MLMs and COVID-19: Inside the ‘almost predatory’ business model that thrives during tough times – National | Globalnews.ca
It usually starts with a message: “Hey hun!”
The sender has a friendly tone. They pepper their messages with pet names. Maybe it’s a friend, a distant cousin, or someone you haven’t spoken to since high school.
But the real reason for their message becomes clear when they finally ask: have you ever wanted to be your own boss?
That was the kind of message Anna Lange, who lives in Missouri, had been turning down for months. But then COVID-19 hit. Lange had an 11-month old baby at home. The self-described workaholic had become a stay-at-home mom after having just graduated college. She was living in a new city. She was lonely, and she wanted to help her husband by bringing home some extra cash.
She said yes. And today, Lange is still recovering from it financially and emotionally.
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The business opportunity she pursued was with a multi-level marketing company, also known as an MLM. She paid to buy products to sell. She paid for marketing materials. But the sales just didn’t come. By the time the dust settled, Lange was about US$5,000 in debt.
And she wasn’t alone. Industry data shows participation in direct selling — the umbrella term for the sales industry that includes MLMs — grew by 20 per cent in 2020 as the COVID-19 pandemic hit.
“I saw a lot of recruitment posts, ‘because it’s COVID, people are working from home,’ they’re like, ‘now’s the perfect time to join in because we’re going to have this boom,’” Lange said.
“They told me when I signed up, ‘you can just sell the products and you will be able to make a full-time income doing that.’”
But despite the promises made to people like Lange, more than 80 per cent of participants in the direct selling industry make less than 10 per cent of their household income from this work.
“Realistically, I would say that probably five per cent or less of the people doing direct selling in Canada make a full-time wage or something near that,” Peter Maddox, the president of the Direct Sellers Association of Canada – the industry group representing MLMs – told Global News in an interview.
On top of that, “less than one (per cent) of MLM participants profit,” according to a paper published on the U.S. Federal Trade Commission website in 2011.
It’s a lesson Lange learned the hard way.
“I fell on my face big time,” she said.
It all started with the door-to-door salesman.
Often portrayed on TV as a slick, persistent man who won’t take no for an answer, these individual sellers would march up customers’ porches and try to sell them a product.
That’s what direct selling is — it’s a business model where, instead of placing a product on store shelves, individual “consultants” hawk a brand to their family, friends and community.
It has a long history. Back in the 1950s and 1960s, women would hold Tupperware parties. They’d pass around the plastic containers in the comfort of their living rooms in the hopes of making a buck.
But in an MLM model, the host of that kind of party isn’t just selling the product — they’re trying to recruit an army of others to sell the goods, too. The recruiter, commonly called the “upline” gets a percentage of any sales the recruit, or the “downline,” makes.
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As laws changed and society moved online, these salespeople did too. Selfies and product pictures posted on Instagram overtook these living room sales parties. Salesmen and women who might once have knocked at your door now slide into your direct messages on social media.
But their goal remains the same: sell the product and recruit a sales team. Push your sales team to recruit a sales team of their own. Rinse. Repeat. Theoretically, a recruiter could make limitless commissions from their downline of sellers.
If this sounds like a pyramid scheme, it’s because the two business models are very similar — but with one important difference: pyramid schemes have no real product and are illegal.
MLMs are legal because the focus is on the real, tangible products — even if the sellers can beef up their earnings by recruiting more sellers.
Much like Lange, Lillian Cariaga was feeling isolated in her Mississauga, Ont., home when she received the message from a friend in June of 2020.
“It just felt nice to reconnect with someone outside of my household,” Cariaga said.
The friend mentioned she had been exploring a new business opportunity. She was working from home.
Eventually, Cariaga, a single mother at the time, opened up about her financial struggles.
“That’s where the hook was,” Cariaga said.
The friend went all-in. She told Cariaga how much money she had made in her first few months with the company. The opportunity, she said, had “changed her life.”
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Eventually, the friend invited Cariaga onto a Zoom call with other moms who were part of the MLM. That’s when Cariaga caved.
