Direct Sales: The Truth About Selling From Home
You've seen your friends' posts pitching products, and maybe you've thought about joining someone's "team" to earn money. Before you do, read this.
When Sarah Johnson became a sales consultant with doTERRA oils, she wasn't looking for a career change—in fact, she already owned her own successful property management company. "I've always been into natural remedies and essential oils, so when a friend brought the products by I was happy to give them a try," explains the mom in Oak Park, Illinois, who was pregnant with her second child at the time. "Then I started thinking, 'Hey, when I go on maternity leave, this could be a nice way to get a break on what I already buy and also support my friend. And if I can make a commission, all the better.' "
Johnson decided to sign up as a Wellness Advocate, which seemed to offer the biggest product discount. It only cost $35 to register, and her friend explained that the best deal was to join the doTERRA Loyalty Rewards Program. This would commit Johnson to buying a minimum of $100 in oils every month, but she would also receive a "Fast Start" cash bonus (20 percent of whatever her customers spent) and even more discounts. In addition, she would earn points with just about every purchase, which could be redeemed for more products.
Although Johnson wasn't convinced she'd make a ton of money, nonetheless, she was intrigued by impressive accounts of women earning huge payouts. "My friend would tell me these crazy success stories, like this one woman she knew who was supposedly making $20,000 per month," she recalls. Johnson knew other moms who were into the products, so hearing that she'd be "getting paid to hang out with my friends to talk about oils," she said, had its appeal.
Instead of simply selling products and collecting commissions, though, Johnson found herself in a complex web of rules and stipulations that seemed to undercut her profit at every turn. "If I signed up three people with my Loyalty Rewards Program orders, I would earn a $250 bonus. But if I only recruited two people, I wouldn't get anything," she recalls. "It turned out that if I wasn't maintaining a $100 order in my online shopping cart at all times, I would not be able to earn points for the following month."
After a year of trying to make the business work, Johnson says her net income was negative $3,298. She had often bought more than the monthly minimum to take advantage of various "special deals," until she realized she wasn't breaking even, and struggled to merely hit her quota each month. "The only time I ever earned a commission was after I held my one and only party, and that was $34," she says.
Johnson is among millions of people in the U.S. who have become involved in direct-selling businesses, also known as multilevel marketing companies, or MLMs. William W. Keep, Ph.D., a marketing researcher and dean of the business school at the College of New Jersey, has studied the industry for 30 years. He says that the vast majority of people who join such ventures lose money. "The MLM is a well-known but little understood business model that is unfortunately fraught with fraud," Dr. Keep explains. Women make up almost 75 percent of the sales force, and the businesses are especially popular among mothers who are staying home with their children and in need of income.
But critics say that it's almost impossible to make a real income: While the Direct Selling Association (DSA) reports that the industry's estimated retail sales reached $34.5 billion in 2014, Dr. Keep's research of several major MLM companies shows that the average salesperson earns less than $750 per year before expenses, a figure that has remained stagnant since 1980. Direct-selling businesses used to be entirely home-based, with neighbors throwing Tupperware potlucks or shopping parties. But many savvy brands have realized that social media means the party never has to end. And women today say that rather than bringing them closer to their community, the onslaught of aggressive sales pitches can put a strain on friendships, both online and in real life.
Here's what you need to be aware of before you sign up for that "amazing business opportunity!" popping up in your Facebook feed.
You're pressured to buy products.
