The nu face of pyramid schemes?

We investigate Nu Skin, the social media cosmetics company where only 1% of workers make money

9th December 2018

Ruth* had been looking forward to a financially stable retirement. So she had never expected that, at 75-years-old, she’d be so far in debt that she’d be forced back out to work, to have her daughter remortgage her own house and cash in her pension early. But that was before she got involved with multi-level marketing company Nu Skin.

“No one sells in multi-level marketing. There are no multi-level marketing end-user customers. They buy — ‘pay’– and they recruit. Without recruiting there is no chance of income. At the end of the chain, there is no chance at all.”

This is how Robert Lawrence FitzPatrick, author of False Profits: Seeking Financial and Spiritual Deliverance in Multi-Level Marketing and Pyramid Schemes, and president of Pyramid Scheme Alert, describes multi-level marketing, sometimes abbreviated to MLM. And Insta-famous cosmetics giant Nu Skin, he tells The Overtake, could not be more typical.

Set up

You might not have heard of Nu Skin before but it’s possible that someone you know, probably a young woman, has. They might use Nu Skin products — such as ageLoc Galvanic Spa, Sunright Insta Glow Tinted Self Tanning Gel and AP-23 Whitening Tooth Paste — and potentially, they may have been approached by distributors, asking them to join the team and make easy money. All you need to do is invest a little bit of money in stock and sell directly to your friends. And you’ll earn even more money if you can get your friends to sell to their friends, and their friends to sell to more friends, and so on and so on.

The law governing multi-level marketing does not allow an investment of more than £200 in the first seven days

If that sounds like a pyramid scheme, that’s because it is like a pyramid scheme. Sometimes known as pyramid selling, this is a known method of fraud, and for this reason, pyramid schemes are illegal under The Fair Trading Act 1973.

Multi-level marketing falls into the grey area between direct sales, the legal process of making money by buying stock from a company — like Avon or Tupperware — and selling it directly to customers; and pyramid schemes, the illegal process of making money by charging a joining fee to new employees and getting them to recruit and charge more individuals, while you take a cut of their profits.

Multi-level marketing is a combination of these two systems. In a pyramid scheme, the only thing that changes hands is money. In multi-level marketing, you buy and sell stock directly, and earn additional commission by providing stock to employees beneath you, creating a distribution chain. The more employees beneath you, the more money you make.

Surprisingly, this subtle distinction means that multi-level marketing is, unlike pyramid schemes, perfectly legal. It is a little like the Nigerian prince taking your money but sending you some wholesale cosmetics, rather than the millions he promised, to make up for it. Essentially, it’s not a crime because the company sends you face cream.

At first glance, Nu Skin doesn’t require an upfront payment. Only there is a catch. You can register to join Nu Skin for free, but of course, you would have zero stock to sell. You pay nothing to join, but you get nothing by joining. To start making money, you have to buy some start-up stock, generating a de-facto participation fee.

The Direct Sales Association UK (DSA UK), the trade body for the direct sales industry — of which Nu Skin is a member — warns: “The law governing multi-level marketing does not allow an investment of more than £200 in the first seven days.”

Hannah Martin, the founder of talentedladiesclub.com, a website dedicated to helping mothers get back into the workforce, looked into the cost of Nu Skin startup packages and what your chances are of making money with Nu Skin are. In short, it doesn’t look good.

Nu Skin offers two types of start-up package. The first is an Automatic Delivery Reward (ADR). ADR is essentially a monthly stock commitment, where your payment is direct-debited from your account each month and you receive a set amount of stock. The cheapest of those options is £152.65, for which you receive four items, which is under the legal limit of £200.

Yours for only £152.65 a month 📷 Hannah Martin

Alternatively, if you want to get off to a flying start, rather than build up your inventory over months, you can opt for an Introductory Product Package (IPP). With the cheapest of these, you do get nine items but it also costs £377.52, which is more than the legal investment for multi-level marketing.

If you have gone for either of these packages out of interest or excitement but decided that maybe you had made a mistake, you do have options. With the ADR, though you can sign up with just a few clicks, you have to give 14 days written notice to Nu Skin to stop your standing order and with IPP you can try to return your unsold stock.

