04 Oct

AdvoCare Pyramid Scheme

On Wednesday it was announced that AdvoCare and the FTC entered into a settlement which bars it from participating in any multi-level marketing (MLM) activities. AdvoCare will also give $150 million in consumer refunds.

The settlement comes after the FTC said AdvoCare was running an illegal pyramid scheme. There were allegations that the company “deceived consumers into believing they could earn significant income as distributors of its health and wellness products.”

There is interesting stuff in the complaint filed by the FTC:

14. To convince consumers to pursue AdvoCare’s business opportunity, Defendants claim that AdvoCare offers the average person a financial solution that will enable them to earn unlimited income, attain financial freedom, and eliminate the constraint of traditional employment. In reality, the overwhelming majority of Distributors never earn compensation from the company.

15. AdvoCare charges consumers $59 to become a Distributor. Distributors can recruit a downline and earn wholesale commissions ranging from five to twenty percent of purchases by certain members of their downline. Distributors receive a discount on products and are eligible to sell products to the public.

16. However, to earn all possible forms of compensation AdvoCare offers, consumers must become Advisors. In addition to earning wholesale commissions and being eligible to sell products, Advisors are eligible to earn overrides, leadership bonuses, and incentives(collectively, “Advisor income”). Advisor income is based on the purchase volumes of downline Advisors and their recruits, with the highest rewards going to those who recruit the most Advisors and generate the most volume from Advisors in their downline. The clear directive of this structure is—as a leading Distributor instructed consumers at Success School, AdvoCare’s marquee annual training event, which all of the Individual Defendants regularly attend and present at—for consumers to “recruit business builders who recruit business builders who recruit business builders. . . .”

17. To reach Advisor, consumers must pay the Distributorship fee and meet certain AdvoCare product purchase requirements, measured as personal and group volume (“PGV”). Consumers typically spend between $1,200 and $2,400 purchasing AdvoCare products to reach Advisor.

18. AdvoCare’s compensation plan contains recurring incentives to encourage business opportunity participants to purchase large quantities of product. Advisors must accumulate thousands of dollars of product purchase volume each year to become and remain Advisors. They must meet volume thresholds to earn Advisor income each pay period and to advance to higher ranks in AdvoCare, where they can receive bigger bonuses.

19. Given the incentives for business opportunity participants to continually purchase large volumes of product, product purchases are driven by the compensation plan and not by consumer demand for AdvoCare products, leading a recent AdvoCare CEO to observe that he was “not concerned about retailing the product . . . . If you package dirt right and it’s got PGV on it, the Distributors will buy it.”

If you’re familiar with MLM, you read this stuff and realize you could substitute the name of any MLM and it would read the same.

The complaint talks at length about the deceptive income claims. How the recruiters say you can earn unlimited income. How you can decide how much you want to make, and they will teach you how. That they flaunt their material goods and make it seem like you can have that too. How you can work part time and earn very large sums of money.

The FTC says:

To recruit people, the FTC alleged, AdvoCare and the other defendants told distributors to make exaggerated claims about how much money average people could make—as much as hundreds of thousands or millions of dollars a year. The FTC alleged that distributors were told to create emotional narratives in which they struggled financially before they joined AdvoCare, but obtained financial success through AdvoCare. Distributors were also allegedly told to instill fears in potential recruits that they would suffer from regrets later if they declined to invest in AdvoCare.

The income claims and the financial stories used to draw in recruits are the same among all MLMs.
And in all MLMs, the vast majority of recruits earn nothing. In fact, they lose money.

About AdvoCare being a pyramid scheme, from the FTC’s press release:

“Legitimate businesses make money selling products and services, not by recruiting. The drive to recruit, especially when coupled with deceptive and inflated income claims, is the hallmark of an illegal pyramid.” said Andrew Smith, Director of the Bureau of Consumer Protection. “The FTC is committed to shutting down illegal pyramid schemes like this and getting money back for consumers whenever possible.”

According to the FTC, AdvoCare operated an illegal pyramid scheme that pushed distributors to focus on recruiting new distributors rather than retail sales to customers. The compensation structure also incentivized distributors to purchase large quantities of AdvoCare products to participate in the business and to recruit a downline of other participants with the same incentives. The clear directive of this structure was, as one AdvoCare distributor explained during the company’s Success School training, to “recruit business builders who recruit business builders who recruit business builders. . . .”

Again, no different than all other MLM.

What did the FTC base its statements about distributor income on? The income disclosure statements AdvoCare created.

In reality, the FTC alleged, AdvoCare did not offer consumers a viable path to financial freedom. In 2016, 72.3 percent of distributors did not earn any compensation from AdvoCare; another 18 percent earned between one cent and $250; and another 6 percent earned between $250 and $1,000. The annual earnings distribution was nearly identical for 2012 through 2015.

I have to wonder if this action by the FTC means they are getting serious about going after MLMs. Why AdvoCare? I’ve been researching and writing about MLMs for nearly 20 years, and I’ve been saying the same thing about Mary Kay, Herbalife, and many others. Why not pursue those companies?

I’ve said it before and I’ll say it again… It doesn’t matter what the product is or the details of the pay plan. All MLMs are the same: They incentivize recruiting. People are recruiting people not to sell a product, but to sell a bogus business opportunity to other  recruits.

One thought on “AdvoCare Pyramid Scheme

  1. Thanks for this…it is very encouraging to see the FTC get to the heart of the issue with Advocare. It says, “[Advocare reps] will no longer be able to earn compensation based on purchases of distributors in their downline”. Notice it says nothing about purchases from outside customers of the distributors in their downline (as if there were any to begin with). This rule specifically eliminates the incentive for front-loading…the biggest gravy producer in most MLMs. But it does not address the endless-chain recruiting aspect (although the incentive to recruit takes a huge hit since the down-line rep is no longer the primary customer).

    My question is: Can the FTC just make this the rule for all MLMs, or would that require legislative action?

    And while this is a great first step, I’d like to see that rule applied to all MLMs, as well as the elimination of the endless-chain.

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