Multilevel marketing: How selling your way out of debt can sink you deeper

Erica Sandberg
Personal Finance Writer
Consumer finance expert, author and “Opening Credits” columnist.

Multilevel marketing: How selling your way out of debt can sink you deeper

If you’re in debt and looking for ways to generate more income, selling products such as Amway, Herbalife and LuLaRoe may seem like the perfect solution. But all too often, consumers end up relying on credit cards to fund their new multilevel marketing (MLM) venture and find they’ve accumulated new debt on top of the old.

While the products vary, the business model is constant. You buy in to become a consultant or distributer, sell what’s offered, then keep a percentage of the proceeds. To really get ahead, you recruit other people to do the same. They become your “downline” distributers and you make commission based on their sales.

The ability to jump right in and begin earning has made multilevel marketing wildly popular. According to the Direct Selling Association, the trade group that represents these businesses, approximately 1 in 6 U.S. households is involved in one, generating $35.56 billion in revenue annually.

But before plunking down your card, especially if you’re already overwhelmed with financial obligations, remember the adage: buyer (but in this case, seller), beware. 

Can it work? Yes

Eva Palacios is a San Francisco consultant for Ambit Energy, which touts being “your journey to financial freedom,” by providing low-cost electricity and natural gas services to businesses in deregulated markets. Palacios, however, has nothing but rave reviews for the company and multilevel marketing in general.

“I’m an advocate,” she says “I invested $429 and made more money in four short years than I did in 17 years with my previous company.” This year, she expects to break the six-figure annual income mark. The current enrollment fee is $75.

Palacios would appear to have plenty of company. Success stories abound on websites dedicated to getting people involved with and learning how to prosper from MLMs.

For example, Jason Lee’s website, which claims to help “network marketing professionals unleash their potential” and offers tools for network marketers, is peppered with accounts of insolvent yet motivated people who made their American dream come true.

Before plunking down your card, especially if you’re already overwhelmed with financial obligations, remember the adage: buyer (but in this case, seller) beware.

However, according to research published by the Federal Trade Commission, the median income from multilevel marketing endeavors ranges from about $200 to $400 a month.

Does it usually work? No

As compelling as the life-changing testimonials on many mutilevel marketing sites can be, they’re dramatically uncommon. According to a 1999 paper written by Jon M. Taylor, of the Consumer Awareness Institute, and published by the Federal Trade Commission, 99 percent of those who participate in multilevel marketing lose money.

With such abysmal success rates, why would anyone take the chance? Not being aware of the reality is one reason, as multilevel marketing companies don’t publicize their failure rates.

Regina Lopez, from Salinas, California, joined the nutritional supplement company Herbalife expecting to support her three young children and her unemployed husband who is sick with diabetes. The family was in a bind. She couldn’t secure a flexible job, their credit card balances were in the $15,000 range, and bills were piling up.

“My cousin said I could make a lot of money and took me to his meeting,” says Lopez. “It was so exciting I signed up that night. I definitely thought it was going to be great, the answer to my prayers.”

Lopez immediately bought $700 worth of product with her credit card. As with many MLMs, the more inventory you purchase, the greater the profit margin you’ll earn on those items. Consequently, buying in bulk can seem like a sensible decision.

Unless the demand for it isn’t there, as was the case for Lopez.

“I tried, but could not sell it because, honestly, people did not want to buy it,” says Lopez. “It’s too expensive. Nobody wanted to be my distributor either, so that didn’t work for me.”

After a year, she wanted to stop and return the remaining product, but the value had eroded because the company deducted fees.

“They would not let me give back what I paid, so I got even more behind with my credit cards,” says Lopez. “It made me feel very dumb, embarrassed. I got depressed. I hated myself.” 

Dreams are an easy sell

There’s no cause for self-loathing, though, says Stephen Barrett, retired psychologist and founder of MLM Watch, a guide to combat fraudulent multilevel marketing companies. Multilevel marketing appeals to people who want to do the right thing with their finances. And it’s natural to trust loved ones who’ve come out ahead.

“It looks attractive because the person approaching you may be your best friend, mother, brother,” says Barrett. “They made a little bit of money; they’re not trying to mislead you, they want you to get ahead, too.

“It’s easy for a lot of people to be fooled. If the claims sound plausible, you may invest. People can sound very convincing, and a lot of people are vulnerable. They make it sound simple.”

Another reason multilevel marketing sparks the interest of so many is that the companies tend to focus on specific demographics.

“Herbalife is very big in the Spanish-speaking community now,” says Barrett. “Two years ago, they started going into these neighborhoods and they would have people come in and taste it, then sign them up to sell.”

