You might hear the story of how Nicole Lopez lost $10,000 and think, “How could she be so stupid?” But when you talk to her on the phone, you don’t get that feeling at all. Her voice is calm and kind. She knows she screwed up. It makes you feel really sad.

Lopez, twenty-nine, lives in Springville, Utah, with her husband and two children. She’s got a college education and a full-time job as a manager at a flexible-packaging manufacturing company. In 2004, when she was a sales assistant for her company, she started to really hate the grind. She missed her kids, who were home with her mother-in-law all day, and she almost never saw her husband, who was still in school and working nights. So she did that thing we’ve all done when we don’t know where else to turn for help: She went online.

She found a site that asked all the right questions and offered all the right answers. Tired of working that dead end job, need extra income or want the financial freedom to stay home with your kids or take a vacation? reads one site that Lopez pointed out is similar to the one she saw four years ago. There are a million work at home opportunities … and you need no prior experience to be successful.

All it took was a click of an icon, and a packet of information was heading her way. It was a baby step, but one that led her into a sophisticated web of lies and deception. “I wanted it so bad,” she says. “I wanted to be able to help support my family and to be able to raise my kids myself and not have someone else do it.”

When the package arrived, it contained a video that spoke to her frustrations over lack of time with her family. But she still didn’t know what kind of work she might be doing or even the name of the company. Then she got a phone call. There were three or four other people on the line.

The business was Herbalife, the callers told her, a “health and wellness” company. The people on the phone said that selling the products was easy. They said they each earned $20,000 a month. Why would they lie? And anyway, she only wanted to make $1,500 a month. She didn’t need all that much. The products were healthy, they said, good for people. Why wouldn’t she want to do it?

Yes, why not? Lopez thought.

Then they told her that if she really wanted a profitable business, she would need to do more than just sell products. She’d also have to recruit others to sell, too; this would create what is known as a “downline.” The real money, they told her, is in the commissions brought in by her downline, the people she’d have below her.

Oh, and there was just one more thing. To get started, she would have to make a big inventory purchase up front. But not to worry, they said—the products practically sell themselves. She’d easily sell her inventory in the first month for twice what she paid for it. Then she’d get promoted to supervisor and could begin recruiting others.

Lopez thought she could make it work, but she wanted to talk it over with her husband, Oscar. Off the phone, she gave him the pitch. Think about it, she said, I can be home for you and the kids and I can make more money than I am now. It could be perfect! Oscar was skeptical. But the more Lopez talked, the more she became convinced she could do it. So they picked a credit card for her to use, and she plunked down more than $4,000 for her first month’s inventory. She spent an additional thousand dollars on marketing materials from the company: ten online marketing leads (essentially, people who had done as she had and clicked on the “send me more information” icon) and fifty “call me” leads (people who didn’t order the packet but agreed to have someone call them). She also paid for a company-sponsored website where the leads would be sent.

“They told me all it takes is time and effort and a willingness to learn,” she says. “They said if I had that, I’d be fine.”

Welcome to the world of multi-level marketing. Boosters of MLMs claim that their business model provides advantages that few others do. Among them: the ability to “be your own boss,” to “determine your own future,” “set your own hours,” and “work from the comfort of your own home.”

For many women with young children, the claims made by organizations like Herbalife are nearly irresistible. It’s one of the abiding truths of our time that mothers are deeply torn over their work/life balance. No wonder MLMs come across as the Holy Grail of modern mothering: a way to make money and be home for the kids.

Today’s MLM companies are well aware of their appeal to mothers, and they’re taking full advantage of it. According to the Direct Selling Association, a lobbying group for the MLM industry, more than eighty-five percent of participants in MLM companies are women. Websites like themomteam.com, for example, feature photographs of women hugging and playing with small kids surrounded by text that promises to solve financial problems—saving for college tuition or getting out of debt, for instance. But they make little mention of the actual work required.

