4 ways to tell if the business is a scam

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Captivating new documentary miniseries draw attention to multi-level marketing platforms.

“LuLaRich”, available on Amazon Prime, tells the story of LuLaRoe, a clothing empire famous for its “buttery soft leggings” but accused of being a pyramid scheme and of using predatory practices to earn money. ‘money. The company has been the subject of several lawsuits, including a lawsuit in Washington state that was settled for $ 4.75 million in February.

The four-episode series, which debuted in early September, highlighted the predatory practices of multilevel marketing schemes, also known as MLM. While MLMs are legal in the United States and recognizable companies like HerbaLife and Young Living use the corporate structure, experts say they often look like pyramid schemes and victimize salespeople.

What is a multilevel marketing scheme?

The Federal Trade Commission defines MLMs as “businesses that sell products to family and friends and recruit other people to do the same.” MLMs are also known as direct marketing or network marketing businesses.

The FTC also notes that “some MLMs are illegal pyramid schemes”. The experts we spoke with were tougher on the business model.

“If you are in MLM, this is a scam,” said Robert FitzPatrick, author of several books on multilevel marketing and president of Pyramid Scheme Alert, the premier international association to prevent pyramid fraud. . “… Almost everyone is going to lose. But the people who are at the top of the platform will make a lot of money.”

FitzPatrick said that there are four characteristics of a tiered marketing program:

  1. “It’s a never-ending chain:” FitzPatrick said the most obvious sign of an MLM is that salespeople are pressured to recruit other salespeople, whom they will then earn money from. This is generally described as “downline”: the recruiter will get a portion of the sale that the person they’ve recruited sells, and the chain continues.
  2. “You just have to pay:” FitzPatrick said that another hallmark of a tiered marketing program is buying merchandise in advance or paying a hefty fee to join the business. These charges are generally described as “start-up costs” or a “starter pack” of the merchandise. Since the sellers have to buy the clothes before they can sell them, this can be financially risky. MLMs also emphasize hitting a certain sales goal each month and often recommend that salespeople buy enough to hit that minimum if they don’t have enough sales.
  3. The third warning sign is a “recruiting mandate”, which is closely related to the “endless chain” concern: FitzPatrick said multi-level marketing programs will focus on constantly recruiting more people, which makes the sustainability of the company difficult.
  4. The fourth characteristic, FitzPatrick said, is how and what a person is paid. The vast majority of people lose money. Only about a quarter of people involved in MLM make any money, and that money can be quickly consumed by the need to buy more merchandise.

Dr William Keep, a professor at the College of New Jersey who is considered an expert in multilevel marketing, said another struggle is the MLM industry’s refusal to be transparent. He said “LuLaRich” offered unusual insight into the inner workings of such a business, and said the opacity of the industry makes it difficult to know “how many tiered marketing platforms operate as systems. pyramids “.

“We know for sure that by using this model it is very easy to exploit an illegal pyramid scheme … The main warning sign is that in order to be successful you are required to recruit other people who will be then invited to recruit others, “he added. Keep said.

Keep added that this focus on recruiting, which FitzPatrick has listed as one of the hallmarks of a tiered marketing platform, is “against all competitive models” typically found in businesses, as customers recruited will no longer purchase a product from a vendor.

He also touched on the financial aspect of multi-level marketing platforms, with particular reference to LuLaRoe. As part of their settlement with Washington state, the company disclosed its median earnings for sellers. Typically, MLMs publish average or average incomes, which can be skewed by high incomes with large downlines.

“Median earnings were zero,” Keep said. “We are talking about financially negative people (after spending).”

MLM Myths, Debunked

“If they were illegal, the government would shut them down.”

Keep said that many people defending MLMs against accusations of being pyramid schemes would turn to this phrase, but it is “not true”, referring to the company AdvoCare, an MLM that has operated for decades. and had national spokespersons like Drew Brees. In 2018, after more than 26 years in business, the group was finally sued by the FTC – but Keep said it took a long time to get there. AdvoCare still exists, but now works with a different structure.

“If they have a product, they can’t be a pyramid scheme.”

Keep pointed out that for many organizations the products they sell – like LuLaRoe’s “super-soft leggings” – are just “vehicles for moving money.”

“Naturally you want a product to be viable because it looks more suspect otherwise,” Keep said, but said that for many companies the product is secondary to the downline recruiting and development model.

FitzPatrick said other things, like being traded on the stock exchange, can also give MLMs a shine of legitimacy.

“(People say) surely it can’t be a pyramid scheme, celebrating in plain sight,” FitzPatrick said. But being publicly traded doesn’t mean it’s a fair deal.

“All businesses have start-up costs.”

One of the hallmarks of MLMs, as FitzPatrick explains, is to constantly buy products, and this usually starts with a “start-up fee” or the purchase of a “starter pack” of merchandise from the company. Many MLMs compare these fees to the costs associated with starting an independent business, but they are vastly different, especially since MLM products are not unique and are sold by other sellers on the platform, Keep said.

“There’s one thing the industry is very good at doing, and that’s taking statements and presenting them as if they’re individual things in their own right,” Keep said. “A lot of businesses don’t make money right away, that’s true. A lot of businesses fail, that’s true. But here the business model, if you want to call it a model, is that the vast majority people fail, and their failure generates profits for those above them (in the ascending line). “

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