Network marketing gone wrong: LuLaRoe
LuLaRoe is an MLM company that sells casual women's apparel through a network of independent distributors called consultants. While LuLaRoe may offer a legitimate business opportunity today, the company's history is scandalous -- scandalous enough to be retold in an Amazon (AMZN +3.47%) Prime documentary called LuLaRich.
In the mid-2010s, LuLaRoe charged its new consultants some $5,000 in startup costs. Those fees paid mostly for inventory, which was only partially returnable. Consultants had two earnings opportunities: They could sell their inventory and/or recruit new consultants. Recruiting produced commission on every sale closed by the people beneath them.
The brand grew quickly as consultants leaned on their social media networks to generate sales and build their teams. Then the lawsuits began to surface.
Consultants, employees, suppliers, and the state of Washington all lodged complaints against LuLaRoe. The high-profile complaints alleged defective products, employee mistreatment, nonpayment, and deceptive business practices. The Washington state lawsuit accused the company of operating an illegal pyramid scheme and grossly misrepresenting the business opportunity to new recruits.
LuLaRoe settled with the state of Washington in 2021 for $4.75 million. The state distributed $4 million to Washington residents who had invested in LuLaRoe but never earned the full-time income they were promised. The state also required LuLaRoe to implement these changes to its business model:
- Allow new consultants to return all unsold merchandise for a full refund within 45 days of joining the company.
- Pay commissions only on an individual's sales, not on sales made by consultants an individual recruited.
- Publish an annual disclosure statement showing how much consultants are earning.
Today, the minimum startup cost for a LuLaRoe consultant is $499, one-tenth of what it used to be. According to the company's 2022 consultant income disclosure, about 20% of new consultants lose money on their LuLaRoe business. Some 45% make between $1,000 and $5,000 annually. And just over 6% earn more than $50,000 each year.