Depending on how quickly you make your return, you may be charged a 10% administration fee based on the price of your stock and lose any bonus commission you were entitled to, so long as the items are unopened and resellable. On top of which, all returns must be paid for by you, with tracked post to the Netherlands. Nu Skin isn’t going to reimburse you if the package goes missing, so with cover, you are looking at a cost of about £50. Seeing as returning the IPP could lose you another £80-90 on top of your £370 investment, you may as well try and sell it and at least make some of your money back, right?

Well, there is a slim chance of that happening.

Income

As you may have already noticed, Nu Skin loves abbreviations. Abbreviations serve two purposes. The first is that they sound cool and business-like and the second is that they can be confusing.

The details of Nu Skin’s commission scheme don’t use simple terms, like units sold, margins or income. Instead, they use a complicated chart combining PSV (Personal Sales Volume) and GVS (Group Sales Volume). None of the values in the chart are denoted by recognisable units like pounds or dollars, making it seem more like points than actual currency. Distributors have to maintain a level of sales over three months to remain active — hence the appeal of ADR — as only active distributors qualify for commission.

It’s all quite confusing, but you don’t have to wrap your head around it because Nu Skin conveniently revealed how many of its American distributors made money in a 2017 income disclosure statement. As Martin found out, roughly 85% of distributors made absolutely zero commission.

This is based on Nu Skin’s own 2011 income report. 📷 Hannah Martin

 

Of the 15.42% that actually made any commission — 14,132 individuals of a potential 65,778 active US distributors — only 944 (1.4% of the entire distribution chain) made more working for Nu Skin than they would have, working a minimum wage job. If this sounds bad, it’s actually much, much worse.

This income report doesn’t take into account any expenses. Jon M Taylor PhD, also of Pyramid Scheme Alert and the Consumer Awareness Institute, spent a year working for Nu Skin to assess its viability as a means of making extra cash. He reported that to make a living, not only did he have to work full time — negating the idea that multi-level marketing is something you can do in your spare time — he spent a considerable amount of money on things like promotional materials, training, travel and advertising.

In the extreme, he estimated that his expenses were around $18,000 after he had no more friends or family to sign-up. Had he not advertised and recruited strangers, he would have lost both his position as an active distributor and his commission. That may seem like an obscene amount to spend, but if you consider Nu Skin your personal business and you want to make the best commission, it makes more sense. Even a more conservative estimate of $7,000, Taylor argues, would still cut drastically into any profits you might be able to squeeze out.

In a report for the US Federal Trade Commission, Taylor estimates that the claim that 85% of distributors don’t make money is realistically closer to 99% after expenses. Only paying 1% of employees has allowed Nu Skin to create a revenue of $2.25bn a year.

Oversight

The DSA UK page warning about pyramid schemes states that multi-level marketing “may seem similar to pyramid schemes, but in reality they are substantially different and are more similar to a conventional corporate business model.”

It recommends people ask three questions to figure out if a multi-level marketing company is a front for a pyramid scheme:

“If the answer to each is yes then you are probably considering a legitimate direct selling opportunity,” DSA UK says.

Income is possible, in the same way that getting off the couch and winning the 100m sprint at the Olympics while blindfolded and catching a winning lottery ticket dropped from a plane as you recite Shakespeare backwards is possible. That is to say, the chances are so low as to be practically impossible

Well, it’s not quite that clear-cut with Nu Skin.

Startup — if defined as joining the company– is free. Though to actually start up requires either a costly subscription that is difficult to cancel quickly or purchasing an IPP that surpasses the legal limit for multi-level marketing investment.

Returning unsold stock is possible but will cost you an arm and a leg in postage and fees.

And finally income. Income is possible, in the same way that getting off the couch and winning the 100m sprint at the Olympics while blindfolded and catching a winning lottery ticket dropped from a plane as you recite Shakespeare backwards is possible. That is to say, the likelihood of you achieving this are so low as to be practically impossible. Generating an income is dependent on sales, but those sales are realistically dependent on recruitment.

