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How Do Multilevel Marketing Companies Make Their Money?

By Motley Fool Staff – Updated May 16, 2019 at 12:04PM

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It's often not through selling to the public.

Multilevel marketing (MLM) companies use a pyramid model where top salespeople recruit people below them. The person at the top then gets a cut of any sales generated by people below them. That leads to a system in which the vast majority of the money earned goes to the salespeople at the top of the pyramid. In most cases -- and data is scarce -- the vast majority of members who have bought into the system don't make any meaningful money.

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. A full transcript follows the video.

This video was recorded on May 14, 2019.

Dylan Lewis: Alright, Dan, we have that big industry number from the researcher, but I want to get into what some of these companies put out in terms of estimated compensation. I think that it is perhaps even more telling than the broad stroke number that we just threw out there.

Dan Kline: Yeah, and I think it's important as we bring up specific company names to note that it's hard to find these statistics for specific companies. We're not calling out these couple of companies just because we're deciding to pick on them. We're calling them out because they're actually sharing their information and putting it out there, and they're in line with the broader numbers we saw on the research you cited earlier.

Lewis: Right. The first one we're going to talk about is Herbalife (HLF -4.05%). This is a company that sells nutritional products. It has been in the news a ton recently. [laughs] The hedge fund managers Bill Ackman and Carl Icahn have just been duking it out for quite some time on this company. It's been a controversial name, Dan.

Kline: Yeah. Bill Ackman basically said, "This is going to go to zero." He doesn't believe in the business model. He felt it was a scam. Carl Icahn said, "No, this is a legitimate multi-level marketing company selling a legitimate product." The reality is, it didn't go to zero. The stock has been doing reasonably well. But, when you dig into the numbers, they do show what we were talking about before -- only 14% of its members, its salespeople, its reps, whatever you want to call them, made any money. Half of those made less than $245. Only 10% made more than $4,350. That's maybe a little bit better than the 1% model. But if you look at people who are actually making a living, it's probably a very tiny percent of those 1%. So, yes, you can make money selling this, but clearly, the path with Herbalife to make money is very, very difficult for most people.

Lewis: Yeah, Dan. Those numbers that you cited were from 2016, the company's statement of average gross compensation. To give you a sense of how big their distributor base is, that is over 400,000 people we're talking about. When you talk about over 80% of U.S. membership not receiving any earnings, that's several hundred thousand people that didn't receive any earnings. This isn't some small operation.

Kline: Right. And those are people who are buying in. The company's revenue is coming from its rep base. It's not coming from sales to the public. Now, that's something they've tried to work on. They acknowledge that it's not how they want it to be. But that's the plain reality of what they're doing. And it's matched by the next company we're going to talk about, Tupperware (TUP -1.80%). You know what Tupperware is. Dylan, we often talk about our age difference. But even being younger than me, you're familiar with Tupperware, I assume?

Lewis: Yes. Tupperware transcends, Dan. It is one of those names that just has become the default for an entire category.

Kline: I feel like it had its heyday maybe the '80s, maybe even the '70s. But it's still around. Tupperware kind of created the model of having a party, where you play games, there's free prizes, and then at the end of the night, someone takes orders. The positive about Tupperware is, it's a very good product. It's a top-of-class product. Everyone probably has some in their house. If they don't, they have a poor knockoff, and they should get some Tupperware. We're not against it.

But the reality is, you pay $99 to join and you get a 25% discount. In theory, if you're buying a whole bunch of Tupperware because you just got married or bought a house or whatever it is, you might actually come out ahead just on your own purchases. But a 2016 income distribution statement from the company said that 96.9% of all participants made less than $500 from August 2015 through May 2016. That's with over 35,000 distributors. Again, a very small percentage are making any real money.

Now, some of those people might have just spent the $99 to sell a little bit to friends and family and buy themselves. Clearly, not all of them have tried to make this a side hustle or a business. For some of them, it might just be a discount plan. But if you think you're going to start selling Tupperware and turn it into a meaningful business, the numbers are very much against you.

Lewis: Yeah. There's this common line in MLM parlance where they say that a large portion of the distributors are hobbyists that enjoy getting discounts on the products they'd be buying anyways. I'm going to quote directly from a piece of Herbalife literature. "Most people join only to receive a discount on Herbalife products and do not participate in the business," talking about their distributors. I take some exception to that because I think the way that these are generally pitched is, "This is a business opportunity. This is a way for you to quit your job. You can have some fancy car in your driveway and tell your boss, 'I'm done.'" That's kind of at odds with that. But, that's how they talk about some of those numbers. And I think that's true to some extent. I don't think it's true for thousands of people.

Kline: Yeah. It does feel like they should separate those businesses. If they want to offer a membership program where you have the right to sell to friends and families and you get a discount, you should be opting into that program, and not the overall model of, "This is going to be something you do," even if it was only so they could honestly say what their salesforce is, vs. what their membership is. I'm a member of Costco. I could in theory become a business. If you have a selling license -- it varies in every state what you need -- you could go to Costco and buy a case of Coca-Cola or a box of Milky Ways and resell them and make a profit compared to what they charge for one individual can of soda in most places. But most people aren't joining Costco for that reason. In the case of Herbalife or Tupperware, I think it's fair to say that the vast majority start out thinking it's going to be a business for them.

Daniel B. Kline has no position in any of the stocks mentioned. Dylan Lewis has no position in any of the stocks mentioned. The Motley Fool recommends Costco Wholesale. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Herbalife Ltd. Stock Quote
Herbalife Ltd.
$19.89 (-4.05%) $0.84
Tupperware Brands Corporation Stock Quote
Tupperware Brands Corporation
$6.55 (-1.80%) $0.12

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