Social networking for direct sales
Multilevel marketing shifts to Facebook. One firm faces suits.
Betsy Stover was 17 when her mother asked her to help fax strangers, hawking a service that had the markings of a pyramid scheme.
“I always felt like a creep sending unsolicited faxes,” said Stover, who hated the chore, but knew the work required cold calls to succeed.
Stover, now a 38-year-old comedian in Los Angeles, had largely forgotten about the experience until about three years ago. That’s when her Facebook feed started filling up with new direct sales posts touting cosmetics, jewelry and leggings.
Unbeknownst to her, friends Stover hadn’t seen in years had added her to pri-
vate Facebook groups promoting body oils and makeup. She had little interest. It felt too similar to her mother’s get-rich-quick schemes, which had more to do with recruiting new distributors than selling actual products.
“It was super awkward,” said Stover, who discreetly left the groups. “With these people, there was always a looming sales pitch in the background.”
Unsolicited calls and face-to-face pitches once defined multilevel marketing — a $35-billion industry that recruits an ever expanding network of independent distributors to sell their products rather than rely on bricks-and-mortar stores.
Instead, today’s multilevel marketing brands including Rodan + Fields, Stella & Dot and LipSense are often discovered on social media platforms such as Facebook, which gives distributors instant access to a vast network of potential customers and recruits with the swipe of a finger.
Rather than suffer the humiliation of cold calling, adherents can blast sales pitches and promote their brands online with little effort, attracting increasingly distant acquaintances who would have been previously unreachable.
It’s why many women such as Stover have seen their news feeds transformed from a place to keep up with friends and family into a clutter of live-streamed sales events, invitations to trunk shows and incessant promotional threads about moisturizers and lipsticks.
“This is what multilevel marketing has always done,” said Richard FitzPatrick, president of watchdog group Pyramid Scheme Alert. “It is the only business that ignores the boundaries of private life and professional life. It simply follows where people are gathered, and now that people communicate on digital forums like Facebook, it has invaded social networks.”
No recent company exemplifies the industry’s shift more fittingly — and controversially — than LuLaRoe, a Corona multilevel marketing brand that through Facebook developed a cultlike following for its patterned leggings and is now the target of five class-action lawsuits.
One of those suits, filed in October, seeks $1 billion in damages and alleges LuLaRoe operated a pyramid scheme, enriching itself by primarily selling inventory to its distributors, or sales consultants, rather than its customers.
The plaintiffs say the company did this by using social media to lure a sales force mostly made up of stay-at-home mothers into paying thousands of dollars to become consultants with dim hopes of turning a profit.
“Defendants achieved such rapid growth by enticing consultants with social media posts boasting large bonus checks and other lavish material possessions,” the suit says.
LuLaRoe, which was founded in 2012 and surpassed $2 billion in annual sales this year, called the lawsuits baseless. The company said it has given thousands of consultants the opportunity to earn income. And it rejected allegations it was a pyramid scheme, explaining it does not reward consultants for simply signing up new sellers, but instead offers bonuses based on a cut of retail sales achieved by a consultant’s recruits.
Only 27% of LuLaRoe’s consultants received such bonus payments last year, which means about a quarter of the company’s consultants were involved in recruiting and maintaining a sales team — the multilevel part of multilevel marketing.
“LuLaRoe has grown exponentially over the last four years. Our success has made us the target of orchestrated competitive attacks and predatory litigation. We take all litigation — regardless of its lack of merit — seriously,” the company said in a statement.
In addition to the pyramid scheme claims, LuLaRoe has been saddled with complaints about shoddy merchandise, an unfair return policy and unsympathetic leadership (consultants say the company pressured mothers to sell their breast milk to pay for more inventory).
“It was an endless chain. They always wanted you to buy more,” said Pamela Winkelman, a Minnesota consultant who was introduced to LuLaRoe over
Facebook and is a member of the $1-billion class action.
Before the lawsuits, LuLaRoe had built an ultraloyal following thanks to its buttery soft leggings. The company’s embrace of all body types positioned it as something of an anti-Lululemon, the maker of pricey yoga pants whose former chief executive once suggested its clothes weren’t appropriate for bigger women.
By 2015, LuLaRoe had become a social media sensation. Its clothes couldn’t be found at stores or e-commerce sites. Instead, women had to join private Facebook groups run by the company’s consultants.
Once in, they had to hope the seller had their size and pattern — not an easy task because consultants had no say over what pieces LuLaRoe would give them to sell.
Those restrictions on supply sparked a frenzy. Women joined multiple Facebook groups scavenging for rare leggings — known as unicorns — with playful prints such as purple dragons or the solar system. Eventually, unicorns would show up on EBay for double or triple their typical $25 sticker price.
