In a multilevel-marketing pyramid scheme, would-be entrepreneurs pay to become a sales representative or member of the company with the right to sell a certain product and recruit others to do the same. But the sales side of the business is often secondary to the recruitment of new participants. Those on the top of the pyramid can make substantial money but it’s mostly on the backs of people at the bottom who are recruited to entice others into the business.
AdvoCare charged people $59 to become a distributor, the FTC said in its complaint. In turn, distributors were encouraged to recruit people to be part of their “downline.” Top distributors would then earn commissions ranging from 5 percent to 20 percent of purchases by members of their downline.
In its complaint, the FTC said people were told that they had the potential to earn unlimited income and “attain financial freedom, and eliminate the constraint of traditional employment.”
But in reality, the overwhelming majority of distributors never earn any money from their activities, the FTC said. The business model was really to “recruit business builders who recruit business builders who recruit business builders,” the complaint said.
And, to achieve a high-enough level in the company, each year recruits had to keep buying thousands of dollars worth of product themselves.
The claims of potential earnings were preposterous, the FTC said. One recruitment video said distributors could earn as much as $50,000 a month. Another pointed to a distributor who made more than $413,000 a year.
The FTC said recruiters were told that “they did not need to believe their income projections — they just needed recruits to.”
So, how much were people really making?
Not much at all, the FTC alleged. The agency says in 2016, 72.3 percent of distributors did not earn any income from AdvoCare; 18 percent earned between one cent and $250; and 6 percent earned between $250 and $1,000.
“Legitimate businesses make money selling products and services, not by recruiting,” said Andrew Smith, director of the FTC’s Bureau of Consumer Protection. “The drive to recruit, especially when coupled with deceptive and inflated income claims, is the hallmark of an illegal pyramid.”
In a statement, AdvoCare took issue with the FTC’s characterization of its multilevel marketing business model as an illegal pyramid scheme.
“We strongly disagree with the FTC allegations, but we are committed to abiding by this agreement and moving forward,” AdvoCare chief executive Patrick Wright said.
Yet, as part of the settlement, the company is banned from the multilevel marketing business. Distributors can no longer earn compensation based on purchases by people in their downline. If distributors had significant losses they may be entitled to get some of their money back, according to the settlement.
This case is further proof of why I’m not a fan of multilevel marketing, also referred to as network marketing. Although the business model involves selling a product, to be an elite team member you have to constantly recruit people into the business. This can result in every family member, friend or acquaintance being viewed as a potential convert.
Read this guide from the FTC: Multi-Level Marketing Businesses and Pyramid Schemes
Laura Richards, a freelance journalist, received quite a bit of feedback when she wrote that the drive to find recruits has led to “underhanded tactics that strain, fracture and sometimes end friendships and family relationships.”
Richards wrote, “Over the past few years, many women’s social media feeds have morphed from photos of kids and pets into endless posts by friends peddling everything under the sun: makeup, skin care, candles, essential oils, hormone gel patches, leggings, tote bags, juice powders, nontoxic cleaning products, whitening toothpaste, vitamins, nail decals, nutritional shakes and gardening towers.”
“Most people who join legitimate MLMs make little or no money,” the FTC warns in the guide. “Some of them lose money. People who become involved in an illegal pyramid scheme may not realize they’ve joined a fraudulent venture, and typically lose everything they invest. Some also end up deeply in debt.”
If you’re still thinking about getting into multilevel marketing, even as a side hustle, watch Showtime’s “On Becoming a God in Central Florida,” which stars Kirsten Dunst as Krystal Stubbs. You only need to watch the first episode to see how these schemes sell the promise of financial freedom to people who can least afford the pitch.
Dunst plays the suffering wife whose husband, Travis, quits his job to work full time pushing FAM (Founders American Merchandise), a multilevel marketing scheme.
As Hank Stuever, The Washington Post’s TV critic, writes in his review of the show, which premiered in late summer, “Travis is utterly suckered into the strategy of selling FAM-branded household goods while recruiting gullible others (known as ‘downliners’) to join the sales force, motivating them to order more stock and recruit still more salespeople, while brainwashing them with costly, FAM-generated cassette tapes that contain lectures of self-determined gobbledygook.”