Nu Skin may not legally be a pyramid scheme, but it has the same outcome. A base of people is left out-of-pocket as money filters up through recruitment to a small number at the top. Nu Skin isn’t so much “substantially different” from a pyramid scheme, as it is an homage to a pyramid scheme.

Wikicommon - public domian
From Wikipedia’s entry on multi-level marketing: a shape inspired by — yet not– a pyramid.

The National Fraud Intelligence Bureau was unable to offer any clarification on the difference between a legitimate multi-level marketing structure and a pyramid scheme. It says it would be different in each case and points to its A-Z of Fraud webpage — which contains an entry for a pyramid scheme but not multi-level marketing– for guidance. However, that page does state that you may have been the victim of a pyramid scheme if :

Despite the fact that Nu Skin has faced repeated legal difficulties in the US for overstating the earnings of its distributors, was dismantled by John Oliver and was sued in China for straight-up operating as a pyramid scheme, the UK seems well behind in taking the dangers of MLM seriously.

With law enforcement unable to reform an entire industry, trade associations being “neutral” to the point of condoning MLM and Government — still dealing with the old £350m on-the-side-of-a-bus swindle — perpetually distracted, it’s no surprise that grassroots groups like the Anti-MLM Coalition have popped up.

Resistance

The Anti-MLM Coalition is made up of a group of former multi-level marketing members who have combined their professional knowledge and experience in the industry to raise awareness of the danger of multi-level marketing. Their site features regular guest writers but the core group consists of Red Corvette, Elle Beau, Emma the Naked Typist and Bot Watch, all writing under pseudonyms, obviously.

The hardest part is finding ex-distributors who are willing to talk to journalists

The group’s goal is to educate, inform and to act as a central hub for multi-level marketing awareness on the net, in the hopes of preventing the unwitting from signing up. They cover a range of topics; general traits and practices used in multi-level schemes, specific companies, how to help a friend who is caught in multi-level marketing, and the fallout that being a part of these distribution chains can cause. On top of this, they provide support for those whose lives have been affected by multi-level marketing.

“The hardest part is finding ex-distributors who are willing to talk to journalists,” says Red Corvette, a former distributor for multi-level marketing scheme, SeneGence. “Most are afraid of retribution and bullying from the companies and their acolytes.”

Part of Anti-MLM Coalition’s objective is to give people an insight into how multi-level marketing works and stopping people from becoming a part of the base the pyramid is built on. Multi-level marketing is like a grift, and distributors can lash out when you tell their marks they can’t win at three-card monte.

They get very defensive, almost as if they think their livelihood is being threatened

This is the reason the Anti-MLM Coalition and its members operate under pseudonyms. Ex-distributors have reported instances of harassment –both online and in person–, having personal information stolen, cease and desist letters for writing negatively about former employers and even death threats.

Elle Beau explains: “As for the pro-MLM crowd being vicious, I’ve had some very angry people descend on my first Facebook page — it got mass-reported and Facebook deleted it. It is usually the reps — they get very defensive, almost as if they think their livelihood is being threatened.”

“Bullying culture within the organisations is rife,” adds Red. “And when [distributors] leave, they can be bullied by the MLM distributors who were once their friends, and hassled or threatened by the MLM company too, if they make the mistake of speaking out against them.”

The illusion of support and friendship is strong. Until they start to have any issues with the group, of course, in which case they are shunned

This fervour and slavish devotion are some of the reasons some consider multi-level schemes cultish. In fact, a well-known method of recruitment is “love bombing”. The phrase, coined by Sun Myung Moon of the Unification Church — frequently criticised for being a cult — describes a method of showing affection to a new or prospective member of a group in order to win them over. While this might seem benign on the surface, this affection is often fabricated as a mere means of manipulation and can be particularly effective on vulnerable individuals with low self-esteem.

In multi-level marketing, love bombing is a tried and tested technique of “hunbots“; people on social media who blindly use terms like “hun”, — commonly spelt with multiple “n”s — “bae” and “babe” to create a false sense of friendliness. This is maintained only so long as is profitable say Red, “They help each other out, and the illusion of support and friendship is strong. Until they start to have any issues with the group, of course, in which case they are shunned, criticised and cast out.”

