a profit, or discomfort with having to pitch the product to friends and family. A full two-thirds of survey participants said they would not sign up for the MLM again, had they understood at the outset what they knew after participating.

Reinvented

Jowers says he doesn’t believe these numbers are significantly worse than any similar industry—selling insurance, for example. “You’ve got to be committed, and you’ve got to have real skills to be successful at this or any career.”

But there are companies, Jowers acknowledges, that put their consultants in peril and give the rest of the industry a bad name by transferring the risk to the seller by expecting them to maintain thousands of dollars in product—sometimes more than they can realistically sell. “I know, personally, some people who left other companies after having horrific experiences,” he says. “That needs to stop.”

Jowers says doTERRA bucks this trend as well, with a 65 percent retention rate among its consultants. But doTERRA, he says, does two key things differently than the companies that have struggled with legal enforcement and negative public image: they focus on the product, rather than the business model, and they avoid shifting risk to their independent consultants.

ADVERTISEMENT

Most of the companies who’ve had run-ins with the FTC, Jowers says, have run into trouble because the company lacked a viable product. But doTERRA was focused first and foremost on the quality of its product; the fact that it was an MLM was second to the company’s purpose. “That’s what you see them cracking down on the most,” he says, “because in the end, that’s going to fail everyone involved if nobody wants what the company is selling.”

On top of this, doTERRA minimizes the investment required to become a distributor. New “wellness advocates” pay $35 to sign up, and later pay a $25 annual fee. In return, they get wholesale pricing, can participate in the company’s rewards program, and occasionally they even get free product. The company does not require its consultants to maintain any particular amount of stock, and unsold products are fully refundable.

But for all its emphasis on creating a positive experience for its consultants, doTERRA, too, is seeing a shift in how multi-level marketing functions in the modern economy. The vast majority of doTERRA’s customers, Jowers says, are “wholesale” customers—individuals who don’t necessarily plan to distribute doTERRA’s products to others, but who treat doTERRA as a sort of Costco for essential oils, signing up for a membership to enjoy wholesale prices and to participate in the company’s rewards programs. 

When consultants sign up to distribute doTERRA oils, they are offered the option to become “wholesale” members with a planned customer list of one—and the vast majority, upwards of 80 percent, take the company up on this offer. Only 19 percent of the company’s consultants actually distribute product to other customers, Jowers says, and an extremely small percentage of the 19 percent sell full-time for doTERRA.

The wholesale program has also helped maintain doTERRA’s competitive edge in an increasingly digitized world. While other MLMs have struggled to compete with e-commerce outlets, which may offer lower prices, the wholesale and loyalty reward program offer deals that can be difficult to beat on Amazon.

ADVERTISEMENT

Other companies, Jowers says, are following doTERRA’s lead and establishing similar programs, resulting in direct sales firms that have “evolved somewhat from the old Avon representative walking around your neighborhood.”

Yet, while the economy seems to be driving doTERRA to a more Costco-esque business model, Jowers doesn’t see the company giving up direct sales any time soon. Their consultants, Jowers says, enjoy and benefit from the social nature of their work. “They come initially for the product, but they stay a lot because they love the community,” he says. “They get to know each other, and they watch after each other, and it becomes a great community. It’s why we have 30,000 plus people at our convention each year.”

And while the internet and other factors may be changing how direct sellers do business, Jowers believes the model has a role to play in an increasingly isolated and depressed world. “People… don’t go to church anymore,” Jowers says. “They don’t go to Kiwanis; community clubs are disappearing. Even grocery stores—everything can be done on the phone. But we are social creatures. That’s how we’ve lived for thousands of years. So we’re not equipped—we need human interaction.”

Multi-level marketing companies promise part-time work that will bring in lots of money. But is it too good to be true?

Emma Penrod is a journalist based in rural Utah who covers science, technology, business and environmental health. She writes a weekly water politics newsletter at pactio.us/host/emma-penrod and Tweets about the latest science and industry news @EmaPen. When she's not writing, reading or researching, she's hunting sagebrush-scented air fresheners.

Post a Comment