Multilevel marketing or 'pyramid?' Sales people find it hard to earn much

USA Today/February 10, 2011

By Jayne O'Donnell

With the "tape of the week," the "book of the month," the seminars, rallies and conventions Jim Wittlich and his wife, Lori, paid for, the couple spent thousands of dollars in the two years they were Amway distributors.

Wittlich says they weren't forced to pay for marketing materials and meetings but were told repeatedly that these "tools and functions" were necessary for success in the multilevel marketing organization. They would be "looked down upon and chastised" if they didn't buy them, Wittlich says.

Multilevel, or "network," marketing pays commissions to salespeople for the products they sell, on products sold by others they recruit, and often bonuses when their teams reach a certain level of sales.

The Wittlichs' experience mirrors some of the claims in a class-action lawsuit against Amway and some of its high-level distributors that the company agreed to settle in November. In the settlement, which is awaiting a judge's approval, Amway agreed to pay $55 million to former distributors, closely oversee high-level distributors who run training businesses, strengthen refund policies and make other changes estimated to cost an additional $100 million. The lawsuit alleged Amway is a "pyramid scheme" — which was changed to "illegal scheme" in an amended version — in which distributors rarely sell products to outside customers, only to other new distributors they bring in, who must bring more recruits in to make money. New entrants, the lawsuit says, were "effectively required" to purchase products and event tickets from the high-level distributors.

Amway general counsel Mike Mohr says "the case was not proven" and that Amway chose to settle because "we're focusing on building a healthy business." In the settlement agreement, the company said it was not acknowledging "any fault, liability, or wrongdoing of any kind."

While Amway is one of the best known among multilevel marketing companies, there are hundreds of firms in the industry, with more than 16 million people selling everything from clothing to jewelry to vacations. These include Avon and Mary Kay, which have largely avoided the legal challenges about recruitment that have dogged Amway for decades. Product commissions can be as little as 1% — or less than $1 on a $100-a-month cellphone bill — or much larger on high-margin products such as vitamins or skin care products. But critics say new salespeople can seldom sell enough to earn anything close to the money those higher in the companies do — the more senior people get a cut of the sales of everyone their recruits bring in.

USA Today reported in October that another multilevel marketing company, Fortune Hi-Tech Marketing, was under investigation by at least four state attorneys general amid allegations that salespeople are primarily paid for recruiting, not product sales, and that more recent recruits can't earn anything near what early entrants do. In a lawsuit the company settled last spring without admitting wrongdoing, Montana charged Fortune was a pyramid scheme. Lynne Egan, Montana's deputy securities commissioner, says she's aware of new investigations of Fortune and says her office has received inquiries from about a dozen state, federal and self-regulatory organizations about the company. Two lawsuits seeking class-action status are also pending against Fortune.

Fortune would not comment on allegations, but spokesman Brian Wright says Fortune "continues to strive to improve this company."

Path to earnings

Even proponents of multilevel marketing say the cases and probes underscore one of the growing problems in the industry: It can be very difficult, if not impossible, for most individuals to make a lot of money through the direct sale of products to consumers. And big money is what recruiters often allude to in their pitches.

With the growth of discounters including Walmart and retail websites, few people need to buy toiletries, detergent or vitamins from a friend or neighbor, especially with the higher prices charged so all the commissions can be paid. Making money by recruiting more people, selling them training materials and persuading them to buy products can become the only way to make much money at some of the companies.   

"The problem so many have is their prices aren't competitive in the real world," says Lou Abbott, who works in multilevel marketing and owns the industry site MLM-TheWholeTruth.com.

When it comes to detergent, Consumer Reports program manager Pat Slaven agrees. She did blind testing of detergents last year and ranked versions of Amway's Legacy of Clean detergents ninth and 18th of 20 detergents tested. She recommends against buying them because consumers can "go to the grocery store and get something that performs a whole lot better for a whole lot less money." The highly concentrated Amway brands cost 23 cents and 28 cents a load, respectively. Five of the eight recommended brands cost less.

A 31-day supply of Amway's Nutrilite Double X multivitamins is $75. Supplement retailer GNC's most comparable product, Ultra Mega Green multivitamins, cost $40 for a 60-day supply.

Amway North American managing director Steve Lieberman says, "The quality of our products (is) reflected in our pricing."

Roland Whitsell, a former business professor who spent 40 years researching and teaching the pitfalls of multilevel marketing, says it's little surprise Amway's big growth is now outside of the U.S. He says the "direct selling" in multilevel marketing is needed in countries with "primitive distribution systems and limited choices in retail stores," but its potential is "seriously limited" here.

Lieberman notes the company is "extremely successful in formerly communist countries and in developing countries." Sales were also up last year in the U.S. by about 5%, he says.

Costs of doing business

Wittlich says he worked day and night on his Amway business and never made a profit. "Active" Amway distributors earn an average of just $115 a month, according to Amway's latest disclosure statement. Just a quarter of 1% (0.26%) make more than $40,000 a year, which Amway attributes to the fact many work part time. Active distributors, which describes about 60% of Amways's 600,000 North American distributors, get at least one bonus check, attempt to make one sale or attend one meeting a year.

"You'd be hard-pressed to find anyone making over $1.50 an hour," Whitsell says of multilevel marketing. "The primary product is opportunity. The strongest, most powerful motivational force today is false hope."

