Is direct selling a pyramid scheme?

With the advent of the gig economy, direct selling is becoming more popular among students and moms drawn to the perceived freedom and extra income that comes with it. But is this a legitimate business model?

Is direct selling a pyramid scheme?There are few businesses that you can start from scratch with little capital and products to sell that are instantly recognisable. This is what makes direct selling, also known as multi-level marketing (MLM), so appealing for many.

Starter kits do vary in price and complexity. With Avon Justine, for instance, you need to pay a registration fee of R85 and an admin fee of R23, make a first order to the value of R550, and a pay for the cosmetic booklet which is less than R15. Meanwhile Pres Les, which offers consultants the ability to sell luxury bedroom co-ordinates, has a simpler structure where consultants start off with a business kit for just R290.

Listen to Maya and Mapalo Makhu discussing this andother topics on the My Money, My Lifestyle podcast.

MLMs also provide their reps with training and an opportunity to join a community of other reps – usually connected through social media on Facebook or WhatsApp. Reps are often introduced to the group through a mentor that provides support and training – these are also known as the upline in the industry. Consultants must typically pay commission to uplines if they form part of a sales team.

Other recognised direct selling brands in South Africa include Herbalife Nutrition, Forever Living and Tupperware. They allow joiners to sell everything from health shakes and vitamins to make-up and food storage containers.

It’s a very lucrative industry. A spokesperson for the Direct Selling Association of South Africa (DSA) told us that there are about 1.2 million direct sellers or business owners in South Africa. Total annual sales came to nearly R13 billion in 2018, and this accounts for about 78% of sales on the whole African continent. Globally, the direct selling industry is worth about $193 billion.

Can you make a living off it?

Money can be made, but this is generally for the institutions promoting the direct selling opportunities and for those who make it up the MLM ranks, creating their own hard-working sales force underneath them that pay them commission. If you’re ranked near the bottom of the sales structure, expect to earn a minimal income.

Some are drawn to direct selling because of the ‘millionaire success stories’, which are more accessible nowadays as people share their lives on social media and post pictures of exotic holidays and fast cars that are apparently earned from direct selling.

But how easy is it to achieve this? According to Herbalife’s South African website, only 1.2% of its 4 702 “sales leaders with a downline” (i.e., 58 members) earned over R500 000 of commissions, royalties and bonuses in 2018, with the average across those members being R1.4 million. More than half of these sales leaders (52.1%) averaged R1 995 for the year.

These numbers do not include expenses incurred by members such as rent, travel and telephone costs. It’s something that people often forget to factor in when looking at these types of businesses. As the company explains: “There is no shortcut to riches, no guarantee of success.”

Sally (name changed) signed up to sell vitamins through a direct selling platform but found that her team manager was making all the money and it was not worth her time. “I run a home gym and I thought it was a great service for my clients, but I then realised that you only make money if you build a team under you. That wasn’t a direction I wanted to take,” says Sally.

Cheryl Jones of Herbalife Nutrition says she built up her R50 000 a month salary over 18 years. She wasn’t earning much in the beginning because of family responsibilities. When she first started off she was only earning about R5 000 a month.

A lot of dedication

She adds that it’s not impossible to achieve a big salary but that this takes a lot of dedication. “Some are getting R1 000 a month from selling to friends and family. Some have gone past me [in earnings] as they’ve created bigger teams and are good at networking and talking. They work hard though and create teams underneath them by recruiting 20 people a month. I’m certainly not doing that – I do one or two a month,” she says.

It’s this structural hierarchy that has often made critics of the direct selling industry claim that these businesses are nothing more than a pyramid scheme – snaring in hapless victims that are sold the promise of earning millions of rands, exotic holidays as rewards for hitting targets, commissions from their teams and other bonuses.

The DSA, however, feels that it’s unfair to compare MLMs to pyramid schemes. A spokesperson says: “Unhappily, we have been dealing with this false characterisation for as long as I can remember. Pyramid schemes are not sustainable, they are based on people getting money from other people with no real underlying value. Put simply, a pyramid scheme’s ability to continue to survive depends on more people entering the scheme because earlier “investors” get returns from new “investors” and the moment the pipeline for new “investors” dries up, then the whole model collapses.”

The DSA spokesperson points out that direct selling is completely different. “First there is real value being exchanged. Goods and services are exchanged for the money that people earn. Second, with a certain critical mass, direct selling businesses continue to be profitable even if the number of new entrepreneurs entering the sector is stagnant because the existing entrepreneurs continue to buy the goods and services from which they receive value.”

Is the industry regulated?

The MLM industry in South Africa has to adhere to the Consumer Protection Act and Companies Act. Claims that products have miraculous healing abilities can also no longer be made. The DSA spokesperson says: “There is a significant number of products sold through direct selling that fall within the medical and healthcare field, as such, strict guidelines have been laid down to ensure that people’s health is not compromised.”

The DSA itself also provides protection for members that join an MLM that is registered with the organisation. It also vets the companies and all new members have to undergo a 12-month probationary membership to allow the DSA to ensure it is compliant to their Code of Conduct.

The DSA spokesperson adds: “The DSA can under extreme situations refer rogue operators to the authorities for further action. Again, all this in the interest of promoting a professional and ethical business environment.”

Real-life stories

Cheryl Jones (50) a mother of two who lives in Midrand, Gauteng, joined Herbalife Nutrition in 2002.

  • How did you get into Herbalife? I was introduced by a flyer that said: “Clever people work from home!” and this really appealed to me as I had two small children.
  • How much do you make a month? I make over R50 000 per month from direct selling and from the commissions of the teams that work under me.
  • What are the pros? Working from home, being my own boss, no traffic, time freedom, money freedom, flexibility and no corporate politics.
  • What are the cons?You need self-discipline. This is not really a negative but it’s the reason that many people don’t succeed. It’s hard work!
  • What’s your advice to those considering direct selling? You can’t share a product in the marketplace that you don’t believe in. Choose a reputable, rock-solid company with lots of history and science behind it, and do your homework.

Nomsa Mtsweni (38) has been an Avon Justine rep since 2012 and lives in Pretoria, Gauteng.

  • How did you get into Avon Justine? Most of my clients are interested in Avon Justine products.
  • What are the pros of this job? Meeting different types of people. Some are amazing and I learn a lot from them.
  • What are the cons of this job? I sometimes face challenges of being unable to collect cash from clients and end up sending the products back to Avon.
  • How much do you earn a month on average? This is confidential but it caters for all my needs and has enabled me to help my family, grow my business, empower other women and be proud to be an independent entrepreneur.

This article first appeared in City Press.

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