Ziemann: I heard it through the downline

Columnist Megan Ziemann dives into the ethics and practices of four multilevel marketing companies to present a cautionary tale.

Megan Ziemann

You’ve probably seen that scene from “The Office” where Michael tries to recruit the employees into selling calling cards. He tells everyone the calling cards will sell themselves, that they’ll all get rich quick and soon they’ll be driving Corvettes like his pal Phil. Michael was part of an illegal pyramid scheme in that scene, but his talking points are more common than you think.

They’re used by multilevel marketing companies, too.

Multilevel marketing is a form of direct selling, where employees sell products and recruit others to do the same. I want to take a look at four popular multilevel marketing companies that have had their fair share of controversy: Mary Kay, LuLaRoe, Young Living and Herbalife, and try and figure out why they’re in so much hot water.

Multilevel marketing companies, known colloquially as MLMs, generally make money through two different strategies. First, MLM employees sell products to the general public (think those door-to-door “Avon ladies” in the ’90s). Second, employees recruit other people to join the MLM and earn commission off of these new sellers. 

The latter strategy is much more lucrative for the sellers. In order to sell product, employees must first purchase it from their company. The pricing of these “starter kits” vary from MLM to MLM. Mary Kay charges $100 for their starter kit, Young Living’s costs $165 and LuLaRoe’s 65-piece initial inventory order totals a whopping $499.

Some companies don’t put pricing on their websites at all. Herbalife is one such offender. In order to find their starter kit prices, I had to locate a new distributor Q&A infographic, which informed me that Herbalife’s starter kit begins at $94.10. 

This starter kit situation is the first red flag. In order to become an employee of a company, you shouldn’t have to spend upwards of $499. I’m a student worker with Student Health and Wellness here at Iowa State, and my onboarding kit included a manual with teaching material, three uniform shirts, a name tag and three days of paid training. 

I did not spend a cent on any of it. In fact, I got paid for it.

As we talk more about money, I would be a terrible business student if I did not go hunting for and pick apart these companies’ financial documents. The first hurdle is that a lot of MLMs are not publicly traded, meaning they do not have stock and their financial statements are not required to be publicly accessible. 

Mary Kay is one such example. Technically, I was able to access their annual reports. However, those annual reports were $60. LuLaRoe’s were absent. I was able to locate financial information for Young Living’s charity foundation, but not its actual company. Surprisingly, I did find Herbalife’s 2019 annual report, but it is 124 pages of corporate jargon that didn’t tell me much about the individual distributors.

Something I do have for most of the companies mentioned is an income disclosure statement. This statement is provided to all new sellers and details how much money they are likely to make compared to the rest of the distributors, typically on a yearly basis. 

LuLaRoe’s income disclosure statement begins with bonus earnings, which I’m not really concerned about. I want to know the base income for an average employee. Unfortunately the aptly named “income disclosure statement” refuses to tell me this. In small print above the bonus tables, the statement informs the reader that not only were 73 percent of employees unable to access the bonus payments, but the tables fail to take into account basic cash flows like sales profits and inventory purchases. I cannot tell you if a LuLaRoe distributor makes any money, let alone if they can live off that income.

Good thing Young Living actually shows me income! I was able to access the company’s 2018 income disclosure statement that told me 89 percent of Young Living distributors earned up to $1,022 during fiscal year 2018. Yikes. Even more disappointing is the average income for that same group. It is just $4. Eighty-nine percent of Young Living employees make around $4 a year.

That is ridiculous. 

According to their own table, in order for a Young Living distributor to earn a livable salary (which I am identifying as around $50,000 a year, which is livable in Ames but far from it in any larger city) they will have to be Gold members, a group that makes up the top 0.1 percent of the company. Becoming a Gold member takes on average four years, and Gold members earn around $47,000 a year. 

Let’s examine this. I am a senior at Iowa State right now and I am set to graduate after spending three and a half years here. I am going into digital marketing and the average salary for an entry level position in that field is anywhere from $50,000 to $60,000, according to Indeed and Payscale. This doesn’t include benefits like insurance or hiring bonuses. 

I am seeing an issue here. I have studied for less than four years at a public university and I am projected to make more than the top 0.1 percent of all Young Living distributors.

