A recent article at CBS MoneyWatch exposes multi-level marketing company LuLaRoe and the alleged fraud being perpetrated on its consultants. You may remember that I criticized LuLaRoe and its MLM model a few months ago based on the false narrative that lots of women are getting rich by selling the leggings. One of my main criticisms:
Business Insider promoted the idea that LuLaRoe is making women rich. While there ARE a handful of women who are making a ton of money from the company, only an incredibly tiny fraction of participants can make this type of money. Why? Simple math. If you’re making a 3% to 5% commission on your downline (as you’ll see below), it takes $700,000 of wholesale purchases by your downline to earn $35,000 in a month. (I realize that various bonuses change the math, but I’m using these numbers to simplify things.)
Other problems that I have with this “business model”:
- Very high cost to start… the smallest startup inventory package is just under $5,000 (and you don’t even get to select your own inventory… you order sizes and styles, and the company decides what pattern/print you’re going to get)
- It’s pay to play… in order to be “eligible” for commissions on your downline, you have to purchase at about $3,500 per month
- Consultants receive an average of $85 PER YEAR in commission
- You don’t OWN a business… you participate in LuLaRoe at the mercy of the company, who can essentially cut you off at any time (so you’ve built up a customer base, and then you can’t get any clothes from the company because they’ve terminated you)
- Almost everyone loses money in multi-level marketing
LuLaRoe consultants already sued the company over its policies regarding sales tax. And according to CBS MoneyWatch, there are new complaints from consultants which may lead to another lawsuit:
…the company misled them about the time and risks involved in launching a LuLaRoe business, as well as the potential income people can earn from becoming a “consultant” who sells its merchandise. They also claim LuLaRoe is slow to process refunds for products they buy that turn out to be defective.
The article cited a “source close to the company” saying that 90% of the consultants who signed up with LuLaRoe since 2012 are still with the company. I say that’s impossible. Multi-level marketing has extremely high churn rates.
Of course it’s difficult to calculate churn rates because the companies publish so little information on how many people quit and how fast… obviously because those numbers would show how awful the “opportunity” is. MLM expert Robert FitzPatrick estimated a 60% to 90% annual churn rate for Herbalife. Dr. Jon Taylor found that at least 50% of people quit their MLM in the first year, and by year five, 90% to 95% of have quit.
LuLaRoe defends its high initial investment by saying it’s a way to make sure that people are serious about the business. Foisting these large inventory packages on MLM distributors is called frontloading. The truth is the MLMs frontload new recruits because they know that in most cases, the first inventory order will be the most they will ever order. The goal is to get that first purchase as high as possible.
There are so many things wrong with MLM in general, and LuLaRoe takes the scam to a whole new level. It is yet another company projecting an image of helping women earn money, when former consultants will tell you it’s nothing but smoke and mirrors for a fake business opportunity that is almost sure to leave you poor.