The clamor for leggings also boosted the ranks of consultants, who were charged a minimum of $5,000 for their initial batch of inventory. LuLaRoe had about 30,000 consultants by the middle of 2016. Since then, the number has grown to more than 80,000.
“I never would have heard of LuLaRoe if it wasn’t for Facebook,” said a 31-yearold consultant in Southern California who didn’t want to use her name for fear of reprisal from the company. (She is not a member of any of the lawsuits directed at LuLaRoe.)
The mother of two signed up as a LuLaRoe consultant in 2015 and initially made a tidy profit. But within months, her suburban neighborhood was saturated with rivals who cut her earnings by two-thirds.
“Now I’m sitting on $22,000 of inventory in my spare bedroom that I can’t move,” she said.
Consultants say new recruits were being minted each day, in no small part because of LuLaRoe’s pervasiveness on Facebook. They say the company drove up engagement on the platform by encouraging consultants to post and comment as much as possible. It also urged consultants to launch Facebook business pages from which they could place ads.
LuLaRoe says it was its consultants who pioneered the company’s Facebook strategy. The brand adopted the strategy because it allowed consultants to interact more intimately with customers in a manner similar to salespeople in bricksand-mortar stores.
The Facebook groups, which routinely had hundreds of members, had a culture of their own. Negative comments about the brand were frowned upon. Acronyms such as FSOT (for sale or trade) and DISO (desperately in search of) abounded. “Roe” became a blanket verb, said Jill Robbins, a San Antonio blogger who wrote about her observations as a member of several LuLaRoe Facebook groups.
LuLaRoe rose as the number of people involved in all manner of direct selling in the U.S. grew to a record 20.5 million in 2016, up from 15.9 million in 2012, according to the Direct Selling Assn.
Experts say economic insecurity born out of the Great Recession has pushed more Americans to multilevel marketing — not unlike the way people have seized on the gig economy working for companies such as Uber.
With her background in direct sales, LuLaRoe cofounder DeAnne Brady has said she started the company envisioning a sales force of mothers who could earn income while raising children.
Jessica Wernz, a writer focused on family issues, says direct selling appeals to women in several ways: It offers a path to entrepreneurship and a promise of “sisterhood” to stay-athome moms who otherwise struggle to find time for socializing. And it gives mothers in the workforce an alternative source of income that allows them to spend more time with their children.
What troubles Wernz is that it perpetuates the idea that mothers are best suited at home, not in an office.
“I love the idea of empowering women, but this is the exact opposite,” she said. “These companies are selling them on the idea that they’ll miss their kids’ childhoods if they have to go into an office.”
Facebook has taken a hands-off approach to multilevel marketing, saying it has no reason to limit the industry’s presence on the social network. A Facebook spokesman declined to share any data about LuLaRoe.
The deluge of posts about direct sales can easily be removed by selecting “hide post” next to any unwanted content, the spokesman added. Otherwise, posts about LuLaRoe and other multilevel marketing brands are subject to the whims of Facebook’s algorithm like most other topics.
The rules are different for paid ads. Facebook requires multilevel marketing brands to “fully describe the associated product or business model” and never to “promote business models offering quick compensation for little investment.” But LuLaRoe consultants interviewed for this story who placed ads on Facebook say they never disclosed such information.
Even if Facebook decided to banish pyramid schemes from its networks, it would have a hard time determining which companies to target.
“Pyramid scheme” isn’t a legal term, and the nation’s laws are notoriously vague about what it means. Most experts and industry officials, including those at the Direct Sales Assn., say the bar for a scam is when the majority of revenue is derived from recruiting new consultants rather than sales. But others say that’s not enough. They argue the majority of multilevel marketing is predatory because it’s founded on the false promise of quick returns, when in reality, the overwhelming majority of consultants lose money.
LuLaRoe needs to take its consultants’ concerns more seriously if it hopes to continue growing, said Terri Villasenor. The Whittier resident signed up with the brand in August 2016 and believes it expanded too fast.
“The first three months were OK, but then it plateaued because they were saturating the market,” said Villasenor, 55.
She’s now stuck with 200 pieces of clothing no one wants to buy. She has no intention of purchasing any more inventory. Though not a member of any of the lawsuits against LuLaRoe, Villasenor is encouraged that disgruntled consultants are fighting back.
Dissenters are even exchanging ideas through private Facebook groups — much like the ones they started to lure recruits and customers. The forums can feel liberating to consultants such as Villasenor, who were wary of questioning LuLaRoe’s business until they saw others come forward.
“I felt like I was stuck in a cult,” she said.