The phrase “multi-level marketing” or “MLM” has earned a negative connotation in the public arena recently, with many ex-members coming forward to share damaging experiences. Kelly Willis joined women’s clothing line LulaRoe in 2016 with hopes of paying off her college loans with her extra income. By the time she finally quit the MLM, which came under fire in the recent documentary LulaRich, the young woman had an additional $50,000 in credit card debt and hadn’t even made a dent in her other loans.
She says she had been forced to get into debt simply to maintain her position as a LulaRoe consultant. It’s stories like Katie’s that make many wonder how much difference there is between an MLM and a pyramid scheme.
For the most part, MLMs should be approached with caution, but there are a few companies that have managed to embrace the direct selling and multi-level marketing model without falling into the toxic trail that many of these companies leave in their wake. Avon is one of the more successful examples.
Why Are MLMs Still So Popular?
The entire concept of starting your “own business” without laying out much capital up front, and the added benefit of riding on the wave of an already-established brand, is tempting to many. With post-pandemic unemployment levels and the high cost of child care, working from home on your own terms is an idea that seems like a lifesaver to one particularly financially vulnerable sector of the population — women.
This is the reason that sign-ups to MLMs continue to steadily rise despite a distinctly negative narrative around them. Unfortunately for those hoping that some of these organizations will be the solution to all their woes, a massive 99% of those who join MLMs will not even break even from their initial investment. In many cases, this is because unethical MLMs (which are closer to pyramid schemes) are intentionally set up so that only those at the very top of the pyramid will make any money.
MLMs vs Pyramid Schemes
The main difference between the two, of course, is that pyramid schemes are illegal in the United States. In legitimate MLM companies, salespeople make money by selling products, while in pyramid schemes, the bulk of income is made by recruiting new salespeople in a “downline”. Those new recruits need to pay an initiation or activation fee and, in turn, they will need to recruit additional people to the scheme. Legitimate MLMs may also have downlines, but the biggest red flag is when a downline is the only way (or the most likely way) to make money.
Unethical MLMs or pyramid schemes also force a huge amount of inventory on salespeople. Often, salespeople end up going into debt just to meet the stock purchase requirements of the scheme. Legitimate MLMs, on the other hand, work on the 70% rule: A salesperson can only purchase additional stock when they have sold 70% of their existing inventory, and that inventory must be sold to non-distributors.
Although the difference between the two types of entities seems quite clear, in practice, the line can quickly become blurred and it is quite rare for an MLM to avoid the “dark side” permanently. So how did Avon do it?
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Ding Dong, Avon Calling
Avon was started by a traveling book salesman, David McConnell, in 1886. He was having trouble getting women to buy his books, so he started sweetening the deal with free perfume samples. Soon, his clients were more interested in the perfume than the books, and the idea for a direct sales makeup and perfume business was born.
Today, the business brings in more than $3 billion in revenue a year. Until a 2020 merger with Brazilian company, Natura & Co Holding SA, Avon was listed under its own stock name on the New York Stock exchange — no simple feat for any company, never mind an MLM. Avon now trades under Natura’s name on the Brazilian Stock Exchange.
Avon has kept itself on the ethical side of the MLM legitimacy by ensuring that it emphasizes product sales over downline recruitment. Avon salespeople can make money without recruiting anyone. There are certainly benefits to expanding the downline, but it’s not mandatory, which has been key for them.
Avon (along with its signature greeting, “Ding Dong, Avon calling”) has built credibility through various means. Many of the less ethical MLMs such as LulaRoe sell overpriced products that really don’t offer much in terms of value. Avon’s products have always remained affordable and while they might not be the world’s number one makeup brand, many specifically seek out their products.
One of the calling cards of unethical MLMs and pyramid schemes is unnecessary complexity around remuneration, and this is another way that Avon has kept itself on the straight and narrow. While it does have tier levels for remuneration, the way in which salespeople can climb the ladder is clear and unambiguous.
Who Are MLMs For?
Although many people have enjoyed some form of additional income from Avon, Amway, NuSkin, and similar ethical MLMs, it is a huge amount of work. To really earn a viable income, representatives would need to be selling to a huge number of people while also making use of downline.
MLMs may be an option for someone who just wants to spend their spare time selling a product they already love, but it is vital to understand the line between ethical and unethical. Companies like Avon and Amway have done an excellent job of building multibillion-dollar businesses that many people will swear have changed their lives while staying on the right side of the law. Transparency and fairness to salespeople is key to remaining there.