Johnson says that, initially, she didn't think that $100 minimum order would be a problem. "I wanted to stock up on the oils so I could have a little medicine cabinet," she says. "After a few months, though, I got to the point where I had everything I needed." But because of the Loyalty Rewards Program, she had to keep spending that $100 each month. "This kind of pay-to-play model is essential to the success of MLMs," says Robert FitzPatrick, a consumer rights advocate and coauthor of False Profits. "These companies earn money by inducing their salespeople to buy products they wouldn't normally have bought, in quantities they probably don't need. The easiest way to do that is to commit everyone to an ongoing purchasing quota." Johnson wasn't permitted to sell the oils she bought each month to the people who attended her parties, because all product sales are handled through doTERRA's website. Instead, she says, her recruiters suggested that she give them away as free samples to convince her customers to place their own monthly orders directly with doTERRA. (Emily Wright, doTERRA's executive vice president of sales and marketing, notes that while some advocates do give out free samples, the practice is "absolutely not required" by the company. While she confirms that Wellness Advocates are required to spend $100 to earn the Fast Start bonus, she insists no one has to spend anything to be able to earn commissions.)
Other MLMs do encourage consultants to stock inventory to sell directly to customers—but anti MLM advocates argue that this can be just as problematic. "I always tell people to go to Target or GNC or any other retailer that carries the kind of product you're considering selling through an MLM," advises Douglas Brooks, an attorney in Concord, Massachusetts, who specializes in MLM litigation. "See how much they're selling it for and then ask: Is the price you're paying low enough that you'll be able to compete in the retail market?" You should also avoid any ongoing commitment to have products "auto-shipped" to you and be skeptical of pressure to place new inventory orders every month or season just because the company has released a new line.
Last, be wary of recruiters who tell you that purchasing isn't required. "Almost every MLM says it doesn't require its sales force to make purchases, because mandatory purchasing is one hallmark of a pyramid scheme," Brooks explains. (See "Is It a Pyramid Scheme?") "But the unofficial pressure can still be intense. You have to ask: How are people actually participating in the business?"
In the case of doTERRA, Wright insists that consultants don't face any unofficial pressure to buy: "Our product is highly consumable, so they're really just replacing the products they use day in and day out when they place their order each month." And she insists that it's possible to reach the company's top rank of salesperson without placing personal orders. But when asked how many of the current sales force has done that, another company spokesperson said, "I'm confident that none of our [top-ranked salespeople] have achieved that level without placing an order. They typically do because they like and use the product."
There are lots of hidden costs.
Her monthly oil order wasn't the only cost Johnson incurred while selling for doTERRA. "I also bought tons of little sample bottles, droppers, and brochures to explain how the oils work," she says, noting that her recruiters encouraged her to order from a site called AromaTools.com, which sells doTERRA-branded products as well as generic supplies. Other women we spoke with reported similar hidden costs—for supplies, uniforms, travel, website maintenance, conference fees, and more—tucked into the business model of many other direct-selling brands. MLMs encourage all that spending for the obvious reason: "It makes them money," says Dr. Keep.
The real cash is in recruiting.
At most MLMs, simply selling products isn't enough; you're encouraged to recruit your customers to join your sales team too. Even women who are happy with their direct-sales business sometimes balk at the idea that they should helm a team full of other women recruited to sell under them. "I know I have to do it, but it's outside my comfort zone," says Tracy Gallagher, a mom of six in Carmel, New York, who quit her job as a facilities supervisor for a telecom company in 2008 to devote herself full-time to her Pampered Chef business. "For years, I tried recruiting games and all kinds of things, but I never found anything that really worked. It just felt like I was pushing it on people." Gallagher preferred to focus on selling the products themselves, though she acknowledges that it could be work-intensive to book, prep, and attend parties, and manage customer orders. (Pampered Chef did not respond to requests for comment.)
Gallagher stopped several years ago but then later decided to start selling Nerium skin-care products—the company emphasizes social media marketing over home parties. "Now I can be available for weekend family activities," she says. She has successfully recruited four people and is excited to keep going, because she believes that recruiting a team will boost her earnings through "residual income," where you earn a percentage of every order placed by someone on your "downline," or team. "You're definitely not required to recruit anyone; we have people who build their business based purely on product sales," says Amber Olson Rourke, Nerium's chief marketing officer, who explains that training is a mix of leadership development and product orientation. "It's not about how you build a team; it's how you become a leader. We see so many who have this renewed sense of confidence that comes from stepping outside their comfort zone."