Targets

It is estimated around 75% of all individuals involved in multi-level schemes are women and the co-opting of female empowerment is used alongside love bombing to target women. Elle started blogging about multi-level marketing scams after she was recruited by a friend, Jade. Elle was a mature student struggling with burgeoning ME/Fibromyalgia and was trying to fit work in around her studies and health issues. Elle explains: “Jade was being a textbook MLMer, living the dream via social media, portraying a fabulous lifestyle and successful ‘business’ venture in Younique [another MLM scheme] makeup. Obviously, I saw her posts discussing how easy it was to make a living and fit around her busy lifestyle as a full-time mum, so I figured I could apply the same logic to my current situation.

Instagram is the perfect hunting ground for Nu Skin recruiters

“I think a lot of MLM companies are owned by rich American men who hold the traditional views that women belong at home raising babies and therefore MLM is the ‘perfect’ way to give them a sense of purpose, and feel like they are busy and important running a ‘business’ just like their husbands do.”

Red agrees these companies target anyone who is vulnerable and not able to easily find work — including students, young mothers and stay at home mums — all on the promise of building a “sisterhood” and the opportunity for them to “be their own #girlboss” too. The use of a hashtag isn’t incidental either. Recent statistics show that 68% of all Instagram users are female, with over a third of all women who use the internet having an Instagram account. Further, 68% of Instagram users between 18-29 said that they were more likely to buy an item if they had seen it on the site first, making Instagram the perfect hunting ground for Nu Skin recruiters.

 

Sarah*, an art student, was contacted out of the blue by a distributor. At first, she simply followed Sarah on Instagram, then she contacted her directly to tell Sarah that she liked the “theme and aesthetic” of her Instagram. At first Sarah was offered the opportunity to make around £100 a month just promoting Nu Skin items — but of course, she would have to buy a product kit worth £100 first — and that she could “then earn the higher incomes from introducing others to this opportunity”. All of this would be doable alongside studying, in fact, it was designed to be that way, counter to Taylor’s research apparently.

Sarah didn’t join Nu Skin but did share her Instagram messages. They all promise easy money, flexible hours and admit that to start you would have to buy-in, the hallmarks of a pyramid scheme. The messages also revealed that Nu Skin likes anonymity in its marketing. Sarah was advised to make posts about Nu Skin products without revealing their price or that they were a part of the Nu Skin line. The distributor gave the reason that this is to get others to directly message you so you can more effectively pitch to them.

This makes it difficult to gauge how much online distributor activity is going on. As of publication, there are more than two million #nuskin posts on Instagram, and on Facebook, there are hundreds of individual groups run by individuals in the distribution chain. But this could represent only a fraction of groups that are selling and recruiting, as Nu Skin’s own social media guidelines state that distributors shouldn’t use brand or company names in their posts or groups.

While it’s possible that Nu Skin is the only company in the world that benefits from advertising that doesn’t mention the company or it’s product lines, this anonymity also allows Nu Skin to distance itself from distributors who act in a way that might bring the company into more disrepute. It also counters any bad press Nu Skin might accrue by hiding under the guise of a friendly local cosmetics dealer, and stops potential new distributors from seeing just how saturated the distribution chain is and how likely it will be to fail.

Damage

And failure isn’t just a matter of money lost. The Anti-MLM Coalition regularly post articles covering the knock-on effects which can be devastating. Red described the regularity with which they see “bankruptcy, marriage and relationship breakdowns, loss of friends, alienation from family, loss of homes etc, and mental health issues” are seen in the more extreme cases.

“We’ve seen students abandon university studies to pursue the ‘MLM dream’. People abandon necessary medical treatments on the basis of MLM distributor advice about the use of essential oils and other products. People throwing away professional careers, resigning from actual jobs.”

Yes, that was a thing, charging to shake the hand of the person stealing your money

Mary*, a health care professional, shares the story of her grandmother, Ruth. After her grandfather passed away she noticed Ruth was throwing the occasional sales party, events where individuals can sell their wares. Mary assumed that her grandmother, who was financially stable, was just getting out of the house after her husband’s death.