“It just felt nice to be part of a community of moms who have similar goals,” she said. “The good feeling outweighed the red flags.”
There were quite a few red flags, according to Cariaga. She said there was a major focus on recruiting, rather than selling. She was also told to cut off unsupportive friends and family. After six months with the company, Cariaga was left to clean up the financial and physical mess she feels it may have caused.
Cariaga had been using the hair products she was selling, and one day, her partner pointed out she had a bald spot.
She was also diagnosed with an autoimmune disease that Cariaga said may have been the source of the hair loss.
Still, when she raised the hair loss with her upline – the person who recruited her — Cariaga was “appalled” by the reaction.
“I showed her a picture … and said, ‘my hair wasn’t like this when I started using this, girl.’ And then she said, ‘well, have you been using it consistently and correctly?’” Cariaga said.
“There was no empathy in it.”
Cariaga had also put one of her kids in daycare so she could focus on her MLM work. But she quickly realized she had miscalculated the cost of the daycare. That expense piled on to the debt she was already accumulating from working with the MLM.
“We racked up a few thousand on that, too, so I had to pick up shifts,” Cariaga said. “I was working like five days a week overnight, running on two to three hours of sleep.”
She left the MLM, but the climb back to financial stability was proving steep.
Ultimately, the stress and the lack of sleep took their toll.
“My health got affected. I was hospitalized for blood pressure issues,” she said.
Searching for ‘pain points’
Cariaga said the tactics used to get her to join in the first place were “almost predatory.” That became even more clear to her when she was being trained to turn around and recruit more members herself.
“There was an emphasis in the calls, in the training, to emotionally connect – to emotionally connect and see where their pain points are,” Cariaga said.
“It’s all about building relationships, finding out what the pain points are, and then hooking into those pain points.”
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Lange said she was pressured to use similar tactics.
“My upline was going through a miscarriage and she was like, ‘oh, we know this is really hard, but it’s bringing me people who see my story and they want to join me,’” she said.
“And I’m like, I don’t want anyone to join me because of that. That’s not something I want to be profiting off of.”
Her team also suggested she use her mental health issues to reach potential recruits.
“They told me .. .you could reach so many women by the fact you had postpartum depression,” Lange said.
Maddox said in a statement that the industry association does not support these kinds of tactics.
“Any statements made by independent sales consultants associated with DSA Canada member companies, which are considered to be deceptive or unethical, go entirely against what the companies commit to and stand for,” he said in a statement.
“DSA Canada member companies have comprehensive processes in place to deal with concerns from consumers and independent sales consultants, and they invite people impacted to contact them directly.”
The ongoing COVID-19 pandemic became fertile ground for recruiters looking to grow their downline. Both Lange and Cariaga joined their MLMs during the pandemic, in part due to the feeling of isolation and a desire to find a community.
They weren’t alone.
As the COVID-19 pandemic shuttered businesses and forced many Canadians out of work, retail sales from direct selling grew by 26 per cent, according to the Direct Selling Association of Canada. In 2020 alone, the number of Canadians that signed up to sell for these companies rose 20 per cent from the previous year, the association said.
MLMs tend to thrive at times when the broader economy is struggling, Maddox admitted.
“When economic indicators aren’t as great, there is a little bit of a pick-up in terms of people who are active in direct selling,” he said.
“Some people just sign up because they want to get discounts on the product … but the people who do have signed up with the intent of sales … that definitely, that does go up at that point.”
Lange said her husband was able to work from home during the pandemic, but she felt “super guilty” after leaving the MLM, because she spent the U.S. stimulus checks on the business.
“Any sort of sale that I made went back into the business. It was buying marketing materials. It was buying samples for people who wanted to try the product,” she said.
“It really took a hit to our finances.”
Lange and her husband had plans to buy a house before she joined the MLM.
“Obviously, that didn’t happen because of the housing market. But like, we can’t even get an apartment right now because we’re still paying off credit card debt from my time with the company,” she said.
“And that’s really hard. And I feel really guilty about that.”
In Canada, there are laws in place to protect sellers like Lange and Cariaga.