Billion-dollar companies like Herbalife, Mary Kay Cosmetics, and Arbonne International, to name just a few, are structured on the MLM model. Most operate roughly the same way. New recruits are required, or at least strongly urged, to buy inventory up front which they sell to their friends, relatives, and acquaintances, usually via parties held in their homes, or in the homes of friends. Selling the actual products is one revenue stream, but as Lopez’s Herbalife team told her, the real money is made when you convince others to sell, too. If you’re lucky enough to find two or three people to sell through you, and if they have the skills to find others to sell for them, you could be sitting at the peak of a nice mountain of revenue. With Herbalife, for instance, Lopez says, “Every time one of your recruits sells something you receive two percent. You’re receiving money from three people below you: the person you recruit, the person they recruit, and the person that person recruits.”

A sweet setup, in theory. In reality? Not so much.

“This is a deadly business model in which you are doomed to fail,” says Robert Fitzpatrick, president of Pyramid Scheme Alert, an Internet-based watchdog group located in Charlotte, North Carolina. “There’s a ninety-nine percent loss rate”—meaning the vast majority of people who start MLM businesses end up losing money. You’d have a better chance betting your life savings on a game of blackjack in Vegas, he says, than you would putting it all into a multi-level marketing home business.

Outright pyramid schemes are illegal, and for good reason: They promise big payouts that are mathematically impossible. Classic pyramid schemes rely on new blood constantly coming in at the bottom to supply cash up the chain. By buying in, you’re gambling that all the people who buy in after you can find more people to buy in after them. Consider a selling operation that starts with five people. Each seller is told to recruit five others, who in return must each recruit five more. With this kind of exponential growth, it would take only thirteen levels to exceed the entire population of the planet. “Pyramid schemes are illegal because they are inherently fraudulent,” says Fitzpatrick. “They are structured in such a way that they cannot continue to deliver on the promise they make to investors.”

Multi-level marketing companies claim to be different because there are actual products involved. Money is made in part through something tangible trading hands, rather than merely from the money put in by newer sellers below you on the food chain.

Perhaps the best-known MLM is Amway, which set the stage for all the others to follow. Amway was started in the 1950s and grew quickly as a direct-selling company peddling soap. But they also offered an opportunity: the chance to sell Amway products and have a profitable home business. Anyone, anywhere, could join the chain and become an Amway distributor.

By the 1970s, Amway was a fast-growing, multi-million dollar company with more than 300,000 distributors nationwide. The government took notice, and in 1975, the Federal Trade Commission charged Amway with deceptive trade practice, including running a pyramid scheme. Amway countered that recruiting was necessary to replace the fifty percent annual dropout rate among its sales force. In 1979, an administrative law judge ruled that Amway’s business model was legally permissible as long as the money flowing up the chain came from product sales, not from distributors’ fees or inventory orders. “Amway was given this sort of green light,” says Fitzpatrick. “Then nothing happened in the way of oversight or law enforcement regarding the retail sales.”

In an effort to distance themselves from an association with pyramid schemes, today’s MLMs have begun shunning the MLM label. Now, instead of “multi-level marketing businesses,” they often call themselves “direct sellers,” “affiliate marketers,” or “network marketers,” trying to place the emphasis on the person-to-person, home-party facet of the business model rather than the recruiting-the-downline aspect.

The victims of multi-level marketing often have no idea what they’re getting into. The products seem legitimate, the names are cozy, the come-ons sound pitch perfect, and the deceptions are hard to unmask. What’s more, the companies generally enjoy a good reputation in the public eye. Herbalife, for instance, sponsors multiple sports events in California to enhance its brand image and provide a forum for distributors to talk face to face with consumers.

And take Mary Kay. I used to think Mary Kay was like Jenny Craig, a nice, woman-friendly company. Then I started reading anti-MLM websites, like PinkTruth.com, run by Tracy Coenen, an ex-Mary Kay consultant who is now a certified public accountant and anti-fraud advocate. “Women lose thousands of dollars [by selling Mary Kay],” she says.

Evidence for this can be found in the astounding “churn rate,” or turnover, of Mary Kay consultants, which Coenen calculates at half a million women per year. “Are women quitting Mary Kay because it was everything they wanted and more, and because they were making money doing it?” Coenen asks in a recent blog entry about Mary Kay. “Or do they quit because they are dissatisfied and are not making money? I submit to you that the reason women quit being independent beauty consultants for Mary Kay Cosmetics is by and large because of failure in the business.”

