Chances are you know someone who is involved in multi-level marketing, or network marketing as it is also known. Perhaps you’ve been approached about getting involved in such a business. The potential rewards are enticing. The opportunity to become your own boss, leave a dead-end job, work from home, and tap into a seemingly limitless flow of income is just too good to pass up. Simply buy products wholesale and sell them to friends, acquaintances, and eventually strangers at a profit. Sounds pretty simple.
However, multi-level and network marketing are called something else by their critics: a pyramid scheme. That’s because the real money isn’t in selling products, but in recruiting other people to sell products— lots of people. As they sell products, or simply purchase items at the wholesale level, the recruiter makes a commission. Many well-known companies use this business model, with several being accused of being pyramid schemes.
Well-known multi-level marketing companies
Amway was among the first companies to popularize the concept of multi-level marketing, but also among the first to draw the ire of critics who labeled it a pyramid scheme. The website Skeptic’s Dictionary gives a detailed description of the Amway business model. While Amway has been accused many times of being a pyramid scheme, and taken to court on such charges, it has not been proven in the eyes of the law to be one. The company has been able to fend off the accusations because it does sell products to the general and does not charge people to join or to recruit others. It’s a shaky distinction according to the Skeptic’s Dictionary.
Herbalife too was an early entrant into the world of multi-level marketing. It has drawn criticism similar to that faced by Amway. Only in the case of Herbalife, one critic went so far as to put his money where his mouth is, according to NPR’s Planet Money blog and podcast.
So strong is the conviction of hedge fund manager Bill Ackman of Pershing Square Capital that Herbalife is in indeed a pyramid scheme, the investment guru took out a $1 billion short position in Herbalife stock, which means he is essentially betting against the international company’s future success. Unlike a regular investment in a company’s stock where the purchaser hopes for the company to grow, a short is the opposite; the investor is betting the company will fail. Ackman is convinced that Herbalife is a pyramid scheme, and will eventually collapse. Though Hebralife denies the claims and accusations, the Federal Trade Commission (FTC) is nonetheless looking into them.
A newcomer to the multi-level marketing universe, WakeUpNow! was founded in Provo, Utah in 2009. The company gained some attention when it was featured on the popular radio program This Amercian Life. While the show spent the better part of an hour examining the company and talking to people who had joined up, the two reporters Brian Reed and Bianca Giaever still weren’t completely sure how it worked.
What was revealed is that WakeUpNow! does handle consumer products, but they don’t sell them, at least not in the traditional sense. People who sign up pay a monthly subscription fee and are encouraged to sign up others in classic pyramid scheme form, and that is presumably where the money is made. According to This American Life, 95% of WakeUpNow! distributors do not turn a profit.
One interesting wrinkle to the WakeUpNow! Marketing plan is the way it combats the accusations that it is a scam or pyramid scheme. These days most people are savvy enough to do an Internet search when they suspect a scam. Indeed, there are videos online about the company with titles like “WakeUpNow! is a Scam” and “WakeUpNow! Exposed.” While the titles of these clips sound damning, they are in fact, informational clips extoling the virtues of WakeUpNow! In public relations parlance, this is known as “getting out in front of the message.”
It should be noted that since the radio story on This American Life, a search for videos with the words “WakeUpNow!” and “scam” are more likely to return videos actually criticizing the company. However, right below those you can will still find the faux exposes.
The Pampered Chef and Tupperware
The Pampered Chef was founded in 1980 and expanded on an idea first developed by the Tupperware Corporation back in the 1950s. Back then, plastic containers in which to store food were revolutionary. But instead of selling these items in stores, the Tupperware folks settled in on the idea of having independent representatives sell the products from home by holding so-called “Tupperware parties.”
Today Tupperware can be bought in stores, but most of its sales still come from hosted parties. While it too relies on a recruitment structure, it also produces significant revenue through the sale of products. The Pampered Chef operates similarly, though it has been accused of relying more on recruiting than on actual product sales in recent years.
Avon, Mary Kay, and Arbonne
The cosmetics industry seems to be a popular business line for multi-level marketing, with the three of the biggest names being Avon, Mary Kay, and most recently Arbonne. It didn’t start out that way though.
Avon, the oldest of the three, had its beginnings in 1886, long before anyone heard of network or multi-level marketing. In the 1960s and 1970s, the company’s heyday, it received most of its sales via a direct marketing plan, or what other multi-level marketers claim is their primary source of income. In Avon’s case though, this was accurate. The iconic Avon Lady, and the company tagline “Avon calling,” became part of the American lexicon.
However, over the years Avon moved toward the multi-level marketing business model, with competitors Mary Kay, started in 1963, and Arbonne started in 1975 in Switzerland, providing fierce competition. All three have been the subject of scrutiny over their use of multi-level marketing techniques.
Mary Kay was the subject of an investigation by Harper’s Magazine in 2012 that accused the company of running a pyramid scheme. Arbonne, meanwhile, has flown under the radar. An Internet search on the company’s business practices returns an article from the British newspaper The Daily Mirror, little else of substance. Taking a page out of WakeUpNow’s playbook, several web videos purport to expose the company, but in fact soft peddle the virtues of getting involved.
How do you know?
Multi-level/network marketing is a legitimate business, but the Federal Trade Commission does take issue with the concept when it crosses the line and becomes a pyramid scheme. What’s the difference? The FTC website offers these warning signs:
- Your income is based mainly on the number of people you recruit, and the money those new recruits pay to join the company — not on the sales of products to consumers
- You’re required to buy lots of inventory
- You’re forced to buy other things you don’t want or need just to stay in good standing with the company
The FTC also points out that you’re likely to lose money in a pyramid scheme. Other critics say all forms of multi-level marketing are pyramid schemes, as the business model is simply unsustainable. If you’re selling products, and making money on those sales, you’re a direct marketer. If you’re making money by signing up people “under” you, you’re likely involved in a pyramid scheme.