Expensive cars, a dream home and a life of luxury: that’s what is promised to distributors in many multilevel marketing (MLM) companies. What distributors aren’t told, though, is that they will more than likely fail, according to William Keep, dean of the College’s School of Business.
“Here, you’re not guaranteed anything,” said sophomore management and psychology double major James Tomasullo. “So it’s a risk.” His risk was becoming a distributor for the MLM company, Vemma, the same company Keep warned students about becoming involved with this past summer. For Vemma, the energy drink and health supplement company, a lot of incentives are placed around recruitment.
In addition to the likely loss of money, those involved in MLM companies take the chance of the institution turning out to be an illegal pyramid scheme.
The legitimacy of MLM companies has been a frequent topic of discussion not only on the College’s campus, but also on Wall Street. The added attention began when activist investor William Ackman shorted the public MLM company, Herbalife. Ackman declared that he felt the company was a pyramid scheme and cited an article written by the School of Business’s dean.
Keep is considered an expert on the topic of MLM companies and pyramid schemes and has spoken to numerous hedge funds on both sides of the Herbalife debate over the past year.
“I have been looking at direct selling and MLMs for almost 20 years,” Keep said.
Companies that have an MLM structure require distributors (sales individuals) to purchase products in advance and then sell them to consumers themselves. Along the way, they recruit additional distributors. A company becomes a pyramid scheme, according to Keep, when more profits are raised from recruiting new distributors than there are from selling to consumers.
“You peak (potential distributors’) interest,” Tomasullo said. “Then you pass them off to someone else doing better than you. That’s their Upline. Then the Upline will tell them about the opportunity.” An upline is a distributor that has had more success and experience than a newly recruited distributor.
The number of people who identify themselves as independent salesmen or distributors tripled from 1992 to 2011, according to Keep. Despite the increase in individuals involved in MLM companies, the percentage of total retail sales in the United States attributed to direct selling has steadily decreased due to MLM companies not assigning territories to distributors. Rather, all distributors must compete against each other.
“It’s not like an application where you fill out a résumé and then go to an employer and ask them to hire you,” Tomasullo said. “You sign up on their website and you buy a certain amount of product based on how involved you wanted to be in the company.”
MLM companies, such as Vemma, look at college students as strong possible candidates for becoming distributors. College is both an anxious and freeing time for young people, explained Keep, and MLM companies present themselves as a way to make an impact with a tangible outcome.
“They play upon aspirations,” Keep said. “The desire to wow people.”
After six months at Vemma, Tomasullo began to question the company and decided to quit.
“The reason I left Vemma was because I felt the CEO wasn’t transparent enough,” he said. “I had concerns that not enough profit was coming from product sales.”
The biggest concern with MLM companies is that they will turn out to be illegal pyramid schemes. Students questioning the legitimacy of an MLM should look to see that the company does not place a greater emphasis on recruitment than sales. Illegitimate companies will not have competitive prices for their products. Additionally, they will use the same examples of success stories and fabulous lifestyles, Keep warned.
“Look, I lost $1,000 total,” Tomasullo said. “But I was actually really happy with the whole thing.” Working for Vemma, Tomasullo explained, provided him with courage, a lot of new skills and a passion for sales.
These skills, though, can still be found and honed without the risk associated with becoming involved in an MLM company. Keep recommends that students interested in sales pick up a professional selling minor or consider a part-time job in sales where the company pays commission and is selling a well-known product.
“Always get paid for what you do sell,” Keep said.