In general, most people who join MLM companies don’t last long. Eighty percent of people who participate as consultants quit within a year, according to the companies’ tax filings, says Pyramid Scheme Alert’s Fitzpatrick, who is also the author of False Profits: Seeking Financial and Spiritual Deliverance in Multi-Level Marketing and Pyramid Schemes (1997). Another twenty percent stay in longer, often with devastating consequences. “They went to the conferences, they drank the Kool-Aid, they did everything they were told to do and they never earned a thing,” he says. Instead, they lose money and lots of it.

But that’s not all. Victims of MLMs too often also lose their self-esteem, their friends, and sometimes even their marriages. “There’s this enormous wake of failure and a sense of loss,” Fitzpatrick says. “They tell you it’s a wonderful program. Anybody can do it. If you don’t succeed, it’s your own fault. All of this is to cover over the deceptions.”

You’d never know any of this if you happened upon a friend who was selling some makeup. That’s what happened to “Cat,” the author of “ArbonneAnonymous” an anti-MLM blog.

“I had just finished a wonderful dinner with two of my high school girlfriends,” Cat writes. “We don’t get to see each other often now that we have families, jobs, and lists of other responsibilities.” At the end of the evening, her friends handed her a gold bag. She was told it was a gift, “the gift of Arbonne.”

But was it a gift? Was she expected to buy these products? It wasn’t clear. And there was more. “They made sure I didn’t forget to take the notebook of information about the business opportunity,” she writes. “I understood from their chatter that they were selling the products and were trying to start a team. They wanted ME to be one of the 4 on their team!

“Two weeks later, after chatting daily with these two ladies that I usually spoke to only once a month, listening to an ‘opportunity call’ and reading countless emails filled with the testimonials of the Arbonne Elite, I was forking over almost $2,000 to buy into the Business Builder plan for success,” she writes. “I was running on a high of excitement and wonder and couldn’t wait to share the ‘gift’ with everyone I knew. Once I shared what I knew about this opportunity, it would only be a matter of time before I was up on stage surrounded by others wishing they were in my place and being presented the keys to a brand spanking new, white Mercedes. To be admired, accepted and even envied.”

Cat’s experience points up one of the most insidious aspects of the MLM trap: its reliance on women’s social-networking skills. Promises of great products and swift income come from the most trusted sources: friends, family, or fellow church members who are themselves trying to make a multi-level marketing business work.

In July 2005, forty-six-year-old Demaree Catherine Peck had been out of the work force for more than ten years raising her four children. After her marriage ended, she began teaching part-time high school and college classes and realized she’d need to take some courses to earn her certificate. Money was tight. Her credit card bills were piling up, and she couldn’t afford things like piano lessons for her children. A friend introduced her to Arbonne skin care products. The friend told Peck that people earn $30,000 a month.

So she ordered some training tapes. “I was thinking about a new kitchen, vacations to the beach every summer with my kids, all these grandiose things I could get and do for my children,” Peck says. “They offered the promise of financial freedom. What they make you hope for is unrealistic.”

Peck is a smart woman, a Princeton graduate who also earned a Ph.D. in English Literature from the University of Virginia. I wondered how she could fall for this. “The thing that happens is that your ego already has been eroded by being a mom for ten years,” she explains. “It’s no longer that you’re a college professor. It’s that you’re a diaper-changing, dishwashing frump.” She was excited by the idea of having her own business. “At first, it really made me feel more professional than I had been in a long time. It was intoxicating to be buying all this stuff. There were perks. I could write things off—like my hairdresser, my dry cleaning—all as a business expense. And in the very beginning I sold the products at retail value, and I made some money.”

While Peck dreamed of a new kitchen and Cat imagined herself driving around in a new Mercedes, the reality was that both women were on the fast track to financial debt. Recruitment into an MLM company is designed to happen quickly. “They try to pressure you to make a decision in an extremely short amount of time,” says one former Mary Kay consultant who is currently writing a book on MLM schemes under the name Angela Garrett. Garrett has interviewed hundreds of women who participated in Mary Kay or Arbonne, and she knows how hard recruiters lean on new prospects. “They don’t want you to talk to anyone else, not even to your husband,” Garrett says. “They are very manipulative.”

