By: Caroline M. Whitlock
Multilevel marketing (hereinafter “MLM”) companies are sales organizations that compensate independent consultants based on the sales and recruitment of other consultants.[1] Avon, Herbalife, and LulaRoe are big name companies that sell products through multilevel marketing.[2] MLMs involve “direct selling”-an industry which is vastly unregulated and leaves ample room for deceiving new consultants into believe that they can earn large sums of money in a short amount of time.[3] Many companies specifically appeal to the non-traditional labor force; making your own schedule outside a customary 9-5 position. Consultants often must purchase a training kit to use when demonstrating their products to prospective customers and the kits can often cost about $500.00 each.[4] After training, consultants are expected to purchase ongoing promotional items such as catalogs and display items or pay a subscription fee for their participation.[5] In direct selling schemes, the money made by new recruits is the main source of earnings for the already established members.[6]
MLM recruiters typically try to keep the initial conversations as vague as possible when speaking to prospective consultants, and if they do provide more information, it is typically shaped to appeal to the specific prospective consultant.[7] Potential consultants may be recruited through a friend seeking a new job opportunity or cold-call advertising.[8] More recently, social media “influencers” are using Instagram and Twitter to recruit people to MLMs under the guise of life-changing products.[9] The information about the products in their posts is typically ambiguous so potential recruits are more likely to accept the skewed information presented to them by the existing member.[10] Additionally, when successful statistics are given in promotional materials, the data is overly optimistic and likely only cites sales, not the probability of sales or per capita sales.[11] MLMs can sometimes exploit biases through a potential consultant’s desire to conform to fit in with “the in crowd.”[12]
Social interactions and social media amplify the myth of independence.[13] By promoting MLMs on social media, the act of selling becomes a way to make new friends and extend your network. Thus, the decision to enter a MLM feels less like an economic necessity and more of a choice.[14] Additionally, MLMs establish a system of support where members can gain leadership opportunities and learn from each other.[15] For example, many MLMs have Facebook groups and teams of MLM sellers who advertise each other’s sales on social media. Once accepted, new members are encouraged to “trust the leadership” and become more susceptible to guidance from the more advanced consultants.[16]
Many MLM consultants continue participating in the business even though they typically lose much of their own money doing so. The sunk cost fallacy is the tendency for people to continue pursuing an option if they have invested time or money in it, even if it makes them unhappy or is destructive to their life.[17] This idea does not just apply to money spent, but also invested time, energy or pain.[18] Whether it be time, money, or energy, the sunk cost fallacy ensures that MLM participants continue to stay within the group simply because they do not want to throw away all of the progress they believe they have already made within the organization. MLMs are consistently among the top ten fraud complaints received by the Federal Trade Commission (“FTC”) and state consumer protection divisions.[19] Because MLMs often involve deceptive recruitment tactics and are frequently fraudulent, their growing presence on social media should be cause for concern for potential consultants.
[1] Heidi Liu, The Behavioral Economics of Multilevel Marketing, 14 Hastings Bus. L.J. 109, 110 (2018) (explaining that MLM consultants are non-employees of the company who may be given incentives to recruit others rather than to sell product, as opposed to traditional salespeople who are employed by the company and are paid a combination of a base salary and bonuses, depending on how much inventory they are able to sell).
[2] Business for Home Team, The 500 Largest Direct Sales Companies in The World 2019, Business for Home (Jan. 3, 2019), https://www.businessforhome.org/2019/01/the-500-largest-direct-sales-companies-in-the-world-2019/.
[3] Sergio Pareja, Sales Gone Wild: Will the FTC’s Business Opportunity Rule Put an End to Pyramid Marketing Schemes?, 39 McGeorge L. Rev. 83, 87-88 (2008).
[4] Liu, supra note 1 at 112.
[5] Id.
[6] Pareja, supra note 3 at 88.
[7] Id. at 122.
[8] Liu, supra note 1 at 123.
[9] Arbonne, https://www.arbonne.com/pws/homeoffice/tabs/home.aspx (last visited Mar. 6, 2019) (“It’s not just what we put in our products that makes them superior. It’s what we choose to formulate without. We integrate the most beneficial botanical ingredients from nature with the principles of green chemistry — we craft products with integrity, expertise and innovation”).
[10] Pareja, supra note 3 at 116 (discussing how companies tend to produce information to potential consultants which is typically based solely on the profit of the “active participant,” a sample which can be easily skewed and omits participants that leave the company due to poor returns).
[11] Liu, supra note 1 at 124.
[12] Pareja, supra note 3 at 88.
[13] Liu, supra note 1 at 133 (explaining that selling becomes a mechanism for consultants to make new friends and to care for other people).
[14] Id.
[15] Id.
[16] Id.
[17] Jamie Ducharme, The Sunk Cost Fallacy is Ruining Your Decisions. Here’s How, Time (Jul. 26, 2018), https://time.com/5347133/sunk-cost-fallacy-decisions/.
[18] Liu, supra note 1 at 123 (explaining how MLMs use their success stories to recruit new members, a sort of false advertising with selectively displaying only the most positive results, with almost no information distributed regarding the average salary of consultants).
[19] Liu, supra note 1 at 85.
