Spotlight on MLM and Pyramid Schemes: Brand Risk Is A-Plenty

When the leading cosmetics manufacturer Coty acquired a 60 percent share in the multilevel marketing company Younique in 2017, the $600 million deal looked like a good opportunity for a legacy brand to ride the coattails of startup magic and social media sparkle. Barely two years later, Coty has shed its interest in the company for a reported $84.5 million. The loss was a steep one on paper. However, considering negative publicity over MLM and pyramid schemes akin to Younique in recent days, overall the decision is a win for Coty’s brand reputation — and a warning signal for other leading brands.

What is the problem with MLMs?

As defined by the Federal Trade Commission, multilevel marketing (MLM) involves selling products to family and friends and recruiting others to do the same to within their circle of acquaintances.

Though not all MLMs are pyramid schemes, even a legitimate MLM can easily be a waste of time — or worse — for those who join.

According to the FTC, “Most people who join legitimate MLMs make little or no money. Some of them lose money.”

To compound the problem, it can be difficult for the general public to distinguish between a legitimate MLM and an illegal pyramid scheme.

The FTC observes that “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.”

Coty drops MLM like a hot potato

With that in mind, Coty’s focus on brand reputation in the MLM area comes into sharper focus.

Last week, the Wall Street Journal took note of Coty’s leap into — and out of — Younique. Reporter Dave Sebastian linked the decision to drop Younique specifically to the MLM model, writing that "executives have said that the business model, which relied on recruiting 'presenters' to sell products to friends, family and others, ultimately proved a poor fit.”

Coty executives may have also taken note of red flags raised last June, when reporter Amelia Tate of The Guardian took a deep dive into Younique’s business model and that of other MLMs.

Tate wrote that fraudulent or not, MLMs tend to recruit people who are vulnerable to exploitation.

“Many people who join MLMs have disabilities, or poor health, and are unable to work full-time,” Tate wrote. "Those who sign up are taught to target new and single mothers.”

More trouble for MLMs

Last week, Forbes reporter Lisette Voytko took stock of the MLM situation overall. Aside from Coty’s decision to ditch Younique, she highlighted several MLMs that have recently gotten into hot water with the FTC.

The list includes hefty fines paid by AdvoCare and Herbalife and lawsuits faced by LuLaRoe.

President Trump and his family have also been drawn into the MLM mess. Voytko’s list includes a July 2019 ruling in federal court that enabled legal action to move forward against three Trump-related MLMs that operated between 2005 and 2015.

The Trump name is already associated with considerable brand risk. Renewed publicity over the family’s involvement in allegedly fraudulent MLMs only adds fuel to the fire.

Canary in the MLM coal mine: Neora/Nerium

Adding to the timeliness of the Coty decision, Voytko also mentions a new lawsuit filed by the FTC against the MLM Neora, formerly known as Nerium.

Announced on Nov. 1, the FTC lawsuit alleges that Neora “operates as an illegal pyramid scheme and falsely promises recruits they will achieve financial independence if they join the scheme.”

In the lawsuit, FTC spells out exactly why people joining Neora/Nerium and other MLMs are at financial risk, regardless if any illegal activity is involved.

“Nerium allegedly incentivizes recruits to make a substantial upfront investment in Nerium products,” the FTC explained. “And then commit to additional product purchases each month.”

Participants can quickly incur other costs. For example, some MLMs require participants to pay for training courses and seminars. Others, like Younique, charge participants on a regular basis for maintaining their status as account holders.

If that all sounds sketchy, it is. However, none of it is necessarily illegal until it crosses a line described by FTC.

“Participants in legitimate multilevel marketing companies earn money based on actual sales to real customers, rather than recruitment,” explained Andrew Smith, Director of the FTC’s Bureau of Consumer Protection. “But pyramid schemes depend on recruitment of new participants to pay out to existing participants, meaning that the vast majority of participants will ultimately lose money.”

Of course, there had to be a Facebook angle

Not that all roads lead to Facebook in the area of brand risk, but in recent years the social media site has been called to account numerous times for its business practices and for its role in spreading and amplifying objectionable online behavior, including (but not limited to) hate speech as well as conspiracy theories, propaganda and other forms of deception.

Facebook does enforce guidelines for advertisers regarding false claims and other issues, but advertisers are increasingly deploying users to post promotional content that skirts the guidelines.

That appears to be the case with the MLM model described by Tate in The Guardian.

“Social media means MLM presenters now sell to – and recruit from – the entire world,” explained Tate, noting that participants on the higher rungs of the ladder routinely write posts on Facebook promising “'rocking’ sales, ‘instant’ pay and the chance to run ‘your own business.’”

Although MLM participation in the U.S. has been declining, MLMs experienced a strong growth spurt in the United Kingdom beginning about five years ago.

More than 425,000 people in the U.K. currently are involved in MLM on at least a casual basis, and many rely on social media as their main channel. Of particular interest is the increasing use of Facebook Live in the U.K. to broadcast “selling parties,” according to a study cited by the accounting firm PRB.

Whether or not the MLM renaissance comes to the U.S. remains to be seen.

Meanwhile, all things considered, the Facebook connection adds yet another element in favor of Coty’s decision to take the long view, absorb the loss and protect its brand from a business model that is all too susceptible to fraud and abuse.

Image credit: Pixabay