Whether you call it team building or "stepping out of your comfort zone," the problem with recruiting is that eventually, you run out of people. Many MLMs tell consultants they just need to recruit two people to make their business work, because then those people will each find two more recruits, and so on. But the "just get two" plan doesn't account for the high drop-out rate with MLMs; investigations by the Federal Trade Commission (FTC) and research by FitzPatrick have shown that with many companies, anywhere from 50 to 90 percent of consultants quit after their first year. FitzPatrick has studied 500 such businesses over the past 15 years and concludes that consultants need a team of at least 200 people under them to keep the business sustainable. "Any fewer and the constant rate of attrition will wipe you right out," he notes.
And building your own team of 200 is nearly impossible because the MLM model reaches market saturation quickly. That was the experience of Heather Colon-Smith, of Fairfield, Connecticut, who two years ago sought something to tide her over while she job-hunted. She joined Jamberry, which sells nail wraps and other hand-care products. "Every time I would reach out to someone I knew who liked the products, they would say, 'Oh no, I'm selling them too!' " she says. "And I was being invited to other people's Jamberry parties at least three times a month." Colon-Smith spent $99 on her starter kit and says she only made two individual sales; the one party she tried to book was canceled due to lack of interest. "I didn't come close to breaking even," she says. Jamberry requires consultants to make a minimum of $600 in sales (their own purchases or their customers') over a 12-month period in order to stay "active." Colon-Smith says she would only have been able to achieve the minimum through her own personal purchases: "That didn't seem worth it."
When Colon-Smith told her recruiter that she was having trouble finding customers who weren't already her own competition, she says she felt dismissed. "She told me, 'Well, I have sales all over the country, so you shouldn't have a problem,' " Colon-Smith recalls. "Jamberry consultants are not limited to selling within their geographic area, so [market saturation] is not a common issue," said a company representative for Jamberry in an e-mail statement.
You only hear the success stories.
Perhaps the true genius of MLM companies is their ability to create the impression that "the possibility of success is palpable," as Dr. Keep puts it, often without making any concrete promises. Every woman interviewed for this article could point to several people in their MLM who were driving a fancy car, taking great vacations, and reportedly earning a six-figure salary. And some of these stories are likely true. "I can't deny that it's possible to be successful," says Dr. Keep, noting that the people featured in a company's "success stories" were often early recruits, able to build their downline before reaching market saturation. "In fact, it's necessary for a few people to be successful in order to sell everyone else on the plan. But the notion that anyone can do this is a fallacy. They push that idea because MLMs make money on every recruit, whether that recruit is successful or not."
Indeed, earnings statements obtained in investigations by the FTC show that many salespeople are making only a modest income from their MLM businesses. Or they had a honeymoon period of initial success followed by a sharp drop-off when they failed to maintain recruitment or generate repeat product sales. Unfortunately, getting your hands on these earnings statements can be tough. MLMs aren't required to release them; you may receive an "income disclosure statement" from the company, but there are no federal regulations overseeing what companies put in those documents.
The most dangerous part of the "success stories" strategy may be their implication that if you fail, it's your own fault. "Individuals have a responsibility to be thoughtful about the business they're getting involved in," says Joseph Mariano, president of the Direct Selling Association, the industry's main trade group. "[Direct selling] is not easy, and it shouldn't be easy. It takes time, talent, and effort." Another way to put that is "you get out what you put in," a popular MLM mantra often used in motivational speeches where recruits are told "you don't have to be average" and are encouraged to buy more products, attend more meetings, and to "remove negative people" (as in, family or friends who question the business's viability) from their life. "It sort of starts to feel like a cult," says Johnson, who quit doTERRA last year but still has friends in MLMs. "And they know exactly what to say to keep you buying."