Soon the whole neighborhood is involved.

"They would not let me give back what I paid, so I got even more behind with my credit cards."

“These companies know what they’re doing,” says Barrett.

Clothing and skin care multilevel marketing companies typically have female consultants who sell to other women. AdvoCare, a health and wellness company, appeals to men with its marketing campaign integrating NASCAR drivers, sports teams and athletes, such as New Orleans Saints football star Drew Brees.

Upfront costs can lead to debt spiral

The amount you’ll need to spend on initial product ranges from a few hundred dollars to several thousand. Those costs can turn into debt and increase existing liabilities. Multilevel marketing companies offer no guarantee you’ll turn even a meager profit, and you may even be encouraged to invest ever more into the venture. The result, as Jaclyn Reifsnyder, of Seattle, attests, can be disastrous.

Reifsnyder spent $6,400 to start with LuLaRoe, the athletic apparel MLM. Someone in her social circle introduced her to the company, and it felt like a great fit.

“I love the clothing, and my friend was doing really well,” says Reifsnyder. “My husband is in the army and we have a child, so we could have used the money. I sold him on the idea, and he eventually agreed.

‘This is going to get me out of debt,’ I thought. But you have to keep buying to make money. I spent a lot on it.”

In the beginning, the clothes were an easy sell.

“I was making money because the company was very selective with consultants,” says Reifsnyder. “That was a few years ago, but by the time I quit in March 2016, there were over 80,000 consultants and the market was oversaturated.”

Today, Reifsnyder is fighting with the company to return thousands of dollars’ worth of merchandise. Because the clothes are quickly becoming last year’s fashion, they are less likely to be sold at full retail cost.

The Better Business Bureau details a history of the same types of complaints as Reifsnyder’s.

In response, LuLaRoe introduced a temporary waiver allowing people who wished to leave the company the option to resell their remaining inventory for the full wholesale cost, including shipping.

Yet, due to what the company describes as abuses of the system (clothes being returned in poor condition), as of Sept. 13, 2017, it adjusted reimbursement to 90 percent of the net cost of the original wholesale purchase price, and an adherence to the rules regarding condition of the garments.

LuLaRoe and Herbalife did not respond to interview requests.

Never take a MLM’s advice to take on more debt

The upfront and continuation costs of working for a multilevel marketing company are often beyond the means of many hopeful distributors. Absent of sufficient savings, you’ll have to fund your initial outlay for products, which is often with credit cards.

In fact, LuLaRoe’s website openly encourages cash-strapped consultants to get and use credit cards for inventory on its FAQ page, with wild assurances of swift repayment from earned revenue:

“Traditionally most of our consultants who seek financial assistance have been directed to go with a 0% interest rate credit card for 15-18 months. They typically find success with Chase, Citi or Capital One. If you are working your business like a business you should be able to have your initial investment paid off WELL before you have to start paying interest.” 

“That’s what happened to me!” says Reifsnyder. “They told me to get a credit card, pay with it, saying I’d pay it off in three weeks with the money I made. That did not happen. And you have to keep charging because in order to make money you have to spend money. 

“You can’t stop ordering because people wanted to see the latest clothes, not what you have already. I felt so pressured.”

Eventually, Reifsnyder ran out of cash and maxed out her credit cards. To keep her head above water, she borrowed from her husband’s paycheck, wanting but unable to pay him back.

Is multilevel marketing right for you?

If you understand the risks and have extraneous money to ”invest,” trying your hand with multilevel marketing may be worth the gamble. Low startup and ongoing costs are also important considerations.

Palacios is earning an impressive income, and since she is selling energy plans rather than merchandise, she doesn’t have to purchase and stock tangible items. She does pay a monthly marketing website fee of about $25, which she finds reasonable.

Still, multilevel marketing is never recommended for people who don’t have a knack for sales or who can’t afford to waste precious resources and time.

“Just don’t do it,” says Barrett. “Look at the mathematics. The majority of people who become MLM distributors don’t make any money and most lose it.”

As for Reifsnyder, even with her history, she’s not entirely against multilevel marketing.

“For me it was all a pipe dream, but if you can’t work outside the home, it’s a way to work,” she says. “But you have to know that it’s a lot harder than it looks.

“A lot of us who are struggling are going to believe the promises. Be realistic and definitely don’t take out credit cards for it. I have cards that I racked up debt on,” she says. “Now we’re picking and choosing who gets what, and we’re selling our house to get out of debt.”

See related: 6 ways NOT to pay off holiday credit card debt, You did WHAT to pay off your debt?

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Updated: 01-23-2019