Since the 1950s, multi-level marketing (MLM) companies like Amway have sold billions of dollars worth of products to consumers through independent individual distributors, who take a cut on every sale they make as well as on the sales of other “downline” distributors they have recruited. These days, a new crop of green companies has adopted the MLM business model to sell various types of environmentally friendly merchandise.
But while the marriage of multi-level marketing and environmentalism seems like an obvious fit—because distributors want to believe in the products they are selling to friends and family—consumers should beware that just because a company looks green does not mean it acts responsibly. Just as in other sectors, MLM companies run the gamut from reputable to fraudulent, and would-be distributors owe it to themselves to investigate whether any such company they are considering working with meets some basic criteria of legitimacy.
According to the U.S. Federal Trade Commission, the key difference between legitimate MLM companies and so-called “pyramid” scams is on what basis distributors are compensated. Legitimate MLM companies pay based on the volume of products an individual distributor sells directly and through his or her network of sub-distributors. Meanwhile, illegal pyramid schemes compensate distributors merely for recruiting others into the company’s fold, and also tend to charge new recruits high fees just to join.
Leading the Way
One example of a legitimate green MLM company is Shaklee, a leading purveyor of nutrition, personal care and household products. Started in 1956 by research chemist Dr. Forrest Shaklee, the company’s initial product line of natural nutritional supplements sold well, thanks to a network of eager distributors selling to their friends and neighbors. The founder’s personal motto, “Follow the laws of nature and you”ll never go wrong,” imbued a sense of environmental responsibility to the company. In 1960 Shaklee blazed a trail with Basic-H, the first mass-marketed biodegradable household cleaning product.
In 2000, Shaklee became the first independently verified “climate neutral” company in the world by offsetting its carbon dioxide emissions with investments in various renewable energy projects. This year the company embarked on an ambitious campaign to plant a million trees across the U.S.
These days some newer companies are following in Shaklee’s footsteps. Amazon Herb Company, for instance, was founded in 1990 by John Easterling, who says he discovered herbal remedies for his own health ailments while searching for treasure in the Amazon rainforest. Easterling decided to formulate and package some of these remedies for his friends up north. The idea caught on, and soon Amazon Herb had thousands of distributors throughout the U.S. and beyond.
Another prominent player in the sector is Idaho-based Melaleuca, which has employed its own version of multi-level marketing (“consumer direct marketing”) to sell health, personal care and household products based on natural ingredients since 1985. The name Melaleuca was borrowed from an Australian plant that produces essential oils found in many of the company’s products.
The Business of Recruiting
However, skeptics maintain that the real business of any MLM company, legitimate or otherwise, is cashing in on the recruitment of new distributors who are unlikely to turn a profit themselves. According to Robert FitzPatrick, who runs the Pyramid Scheme Alert newsletter, the vast majority of new recruits actually lose money before bailing on the proposition entirely.
FitzPatrick’s research shows that industry-wide, fewer than one in a thousand MLM distributors make any profit whatsoever, with most losing money while gaining closets full of products they had to buy but don’t need. “The business practices of most multi-level marketing companies directly cause the financial losses suffered by millions of consumers, not normal competitive factors or the levels of efforts or talents of the participants,” FitzPatrick maintains. He adds that the collective losses represent an enormous transfer of money from several million people in the U.S. each year to a few hundred owners and recruiters.
Last year, FitzPatrick analyzed sales and income data from Melaleuca and found that the top one percent of the company’s hierarchy—about 82 people out of 10,000—received 54 percent of the total payout. The study also found that most Melaleuca recruits didn’t make it through the first year of participation. Those who were able to hang on (unless they were in that top one percent) could look forward to making around $10 per week before expenses and taxes.
Melaleuca representatives were not available for comment, but company materials maintain that the business provides an opportunity for motivated individuals to make money while working independently. “This is not a get-rich-quick scheme,” Melaleuca founder Frank L. VanderSloot told Forbes when the magazine listed him among America’s top 400 wealthiest people. VanderSloot insists the income of a hard-working distributor can “make a real difference to a family.”
Krystal Planet uses an MLM model to sell products (such as an automotive “fuel catalyst”) that make energy-efficiency claims, as well as so-called Green Power Certificates to fund the development of renewable energy. While a portion of the $30 consumers shell out per certificate goes to a nonprofit that works to install renewable energy in schools, the rest goes into a fund to bankroll two proposed wind turbines on the prairies around Kansas City, where the company is based.
But when it was revealed that Krystal Planet was having problems obtaining permits for the proposed turbines, customers began to get antsy, placing calls to regulators. The Missouri Secretary of State then ordered Krystal Planet “cease and desist” from offering the certificates. “The company claimed to use investor proceeds to build wind turbines,” says David Cosgrove, Missouri’s Commissioner of Securities. “However, no wind turbines were ever built and the investors never received their principle or interest.”
Krystal Planet spokesperson Hal Bringman insists that the Missouri cease-and-desist order emanated from a few disgruntled former employees looking to lash out at the company, and says the company is working to clear up the dispute. “Instead of giving money to the Middle East, tap into a company that’s in the Midwest while plugging into opportunities to go off-grid or defray huge energy costs,” Bringman says.
Defenders of the MLM concept are quick to point out that every sector has its problems, and that such cases are the exception. But the Krystal Planet brouhaha only underscores the fact that MLM companies that want to succeed these days have to live up to high standards of ethical conduct in order to gain the trust of consumers. Then and only then can such businesses begin, in the words of Dr. Shaklee, “to do good by helping others be well.”