Laura Ryan, a forty-eight-year-old office administrator in the Illinois state government, was told she had twenty-four hours to decide if she wanted to join Mary Kay. This was late January 2005. “I kept thinking about it and looking at the clock,” Ryan says. She was intrigued by the possibility not only of selling products, but also of building a team of sales people and earning commissions. Plus she liked the fancy cosmetic case she’d get upon signing up. When she wavered, her recruiter threw in a sparkly ring as a gift. Ryan gave in.

Right away, the recruiter launched into “the inventory talk,” says Ryan. “The pressure was on.” The practice is known as frontloading. New recruits are pressured to buy hundreds or thousands of dollars’ worth of products, an expense that is justified as “an investment” in the business. (Alternatively, some MLM companies ask for a smaller initial investment and then set up automatic monthly shipments of products to the recruit along with a monthly credit card charge.) Ryan, who rose quickly in the ranks of Mary Kay, says, “They tell directors, ‘When you get someone to sign up you have to get them to buy inventory as fast as you can. For every day that you let them think about it, it’s $600 in lost inventory sales.’ ”

Ryan was relatively cautious; she only spent $600 on inventory. But many new recruits spend thousands in those first moments. They are promised that the products will fly off the shelves. But in reality, selling is very difficult. “One of the myths they tell you is that once people buy the products they will be hooked for life,” says Peck. “That’s not true. I constantly had to be beating the bush. It was not as if there was anything lasting I could count on.”

Why is this? For starters, the products are overpriced. Jon M. Taylor, co-author of The Network Marketing Game: Gospel Perspectives on Multi-Level Marketing (1997) has spent more than ten years studying MLMs and advising consumers and law enforcement on their pitfalls. According to Taylor, MLM products typically cost three to four times more than comparable items from retail stores. To justify the cost, the companies claim their products are better, even magical, he says. “They’re the modern version of snake oil peddlers,” he says.

In addition, the companies restrict where and how consultants can find customers. They are not allowed to advertise in the newspaper or online. They are also not allowed to sell products in stores or have a display in a local salon, says Garrett. Instead, it’s all about the “home party,” a pressure cooker environment in which friends, family, and acquaintances are given food and drinks and a hard sell. “The home party is really focused on women,” she says. “The companies know that women will feel bad going to a party and not buying anything.”

They make it sound so warm and fuzzy. In Mary Kay, friends and family are actually known as the “warm market.” That’s because they are the ones who are most likely to buy products—not because the products appeal to them, necessarily, but because they want to support their friend or relative in her new business. In reality, it’s cashing in on love. It can quickly distort relationships. “It was awkward selling to friends,” says Peck. “It was hard to justify charging them more than you pay for the products.”

Pretty quickly the warm market gets a little less warm, and then it’s time to go and face the cold market. In Mary Kay, consultants are schooled in “warm chatting,” says Tracy Coenen. “You approach someone in a coffee shop and say something like, ‘That’s a lovely outfit you’re wearing! Would you be offended if I offered you my business card?’ ” The problem is, warm chatting has very low return rate, she notes. “One in ten might accept your card and say it’s okay to call. Half of them will dodge your phone call. Half of those who take your call will agree to have a party, but then half will cancel. It’s really discouraging.”

And what it does to friendships is despicable. “I knew two friends who tried to do [Arbonne sales] together,” Peck recalls. “They ended up not speaking to each other. One always had the parties at her house. She prepared all the food. One didn’t bring as many people. They did a party at the YMCA once, and only one client came. Whose client would she be?”

Peck felt close to falling down the same hole. “Some months I’d be incredibly close to making my goal of $5,000, and my downline would have done nothing that month. She would bag out of it, and I would feel annoyed,” Peck says. “She could have helped me reach my goal.”

In addition, the whole thing was taking a ton of time. “They say it allows you to be closer to your family,” says Peck. “That is a lie. It took me away from my family. I was out making deliveries, or I was making calls. This was during six- to eight-o’clock hours when I should have been reading to my kids or helping them with their homework.” Nicole Lopez agrees. “I was working full time, and I’d come home and shut myself in a room to make calls,” she says. “It was defeating the purpose of having more time with my family.”

