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Published on September 9th, 2020 | by Guest Author

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MLM Income Disclosures: When Average Does Not Equal Typical

This is a guest blog by Peter Vander Nat, Ph.D., former senior economist with the FTC who has testified in numerous federal pyramid scheme cases, and William Keep, Ph.D., Professor of Marketing at The College of New Jersey and an expert consultant on multilevel marketing issues. Together Drs. Vander Nat and Keep have written two seminal works analyzing the MLM industry.

When Mark Twain popularized “There are three kinds of lies: lies, damned lies and statistics,” he was not referring to MLM income disclosure statements but he may as well have been. Before we look at some specific MLM statements consider this health example: A trial drug is given to ten patients suffering from the same disease. Nine patients die soon after taking the drug and one lives another twenty years. The drug company cannot then report that after taking the trial drug the patients, on average, lived two more years. The “typical” or most probable outcome is, in fact, death soon after taking the drug. Here, a patient’s death is the representative outcome; continued living is not, and averaging the two together is entirely misleading.

MLM Income Disclosures

Unfortunately, we often see a similar misuse of “average” in MLM income disclosures. Consider statements from these three MLM companies:

Neora:

“January 2020, 30.6% of Active US Brand Partners earned cash commissions and 69.4% did not earn any cash commissions. The average annual gross cash earnings of Active US Brand Partners was $1,054.”

Neora reports that more than two-thirds (69.4 percent) earned zero commission, which therefore constitutes the typical result among all Active US Brand Partners. However, reporting a single average of $1,054 obscures the typical earnings of the 30.6% who did earn commissions. There can be little doubt that only a tiny minority of Neora Partners earn very high commissions and that many who earn a commission actually earn very little. The company possesses all the data necessary to provide a complete picture of commissions paid. The data the company choose to disclose obscures the distribution of earnings for a significant portion of participants – a matter that could well be material to a prospective participant’s decision to join (or not).

Beautycounter:

  • The average total annual income for all U.S. Consultants was $2,060
  • Top 1% of Consultants were paid on average $94,718
  • Top 10% were paid on average $16,410
  • Top 50% were paid on average $4,056

Regarding its participant hierarchy, Beautycounter’s disclosure statement conveys that those with the title of “Consultant” – as lowest title – comprise 82.2% of all participants, had average earnings of $46/month, and the bottom 25% of the category had average earnings of $0. This need not identify all who earned $0. The percentage of those within the Consultant category who earned nothing might be significantly higher; possibly as high as 43%, without rendering a contradiction in the overall disclosed data. Based on the available annual averages, we estimate that participants in the top 50% but below the top 10% earned, on average, no more than $967.50. The typical Consultant in this group would make much less but how much less is impossible to determine. The company presents data that obscures what a typical Consultant made. Overall, we estimate that 90% of all Beautycounter Consultants earned an average of less than $1,000 in commissions.

Primerica:

“From January 1 through December 31, 2019, Primerica paid cash flow to its North American sales force at an average of $6,249, which includes commissions paid on all lines of business to licensed representatives.”

The Primerica income disclosure appears to serve only one purpose, which is to verify that a commission can be earned. By relying simply on the average commission paid, Primerica makes it impossible to calculate, as we did with Beautycounter, some of the lower commission amounts. There can be little doubt that the typical commission paid, i.e., the most representative amount paid to a person in the Primerica sales force, is well below $6,000, before expenses. Many likely make zero and, further incorporating participant expenses, lose money.

When a company reports on a typical outcome they are reporting on a representative experience, thus one that would be more common than not. Section 5(a) of the FTC Act defines income representations as deceptive when:

  • They are likely to mislead a customer acting reasonably under the circumstances, and
  • The representations are material.

As recently as August 2020 the FTC stated publicly:  “it’s unwise for MLMs to make earnings claims – expressly or by implication – that don’t reflect what typical participants achieve.” Briefly put, MLM income disclosure statements must be representative (i.e., typical) and are deceptive if they materially mislead distributors and prospective distributors.

In Sum

Averages in MLM income disclosure statements are often atypical and, in fact, outliers relative to what most distributors experience. That MLM companies continue to report distributor incomes using averages demonstrates a lack of interest in providing meaningful information to current and future distributors. Recent FTC actions and statements highlight a growing concern for deceptive MLM practices.

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About the Author

Guest posts are written by experts who TINA.org invites to share their opinion on subjects of interest to our readers. The views, opinions, and positions expressed in this blog post do not necessarily reflect the views, opinions, and positions of TINA.org.



One Response to MLM Income Disclosures: When Average Does Not Equal Typical

  1. Douglas M. says:

    Many thanks to Drs. Vander Nat and Keep for this cogent and devastating critique of MLM earnings “disclosures”, and thanks to TINA for giving them a platform. The use of deceptive earnings claims to promote MLM “business opportunities” is endemic. This is inevitable because (1) any earnings claims by an MLM promoter is almost certainly going to be deceptive, and (2) business opportunities, including of course MLM programs, do not get sold without earnings claims. For decades MLM companies have handled this problem by setting forth rules against making deceptive earnings claims in their distributor agreements, and even having compliance departments tasked with enforcing these rules, while tacitly permitting distributors to make deceptive earnings claims so long as they don’t get caught by regulators. The inevitability of deceptive earnings claims calls into question the FTC’s decision to permit MLM’s to exist, provided there are sufficient “retail sales” to fund the compensation plan. While this may appear to be a radical position, my experience representing victims of MLM plans for close to 30 years, along with articles like this by two of the most knowledgeable scholars of the MLM industry, leads me to raise the issue.

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