Jeff Pokorny and Bill Blenn, two of the lead plaintiffs in the class-action lawsuit, both bought tickets and paid for their own travel and accommodations to attend conventions called "Dream Night," according to the class-action suit, which was filed in 2007. Amway distributors — known as Independent Business Owners (IBOs) — were encouraged to attend the convention through messages on a high-level distributor's website, which also "contained material false representations regarding the wealth that would be achieved" if distributors bought the materials and attended functions, the lawsuit says. Tickets for these events alone could cost $200 to $400.

"We discourage dream selling," says Lieberman, noting the new disclosure document "deliberately put a dose of reality into recruitment."

The sale of training materials has to be a "very small" part of distributors' businesses, or "people will focus more on that aspect of the business than on the aspect of selling products to customers," says Gerry Nehra, a Michigan attorney representing multilevel marketing companies and former director of the legal division of Amway from 1982-91.

Nehra, who would not comment on Amway specifically, says that when selling training materials becomes the focus, the business becomes "overly dependent" on recruiting more representatives, which raises questions about whether a company is a pyramid scheme.

"Corporate turned a blind eye to it," says Wittlich, who left Amway in 2000.

'Transformed' business

In the last three years, Amway has been spending about $10 million more a year on training of new distributors and has "transformed" its business, Lieberman says. Outside training companies must now sign licensing agreements.

There's no question Amway promotes its products: Miss America 2011 Teresa Scanlan is an "ambassador" for the company's Artistry skin care line. Amway also recently signed former Super Bowl MVP Kurt Warner in an endorsement deal for its Nutrilite vitamin line.

Jack Tucker of Knoxville, Tenn., who spent 28 years in wholesale sales, says the products simply weren't priced competitively enough to sell. He could only find one customer willing to pay for Amway's products in the year he was an IBO in the late 1990s.

He earned $4 in commissions on the sale of a concrete cleaner to a friend, yet spent nearly $800 on trips, one or two training tapes a week, meetings and products.

While "they didn't hold a gun to your head ... they expected you to do it," he says of the training purchases.

Abbott says nearly all multilevel marketing companies prohibit distributors from selling "tools." When they are allowed, the products are supposed to be sold at cost. He notes $8 DVDs are a "profit center" when they cost "25 cents" to produce.

Amway's business concept "is a brilliant idea," says Abbott, who has worked with former Amway IBOs. "In practice, it sometimes gets skewed."

The class-action lawsuit also alleges Amway broke the law by telling people they could "significantly supplement their incomes, or even become rich and retire" when about 99% of distributors lost "significant savings" because they had to buy so many training materials as well as the company's own products. Says Amway spokesman Rob Zeiger, "We're not in favor of people spending more than they are making."

The Federal Trade Commission Act prohibits "deceptive and misleading practices," which Monica Vaca, assistant director for the FTC's division of marketing practices, says may include claims about what people make that don't make "clear if it's not typical of what everyone who joins is making,"

'Choose to be a king'

Ruel Morton and Todd Rowland, two top Fortune money earners, are both offering "boot camps" to train the thousands of salespeople under them in their "downline." Morton's now-frequent pitches for the $395 three-day seminars at his Texas ranch are not subtle.

"You can either choose to be a king or you can settle for being the subject of someone else's kingdom!" he exclaims on his website, RuelMorton.com.

In a video Morton and his wife posted on the site, Morton declares, "Fortune has set us free financially." He offers amenities including organic food, a beach, bat cave and trolley tours at the "$12 million Yellow Rose Ranch."

"Fortune Hi-Tech Marketing is strongly committed to integrity and expects the same from its Independent Representatives," said Wright. "FHTM is working toward resolving any concerns about its business in the proper venues." (Fortune's independent managers must refer media calls to the company.)

On his website, CoachRowland.com, Rowland says the benefits of his new $100-a-day "millionaire boot camp" include "making big checks immediately." The training cost — $150 if a spouse attends — includes food, activities, training, a workbook and "a set of Todd's favorite educational CD's."

"Presidential ambassadors" such as Morton and Rowland average $1,240,992 in income a year, yet make up just 0.07% of the company's representatives, according to a Fortune document. It also shows 30% of Fortune representatives make nothing, and 54% of those with earnings averaging $93 a month, before costs.

Spending more than selling

Darlene Armbruster joined Fortune last November to make extra money but instead wound up spending it. She paid $199 to sign up and had to buy another $200 worth of products just to join. Recently, she got a solicitation urging her to buy other Fortune products.

"How many companies do you go into where you have to buy shirts, their DVDs and e-books in order to promote a business?" says Armbruster, who lives in Oklahoma. "My question is 'What are you doing for me?' "

Wittlich says Amway IBOs were expected to buy products added to the catalog, even if they didn't need them. When he shopped outside the company to get lower prices, Wittlich says, his sponsor would remind him he'd never succeed that way. Besides, he says, it was so hard to sell products to others to get his "meager" bonus each month, he had to "hyper consume" them. "They would use all different kinds of things, like telling you about your kids' future being at stake," he says. "We were spending money we couldn't afford to spend."

Lieberman says Amway distributors are not required to buy products and says 41% of products sold by the company are to people who are outside of Amway. As for any past pressure on distributors, "Anyone outside of our rules of conduct, we've eliminated from the business. People are not being badgered to buy things (they) don't want," he says.

Stuart Singer, a partner at Boies Schiller & Flexner, one of the law firms that represent the class-action plaintiffs, hopes the Amway settlement, if approved by a judge, will have a beneficial effect on the industry.

"If Amway recognizes the need to transform their business, then I think the other companies that are involved in multilevel marketing will have to follow suit," he says. "It's just a matter of time."

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