The recruiter can’t force the seller to buy more product — product the recruiter makes a commission from — than they could possibly ever sell. They also have to have a reasonable “buy-back guarantee” or a refund policy, so you can send back your extra product if you ever leave the gig.
Recruiters also can’t misrepresent how much money there is to be made.
But with so many individual sellers sending so many direct messages to so many people, Maddox acknowledged that it can be a heavy lift to ensure everyone is complying.
“Honestly, it keeps our member companies up at night,” Maddox said. “I’ve visited some of our member companies, most of them are based in the U.S. … They’ll have a whole floor of their building that is the compliance department.”
There are people, Maddox said, who “scrub all their consultants’ social media accounts” in a bid to find out if anything is being misrepresented.
“There are strict rules in the U.S. and Canada about making income claims, about making product claims,” he said.
But in the last five years, the Competition Bureau told Global News it has not laid a single charge against a multi-level marketing company.
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When the Bureau does find evidence of potentially illegal activities, it said it “does not hesitate to take action.”
“The Bureau is determined to crack down on those who use deceptive marketing practices to steal Canadians’ hard-earned money,” said Marie-Christine Vézina, a spokesperson for the Competition Bureau.
“We strongly encourage Canadians who suspect deceptive marketing practices to file a complaint on our website.”
Still, one lawyer said that while the laws are there, “in terms of actual enforcement, I see virtually none.”
Toronto-based lawyer Steve Szentesi, who specializes in competition, antitrust and advertising law, used to regularly advise MLM companies about the legal framework for setting up in Canada. He did that work for more than a decade.
“I have not seen a significant appetite for compliance with Canadian laws over the last 10 years,” he said.
Part of the problem, according to Szentesi, is that there are both federal and provincial laws that companies and direct sellers have to abide by — and many of these laws are “pretty opaque and highly factual.”
Provincial and territorial laws, Szentesi said, largely lay out obligations for the individual direct sellers. The broader MLM companies, however, have to comply with both those provincial and federal laws.
“The main obstacle I have found has just been – for sellers and operators and even the courts, in some cases, and the enforcers – to distinguish between legal and illegal,” he said.
“If consumers are thinking about joining an MLM plan and have some concerns, they should get competent legal advice.”
Lange remembers how much the tone shifted in the messages she received from her MLM colleagues after she made it clear she wanted to leave.
When she joined, she said, they told her she could work “as little or as much as you want” without needing to sign a contract.
“But when you leave, it’s ‘you’re not working hard enough. You didn’t do what I told you to. You’re not coachable.’ And the tables get turned so quickly when you are not putting the dollar signs in their pockets,” Lange said.
And while Lange didn’t form a tight-knit bond with the team that promised her community when she felt isolated — most of them lived out of town — she was still iced out by them after leaving.
“They all unfollowed me on Instagram. They all unfriended me on Facebook,” she said. “Except for the main upline, she’s the one who hasn’t, but I think it’s because our husbands are friends.”
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Cariaga had a similar experience. Her MLM team had held training about how to handle unsupportive friends and family, and one instructor said she stopped seeing her best friend of almost 10 years because of the MLM.
Cariaga said she had come close to cutting off her best friend, too, who raised concerns about her new line of work. That was a red flag, she said.
Now she doesn’t really talk to anyone from the MLM.
“I felt like I lost that drive that I had, the connection with people that were outside of my family, just that sense of direction,” she said, “because that vision that I had of building something for my family – it was gone.”
On top of that, she said, she “felt very ashamed” about getting involved with the MLM.
“I was beating myself up,” Cariaga said.
But after speaking to the best friend she almost lost and finding an online community of others who had left MLMs, she found a new community that helped her cope.
“I thought, ‘OK, I’m not alone in this whole recovery,’” she said.
As Cariaga looks to the future and tries to heal the mental and financial wounds from her time spent with an MLM, she has a message for anyone who is thinking of joining one.
“Be very careful. Don’t fall in too deep, if you do decide to go,” she said.
“And the moment you start to feel like your family is turning on you, remember who loved you first.”
© 2021 Global News, a division of Corus Entertainment Inc.
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