But soon, Ruth began trying to get Mary to network with her new and changing network of friends — “Imagine the reach you have at work and beyond”, “don’t you want to help others past basic medical care”, “what if you change their life?”. One such individual was Stephanie, the person above Ruth in the distribution chain or upline.

This carried on, innocently enough in Mary’s eyes, with Ruth paying to attend conferences, and meet and greets — “Yes, that was a thing, charging to shake the hand of the person stealing your money” — but over time Ruth began to ostracise members of her family and started to borrow more and more money.

“One day I happened to be home when I received a package containing a start-up kit and all the media training one would need to be a millionaire by nightfall.” Confused, she called Ruth who explained what she was taking advantage of introductory offers. “She didn’t want to pay full price so she sent it to my address instead. This, in hindsight, is the moment my family should have communicated, we would have saved so much time and heartache.”

At this point, Mary found out that Ruth was in $10,000 debt and had been signing up friends and family, without their knowledge, as part of her distribution network in order to maintain her level and qualify for her commision.

“When we contacted Stephanie we all heard the same spiel: ‘We encourage our consultants to sign members of family up so that they may see how successful they are. We encourage they rent or make room for inventory so they make help downline and pop up sells flourish.’”

As part of the recruitment process, Mary witnessed recruiters tell potential new distributors to cut family members and friends out if they refuse to buy or sell. “We are all just lying naysayers keeping them from a dream.”

In the end, Ruth had to rejoin the workforce at the age of 75 to try and pay off her debts while Mary and her aunt took on over $20,000 in debt. Mary’s mother — Ruth’s daughter — had to take out a second mortgage and cash out her pension early to help support her mum.

Nu Skin did not comment on the possibility of people ending up thousands of pounds in debt after becoming distributors, nor did the company respond to any of the other allegations in this article.

Honesty

The phrase “you can’t con an honest man” comes from the idea that all cons ask their mark to participate in something slightly under-handed — something an honest man wouldn’t do — like illegal gambling, shuffling money around for investors whose “hands are tied” or paying to stop people seeing your search history. Legally, Nu Skin’s distribution structure doesn’t break any laws, it’s sold on the grounds of being honest and above board, but if it looks like a pyramid scheme and sounds like a pyramid scheme, it’s probably a Nu Skin scheme.

MLMs are not sales companies or income opportunities any more than mice traps are devices for feeding mice cheese

It’s this surface legitimacy that is the problem. Honest people with the best of intentions and hopes can end up in serious problems and even perpetuate the problem without benefitting from it. Those people can not be held responsible; not only because of their naivety but because of the backlash they could face from the believers. It’s the crooked, immoral business plans of multi-level marketing and the indifference of the marketplace and lawmakers that allow it to continue.

These systems are built to take in money from new recruits, keep them hooked for as long as possible, and when the mark is out of cash, place the failure at their feet for not networking or investing enough. It’s a ploy employed by a number of cons to trick the mark into thinking that the game is winnable. “I said dog six in the 4.50 race, not the 4.15 race.” “If the Holy Spirit didn’t cure you it’s because you didn’t donate enough.” You can’t win. The game is rigged in Nu Skin’s favour to the tune of $2.25bn.

It’s not just the distribution structure that is built in Nu Skin’s favour, according to Fitzpatrick: “All language used to define MLM that is taken from business — such as distribution network and sales — are part of the disguise. And disguise is the means for ensnaring people into the financial trap.

“MLMs are not sales companies or income opportunities any more than mice traps are devices for feeding mice cheese. For this reason, writing about MLM, without depicting it as what they pretend to be, is very difficult.”

And he’s right. The trappings of business — the complication of terms and language, discussion of commission and profits, the fact wealth moves to the top of all businesses that work (though usually that wealth, however unevenly, is spread among 100% rather than 1 % of employees) — are all there and you can’t outright say Nu Skin is an illegal pyramid scheme. But what we can say is that it has been called deceptive, dangerous, manipulative and exploitative. According to the people who have lost money, any other description would be a bare-faced lie.

*Names changed

9th December 2018