Despite her best efforts, Peck says, people just weren’t that interested in buying the products. She stuck it out for months, plowing back the money she made into buying more products. “You have to sell $5,000 worth of products to get a $200 bonus in a month. I had to give away products or put them on sale. I would sell it at my cost just to get the volume looking good. I’d give away some products because I felt a little guilty about how much it cost. If someone bought something from me, I’d throw in something else for free.” she says. “Pretty soon I had a couple thousand dollars on my credit card.”

It was at one of her own home parties that Peck decided to quit. “I was sitting there in my house with all this food out,” she recalls. “I had ten to twelve people who said they were coming, but not a single person came. I wanted to leave, to get on with my life. That was when I decided this was just not worth my time.”

Many people turn to recruiting when they realize that selling products is too time-consuming and not profitable. “If you can’t sell the products “you sell someone the idea of getting rich. Then you get them to buy the products,” says Taylor, who maintains the website mlm-thetruth.com.

After three hard months of trying to sell Mary Kay cosmetics, Laura Ryan decided to turn her attention to team building. Within one week she recruited her mother, her sister, and her good friend. “I was a ‘recruiting machine,’ ” she says. “That’s what they called me.”

Very soon, Mary Kay became fused with her religion. The woman from church who had recruited her in the first place told Ryan, “God put you in front of these people to change their lives.” “That was powerful to me,” Ryan says. “I talked about it to my co-workers, anybody. I opened my mouth to everybody.”

In addition to helping people, she also wanted the praise, recognition, and rewards that come with moving up the ranks. Within three months she had recruited thirty people and was on track to be promoted to director. All she needed were a few more orders.

What happened next changed the way she felt about Mary Kay. Ryan says her director pulled her aside and encouraged her to buy the inventory herself and to spread the orders out among her new recruits, making it look as though they had purchased the products. Even worse, Ryan says, the woman revealed a secret that shook her faith further. “My director ended up telling me that she put in her own money,” says Ryan. “I thought, ‘You’ve got to be kidding me.’ We all admired this woman.”

Despite her unease, Ryan went ahead and bought the inventory. She asked women on her team to cover for her in case the company called to check on the validity of the orders. The women agreed. “These were Christian women,” she says. “I’m a Christian woman. I just asked them to lie, and they agreed to do it.”

The lies sat heavy on Ryan, and soon after that she lost her zeal for Mary Kay. By then she had found out that many of the directors had bought their success and yet would still stand up at the rah-rah meetings and receive praise and admiration from new recruits. When her team failed to meet production quotas for three months in a row, she faced losing her status as director. Ryan briefly considered taking out a loan. Then she abruptly decided to quit. “I couldn’t take all the deception,” she says. “I didn’t know how people lived knowing they bought their way up and acting like they worked for it.”

Deception is rampant in the MLM world, its accusers say. Nicole Lopez says she was instructed by people above her in the Herbalife chain to tell new recruits that she had made $500 in her first month. It was true, she had quickly earned a commission check from a new recruit, “but the truth was also that I was already $5,000 in debt,” she says. “I felt like I was lying.” Peck says she was also encouraged to deceive. “I was told you always have to put a positive face on it no matter how it’s going,” she says. “You say, ‘It’s outstanding,’ even if what you mean is it’s outstandingly bad. It’s a strain.”

At least as disturbing as the ruined friendships that MLMs leave in their wake is the toll they can take on marriages. Angela Garrett says that recruiters will often actively encourage friction between husbands and wives. Women are told, “You don’t need a man because you’ve got Mary Kay,” says Garrett. “It’s sort of like women’s lib, only really twisted.” They want to make it so the women are less inclined to listen to their husbands, she explains. “They don’t want the husbands to tell the wives to stop,” says Garrett.