Herbalife’s income disclosure statement comes in the form of a new member Q&A as I mentioned above. According to this statement, 50 percent of new distributors earn anything from $95 to $740 in their first year. Fifty percent of continuing distributors earn anywhere from $305 to $3,450 in a year. Obviously, these are not livable wages. 

These earnings are also all before expenses. Like I said before, I’ve been a business student for three years and I have been taught to always look for net income, not income before expenses. Where is Herbalife’s net income disclosure statement? How do I know these distributors are making anything? I don’t, and neither do the distributors.

Mary Kay does not provide an income disclosure statement for their U.S. sellers, but I was able to locate the Canadian one

The income disclosure statement debacle is our second red flag. Your potential employer isn’t able to tell you how much money you can earn or if you will earn money in the first place. That puts a bad taste in my mouth.

MLMs put a bad taste in the judicial system’s mouth as well. All of the companies I’ve looked at over the course of my research for this piece have been sued, some of them multiple times. Most of these lawsuits were class action lawsuits, meaning the companies have been accused of misleading or deceiving customers. And that’s our third red flag.

LuLaRoe’s lawsuit was filed in 2017 by the state of Washington when then-Attorney General Bob Ferguson alleged that the company operated like an illegal pyramid scheme. According to the prosecution, LuLaRoe tricked customers into buying into its distributor program where they purchased large amounts of capital, were denied refunds and did not achieve the lavish lifestyle promised to them by higher-ups in the company. 

Young Living is no stranger to a class action lawsuit. In 2019, California resident and former distributor Lindsay Penhall sued Young Living and called it “nothing more than an unlawful pyramid scheme.” According to Penhall, Young Living depends on recruitment, not product sales, for income. Many members buy more than they can sell, which leads to losses for the members but gains for the company. Penhall claims that most sellers lose money despite being told they could make a living from the business.

Herbalife came under fire in 2016 when the Federal Trade Commission (FTC) demanded the company restructure its direct marketing model. The FTC stated that Herbalife must connect distributor bonuses to selling product rather than recruiting others and pay $200 million to current customers. Last year, Herbalife sent out a second wave of refund checks amounting to $45 million.

One of Mary Kay’s lawsuits happened in 2015 and concerned former distributors in New Jersey. According to them, Mary Kay falsely classified them as independent contractors, not general employees, and forced them to purchase inventory and other capital under penalty of termination. 

I cannot find if these lawsuits have been resolved, but I can only assume the companies settled with the plaintiffs in order to preserve their reputation to varying degrees of success.

That was a lot of statistics and business data. Fortunately, I have three years of a business degree to thank for the fact I can pick apart these companies. Freshman Megan wouldn’t have been able to. High school Megan certainly wouldn’t have been able to. 

A lot of MLMs’ target audiences wouldn’t be able to. 

The vast majority of these target audiences are women, BIPOC, people from low-income backgrounds and people who speak English as a second language. These communities are already vulnerable. They may not have the money or resources to pursue secondary education. They may be young parents who struggle to provide for their families while taking care of children. They are in desperate need of quick cash and MLMs present themselves as a perfect way to obtain that. 

A popular phrase among MLM recruiters is “boss babe.” This phrase targets women specifically and carries with it the thought that women can be entrepreneurs and financially free with an MLM. Boss babes often work from their phones and rely on close-knit, impressionable communities of “sisters” to purchase their product.

This boss babe mentality traps women and other communities in a false sense of empowerment. Why can’t women just be the boss?

Feminist opinions aside, you can’t be a boss babe if you don’t own your own business. And if the financials of these MLMs have told us anything, you don’t. MLM employees are subject to the larger company. They may receive 1099s, but they do not do their own independent accounting. They do not design their own product. They do not own their own businesses. 

I understand quick money may seem like a great thing right now. Real talk, I am at risk of being furloughed. At a moment’s notice, I could lose all my income. 

But MLMs are not the way to go. These companies may sound fantastic, but that’s because they’re lying to you. Look deeper into their business structure and you’ll realize like I did that most employees cannot live on an MLM income.

You are worth more than any direct selling company or MLM like the four I’ve just written about. You are competent, you are intelligent and you deserve a living wage.

And that’s the real bottom line.