Yahoo Finance Why COVID-19 could be pushing more people to multi-level marketing companies
The COVID-19 pandemic could be leading more people to join multi-level marketing companies, a controversial business practice that can result in sellers making negligible amounts of money, or none at all.
Multi-level marketing companies rely on person-to-person sales, often with salespeople buying their own inventory and selling products to their friends, family and other acquaintances.
Sellers are encouraged to recruit new salespeople — also known as downlines — to begin selling products as well, with a percentage of their sales going to their uplines.
Products can range from beauty items like cosmetics, skincare and haircare — such as Avon, Arbonne or Monat — to essential oils and scents, like doTerra and Scentsy. Others sell things like smoothie and juice mixes, housewares and home decor and clothing.
The sale of these products, once confined to door-to-door sales and demonstration parties, are now happening largely through social media, often with sellers touting the effects of the products and promising work opportunities.
A 'thin line'
During COVID-19, which has led to mass layoffs and an economic downturn, people may be looking for extra ways to make some cash, said Ed McHugh, a business professor at Nova Scotia Community College.
McHugh says there's nothing inherently wrong with multi-level marketing, but there are some things prospective salespeople should be wary of.
"Multi-level marketing, in itself, can work. It's fairly good for some people for a home-based business," he said. "But of course, you have to be very careful when you look at this, because there's a … thin line between multi-level marketing and pyramid schemes."
The main difference between multi-level marketing, which is legal, and a pyramid scheme, which is not, lies in what is actually making the business money: is it the product or the people?
While there is an element of recruitment in multi-level marketing, the fact that there is actually a product to sell sets it apart from its illegal counterpart, which is "all about recruiting," said McHugh.
Can you make money in an MLM?
Legal or not, it can be difficult to make money as a direct seller, and it's possible to even lose money if someone buys too much inventory they can't sell.
A 2018 survey by AARP, a U.S. non-profit and lobbying group focused on issues that affect people over 50, found nearly half of participants lost money doing multi-level marketing, while another quarter said they broke even. Only a quarter of those surveyed said they made money.
According to the Direct Sellers Association of Canada, an industry group representing more than 30 multi-level marketing companies in the country, more than 80 per cent of independent sales consultants derive less than 10 per cent of their household income from direct selling.
The association also said the industry generates about $3.5 billion in annual sales, with about $1.21 billion paid out annually to independent sales consultants. There are about 1.2 million independent sales consultants in Canada, meaning the average seller would have only made about $1,000 in a year.
However, actual earnings would vary widely because it depends on each company's compensation plan, as well as how much the person managed to sell and how many downlines or uplines they have.
Increased interest in selling
Peter Maddox, the president of the Direct Sellers Association of Canada, estimates about 10 to 15 per cent more independent sales consultants signed on with the association's member companies in 2020 compared to 2019.
"Anecdotally, on a company-by-company basis, there has definitely been more interest in people becoming sales consultants," he said.
"People are looking for opportunities to make revenue and earnings during this time. They're at home more, so they have more time to sort of consider how they make their living and consider their options in this sense."
He also said in dollar value, average sales for its member companies increased by about 25 per cent in 2020, with especially strong growth in housewares and health and wellness products, capping off a "reasonably good year."
The idea of being able to work from home and set your own hours — especially during a pandemic-induced economic recession when many people are out of work — may be alluring.
But McHugh worries people may not fully know what they're getting into, especially if they are buying up more inventory than they can sell.
"All of a sudden, now, what you thought was going to be a money-making scheme for you, is starting to drive you more and more into debt. And that's my biggest fear for people," he said.
For anyone thinking of becoming a seller, McHugh has some suggestions: look at the company's compensation plan, look at how much money they would need to invest up-front, and ensure there is a return policy in place so they can offload any excess inventory.
Side gig, not main gig
Multi-level marketing companies are also under the purview of the Competition Act, enforced by the Competition Bureau, which prohibits pyramid selling and deceptive business practices, such as making false claims about how much money people can make.
In an email, a spokesperson for the Competition Bureau could not confirm if it has received any complaints about multi-level marketing companies in the last year, but "strongly encouraged" anyone who suspects a company of deceptive business practices to file a complaint on its website.
On the Direct Sellers Association's part, Maddox said its member companies must abide by a code of ethics that doesn't allow their sellers to overstate the effectiveness of their products or exaggerate earnings.
"Having said that, these are not employees, they're independent sellers. They're passionate about what they do, so sometimes they're a little over-enthusiastic, and they might sort of be a little over-enthusiastic in the way they sell the opportunity or the products," said Maddox.
"But the companies, they're very strict on that, they will reach out to those people and make sure they take down those posts and work with them to make sure they get that messaging right in the future."
A little bit of income
As for the modest income for many sellers, Maddox said many pursue direct selling as a way to get discounted products, or to just sell to their friends and family for a bit of extra income, rather than as a full-time job.
According to the association's 2019 socio-economic impact study, which surveyed almost 5,000 independent sales consultants, nearly three quarters of respondents surveyed spent between one and 14 hours a week in direct selling.
"People might make $100 a month, or $200 a month, or something like that, and that's fine because that's quite a lot of money to a lot of people, and that typically goes to paying down the mortgage or paying for a holiday or buying some clothes for the kids," Maddox said.
"And that's how we see the industry: as a way to make a little bit of incremental income."
According to the study, the vast majority (82 per cent) of independent sales consultants are women and 70 per cent are married or co-habitant. Nearly half of independent sales consultants have annual household incomes in the $40,000 to $99,999 range.
Sixty-six per cent of respondents also reported being satisfied or very satisfied with their direct selling experience.
Increase in employment scams
Kristin Matthews, spokesperson for the Better Business Bureau in the Atlantic provinces, said the ongoing pandemic is "absolutely" pushing more people toward multi-level marketing.
She said buzzwords and phrases like "be your own boss" and "work flexible hours," often used in online posts promoting multi-level marketing companies, can make direct selling seem attractive to people, especially during COVID-19.
"Being able to be your own boss and work flexible hours, that's a dream for somebody. So they're definitely using those buzzwords and people are definitely reaching out to them more now," she said.
"Even I have been seeing more people on my Facebook and Instagram promoting multi-level marketing companies."
Matthews also said there has been an increase in employment scams in 2020, especially those based around deceptive recruitment.
"People have been saying that they were contacted by what they thought was something different, and going through the process they actually found out that it was either a multi-level marketing company or a pyramid scheme," said Matthews.
In one case, a person showed up to a job interview believing it was for a customer service representative position, only to find out it was for a full-commission sales position with a multi-level marketing company.
"So essentially, it sounds like they were misled," she said.
Matthews stressed that anyone searching for a way to make money should look out for those buzzwords and thoroughly research any company they are thinking about working with.
"You really want to make sure you know everything in and out before you sign up for it to make sure it's the right fit for you," she said.
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