Tracy Coenen agrees. “Husbands are set up to be the villain,” she says. If they express doubts, they are said to be unsupportive. “The companies encourage women to make purchases behind their husbands’ back,” she says. “They tell women, ‘It’s easier to say you’re sorry than to ask for permission.’ ”

Ryan saw this firsthand. “There are a lot of Mary Kay divorces,” she says. “Some husbands like Mary Kay because their wives are wearing makeup and they look better. But most husbands see that the woman’s gone all the time and she starts turning on him.” Not to mention the fact that his salary is likely to be footing the bill for all the debt his wife’s been piling up. Even when marriages survive, they’re not the same. “It created a hard feeling in our marriage,” says Nicole Lopez. “We had just gotten out of debt, and I did this.” Garrett says her own marriage suffered, too. “My husband wasn’t thrilled after I lost the $1,500,” she says. “And he didn’t really trust my judgment after that.”

After eight months of hard work, Nicole Lopez found herself with a $10,000 credit card bill and no hope for her Herbalife home business. “At the end, when I realized what was happening, I knew I’d been scammed,” she told me. “I felt horrible.”

Now the dream of quitting her full-time job and staying home with her kids is over. “There’s no way I cannot work full time until I pay off the credit card,” she says. She works the nightshift at the packaging company to earn overtime pay and doesn’t get to bed before four a.m. Then she’s up at seven-thirty to get the kids ready for school. “I still refuse e-mails from the gentleman who got me into Herbalife,” she says. “When I quit, he said the only reason people don’t succeed is that they don’t try hard enough. That wasn’t true, I worked really hard.”

Out of the whole sad experience, Lopez is grateful for one thing. She never tried to sell products to people she knew. “Luckily,” she says, “I still have friends left.”

 

SIDEBAR: The Industry Talks Back

Amy Robinson, a spokeswoman for the Direct Selling Association, counters accusations that MLMs are run along deceptive lines, noting that all its member companies are bound by the DSA Code of Ethics: “No member company shall misrepresent the actual or potential sales or earnings of its independent salespeople. Any earnings or sales representations that are made by member companies shall be based on documented facts.”

“Companies take very seriously the claims made by their sales representatives,” Robinson added in an e-mail to me. “Proper training for the consultants is critical to make sure any representations they make are both accurate and within the scope of the law.”

Still, she admits that the onus remains on the new recruit to discover any pitfalls.

“It is critical for potential recruits to evaluate the information they have been given and come to their own conclusions about what is realistic for their own situation versus what is not,” she adds. “It is similar to any other situation where you are presented with information. For example, when I go to the store to buy a TV, I may talk to the store clerk about it and get any information they have to share, but before I make a purchase, I go home and research it myself.”

Buying a big-screen TV is one thing. Putting your life savings into a business opportunity is another. The real question is how hard you have to look to spot the bruises in the shiny apple.

In truth, not every single MLM is regarded as problematic by industry watchdogs. On his website, mlm-thetruth.com, Jon Taylor goes out of his way to highlight one company he feels operates aboveboard: Pampered Chef. “Fair and equitable distribution of income in compensation plans for participants who focus on product sales are extremely rare in MLM/network marketing,” Taylor writes. “Where such MLM programs exist, I call them ‘retail MLMs.’ In such programs, every participant can earn a reasonable income for their efforts in selling products—without recruiting a large downline. Out of hundreds of MLMs I have reviewed, Pampered Chef is one of those extremely rare MLM/network marketing programs that can be classified as a legitimate ‘retail MLM.’ ”

So what’s “a reasonable income,” you might ask? Is it true that women often lose money or make very little money from these jobs? We asked DSA’s Robinson.

“ ‘Very little’ is a very subjective term and doesn’t take into account the many reasons why people get involved,” she answered. “Some will look at the average earnings: we have calculated that number to be about $13,000 per year. However, I never use that number without also citing the median (50% more, 50% less) because that is much more reflective of what most people actually earn. That’s about $2,400 per year.

“Why do we use the smaller number? Because it does a better job of reflecting the motivations of discount buyers, short-term goal seekers, folks looking for supplemental income and people who want to meet others. Those are the people who make up a majority of direct sellers. Does $2400 per year (or less!) qualify as ‘very little?’ To some it may, if they are looking for a full-time income, for example, but to the stay-at-home mom who just wants to contribute to the family income, it might be just what she wants.”--Stacey Schultz

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