Color of Money Question of the Week
What’s been your experience with a multilevel marketing business? Good or bad? Send your comments to firstname.lastname@example.org. Please include your name, city and state. Put “Multilevel Marketing” in the subject line.
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Tipping — a hot-button issue
Don’t talk about someone’s mama and definitely don’t question people’s tipping habits.
I poked the bear and it’s been fighting back. Lots of folks have plenty to say — often with profanity-laced commentary — about the practice of tipping in America.
In case you missed the series of columns, read:
People continue to weigh in on the topic.
DeeAnn Brewer wrote: “Your column on tipping really made me think about those times we only tip 15% for egregious service. Please don’t be dismayed by people’s reactions. You probably made some people feel guilty. Rather than reckon with their behavior, it was easier to disparage you. Don’t take it to heart.”
Jan Tremain from Holly Hill, Fla., wrote: “Here’s what pushes my feathers backward: Friends who have gabbed along with me for an hour or so in a busy restaurant and then dare to leave a lousy dollar! That is selfish and thoughtless. I then make it a point to overtip and state clearly that it’s because the waitress (or waiter) could have gotten another tip (or perhaps, two) had we not been sitting there flapping our jaws way after our meal was finished.”
Hank Cusanek of Phoenix wrote: “When I get poor attitude and mediocre service, I leave a mediocre tip. Good attitude and good service gets a better tip. I couldn’t bring my personal problems to work with me and I don’t expect restaurant wait staff to bring theirs to work either. Low-end restaurants have low cost menu prices and high-end restaurants have high cost menu prices. Waiters/waitresses decide where they want to work for various reasons. For whatever reason, they chose their place of employment. If they want more tip money, they should excel at their job and move up the scale to better and better restaurants. Tips are incentive to do a good job just like promotions are in the corporate world.”
Jan Marshall of McKinney, Tex., wrote: “I’m appalled that there are some who think that tips should be given regardless of the level of service. Tips are not an entitlement and no one should be bullied into leaving a predetermined tip percentage after poor service.”
“I’m sorry but I couldn’t disagree with you more,” wrote Ken Sims of Sarasota, Fla. “I believe tipping makes me a payroll/boss to a certain extent. The one thing I’m not allowed to do is fire them for doing a poor job but it does give me the right to not reward poor work habits. I’m also not pleased with the position restaurant owners have put their customers in by making them feel they have to support their staff through tips.”
Lots of readers object to basing a tip on the food total.
“I hate the way we tip in America,” one reader wrote. “Charge accordingly to cover your employees wages. The wait staff works just as hard on a $15 breakfast as a $40 steak dinner. Tipping them a percentage is outdated and the wrong method for rewarding service.”
“One thing I wish you had discussed that I think needs to be considered by our culture around tipping is extreme income inequality,” Wes Gray wrote. “Why does a waiter at the Capital Grille, with a tab of $110, get over $20 for a tip and the waiter at my local Chili’s, with a tab of $15, get only $3? After thinking about this, I now pay all waiters the same amount regardless of where they work, because they all do the same amount of work. What do you think, and would you consider discussing this in one of your future columns?”
I might consider addressing the issue. But I fear for my sanity, for every column and newsletter about tipping unleashed some of the meanest comments I’ve ever seen.
Walt Gamache of St. Peters, Mo., is not happy with tip inflation, writing, “I will not dine anymore when expected tip percentages exceed 20 percent.”
I asked folks what things about socializing out bother them.
Katherine France wrote: “My pet peeve is asking people who don’t drink to cover expensive bar tabs when splitting the bill. It’s happened a few times with my friends and I usually ask politely for the drinkers to kick in more. That can result in problems with attitudes and then there is the math, which is not easy for a lot of people. Oh, and how to split the tax and tip fairly. Arghhhh … We’re back to tipping again!”
Ken Thetford of Bethany Beach, Del., was surprised to learn about the minimum wage for waitstaff. “During discussion of the tipping issue I learned that the government is largely responsible for the confusion,” he wrote. “For example, I did not know that there was a separate ‘minimum wage’ for those individuals deemed to work in a ‘tipping position.’ So the government has pushed the need for customers to subsidize wages for these workers.”
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