Health product company AdvoCare siphoned profits from a 100k+ sales force, say Feds
The Consumer Is the Salesperson Is the Product
There is a fine line between legal multilevel marketing and illegal pyramid schemes, and a key issue is reliance on recruiting efforts for profits rather than product sales. Unable or unwilling to sell goods in a limited market and then reengage that market with new or innovative products once initial growth slows, multilevel marketers too often try to create a market out of their own sales force. Depending on how long their practices go unchallenged, the folks at the top of such a pyramid scheme can ride wave after wave of profit through clever misdirection.
The main asset of a multilevel marketing company, then, is a sort of mercurial charisma: It takes a certain amount of salesmanship to get lower-level sales force members in the door, but that persuasiveness has to adapt as individual salespeople move up the pyramid and get a sense for how the whole enterprise actually hangs together. They must be sold on selling other salespeople, just as they were sold themselves.
Never Break the Chain
Pie-in-the-sky promises of financial independence and personal freedom are at the heart of many multilevel marketing company pitches. It was just such a pitch that landed AdvoCare, a multilevel marketing company that hawked nutritional, weight-management and sports-performance products, in hot water with the Federal Trade Commission (FTC, or the “Commission”).
According to the FTC’s October 2019 complaint, which went after AdvoCare, its former leadership and its lead promoters, the company allegedly promised “the average person a financial solution that will enable them to earn unlimited income, attain financial freedom, and eliminate the constraint of traditional employment.” That, although used for internal recruitment, is an advertising claim that must be true and substantiated.
The workhorses of the AdvoCare business model were salespeople known as distributors, who paid in $59 to have the right to sell products and get a cut from the distributors they, in turn, recruited. A second tier (advisors) received more benefits, including higher cuts from their recruits; but, the Commission alleges, advisors could expect to lay out thousands of dollars in AdvoCare purchases to reach advisor status.
According to the Commission, a “recent AdvoCare CEO [observed] that he was ‘not concerned about retailing the product. ... If you package dirt right ... [d]istributors will buy it.’”
The dirt in question was sold through a mixture of wild promises of financial success pitched to more than a hundred thousand distributors, for whom the promises never really paid off.
This didn’t sit well with the FTC, which accused the defendants of running an illegal pyramid scheme, misrepresenting income and furnishing the means for the deception. As is so often the case, the suit was settled the same day it was filed, with the company and its former CEO agreeing to pay $150 million and getting slapped with a lifetime ban on multilevel marketing efforts. Two of the promoters settled separately for a similar ban and a $4 million fine.