It often feels like old friends that you haven’t heard from in years, or that family member your rarely talk to always turn up when they have a new multi level marketing company to talk to you about. And I don’t believe that’s a coincidence. You see, these types of companies rely on the personal networks of individuals and requires them to reach out to the people they know and trust to build their “downline”. And all of them seem to promise that you’ll make money.
But that’s usually never the case. Or at least that’s not the case in 99% of situations.
That 99 percent number isn’t coming to you courtesy of some jilted former LuLaRoe consultant — it’s from a report done for the Federal Trade Commission (FTC) by Jon M. Taylor, MBA, Ph.D., of the Consumer Awareness Institute. The infuriating part of this statistic is the bill of goods sold to potential consultants in order to convince them to set their (very well-founded) fears of losing money aside and dive into the LuLa (or whatever product) pool.
According to Taylor’s report, when MLM leaders are trying to onboard a new consultant in their “downline,” they often use a misleading statistic to soothe fears of failure and losing money.
“MLM promoters often claim that the failure rate of small businesses is in the range of 90- 95%. They say this to excuse the widely recognized failure rate in MLMs. What they fail to do is quote statistics from reliable organizations not affiliated in any way with MLM,” the report reads.
The Small Business Association (SBA) found that 44 percent of small businesses survive at least four years, and 31 percent at least seven years. The NFIB (National Federation of Independent Business) found in a recent survey of small businesses that over the lifetime of a business, 39 percent are profitable, 30 percent break even, and 30 percent lose money.
Cumulatively, that’s a 64 percent success rate. A far cry from 90-95. There is one number in the 90s that holds water when it comes to MLMs.
“The loss rate for MLMs is at least 99%. This means that less than one in 100 MLM participants make a clear profit, and at least 99 out of 100 participants actually lose money,” Taylor reports.
Less than one in one hundred. Your odds of sleeping through the night with three-month-old triplets are higher. As Taylor notes, you’d literally have a better chance at making money by gambling. “One can do much better at the gaming tables in Las Vegas. And a person need not risk his or her social capital – treasured relationships with friends and family one has spent a lifetime cultivating.”
Though he’s careful to say he doesn’t recommend gambling either.
And that loss of money is happening if the LuLaRoe consultants interviewed for a piece from Quartz are any indication. Women “on-boarding” with LuLaRoe shell out an initial investment of around $5,000, or even more, depending on how much inventory they decide to start off with. They’re then required to buy “a minimum of 33 pieces per month to maintain active status.”
Quartz did the math on that. “This means that if a retailer sold 30 pairs of leggings a week, it would take them just under three months to make back their initial $5,000. As they also need to use their revenue to restock an additional 33 pieces a month ($1,038 worth of leggings over 11.5 weeks), it would therefore take another month or so of selling 30 pairs of leggings a week to start turning a small profit.”
Indeed, one consultant tells CBS News that her LuLa business has fizzled out and she’s now stuck paying the price. “I’m now saddled with over $7,000 in debt and tons of leftover inventory that even other consultants won’t buy from me.”
Quartz reports that women are encouraged by LLR leaders to take out a credit card while some start a GoFundMe in order to pay for their initial order. And they’re doing it, because they’re desperate. The real crime at the end of the day is companies taking advantage of people who truly need money while making most of the profits themselves. Once they’ve gotten a new consultant to spend her first $5,000, they’ve already made their money.
And now, it’s the consultant’s turn to hustle.
Sadly, that hustle is happening amid a market rapidly filling up with other consultants to compete with. Sarah Stern, a Florida stay-at-home mom, tells Quartz she became a LLR consultant in March 2016 after a friend’s “glowing” recommendation. At the time, she says there were only about 10,000 LLR consultants total. Stern concedes that for several months, she did very well for herself, pulling in $18,000 to $24,000 a month in sales with seven consultants working under her. She also put in 80-hour work weeks and tells of being glued to her phone, constantly trying to sell her wares.
Now? With over 80,000 consultants at the beginning of 2017 and counting, Stern found herself with $20,000 in unsold inventory sitting in her house. “It clicked for me that if you order 30 items, they send you 10 quick movers and the rest sit. It’s a false sense of actually being successful,” she says. “I noticed all these people started going out of business. I started getting scared that my inventory would be worth nothing, and I would be stuck with $8,000 on my credit card.”
She decided at that point to cut her losses.
Former consultant Sophie echoes the reason Stern had to get out. “They’ve flooded the market with so many consultants, nobody is making money, and everyone is so stressed out,” she says. “Now it’s like, ‘Oh, there’s another consultant down the street.’”
All of this LuLa talk isn’t just to trash their company in particular — they’re just the most popular right now in a long line of MLM businesses that women have tried their hand at throughout the ages. But they are uniquely risky in the fact that their consultants are forced to carry a large inventory, whereas other MLM businesses do not.
As Quartz reports, “This isn’t a story about leggings, however. It’s not even a story about LuLaRoe. This is the story of rural and suburban disenfranchisement and the MLMs that offer desperate American women a chance at clawing their way out.”
And these companies are only too happy to throw them a rope, however frayed it is.