What Is a Pyramid Scheme?
A pyramid scheme focuses primarily on recruiting other individuals with the promise of quick, substantial profits and little effort supposedly needed to do so, the Better Business Bureau explains. Those that do not involve selling any products but only recruiting more investors would be similar to a Ponzi scheme.
Pyramid schemes that involve products encourage distributors to recruit sellers under them who pay a certain amount for a start-up kit or initial package. The recruiter will then retain a percentage of those sales along with a percentage of products sold. However, they are encouraged, usually by those who recruited them, to grow their network, often referred to as “downlines,” in order to earn even more money. Thus, your profit is primarily dependent upon how many people you can add on to the scheme rather than the sales of products.
This may sound comparable to a multi-level marketing (MLM) company, which requires you to buy in for a start-up kit or initial items but provides no guarantees. But, the real difference is pyramid schemes are illegal. So, is LuLaRoe a pyramid scheme or an MLM?
Is LuLaRoe a Pyramid Scheme?
LuLaRoe sells women’s clothing, such as t-shirts, dresses, skirts, cover-ups, and more. But, their true bread and butter that made them popular are their leggings, which typically come in unique patterns and colors. Their slogan is “where fashion meets comfort,” as their items are also known for being comfortable yet fashionable.
Women are brought on as sellers to sell these items from the comfort of their own home. In fact, the company was started with the stay-at-home mom in mind. Another factor about the company is that all items are sold strictly through direct sales and not through any brick-and-mortars. When individuals sign up to sell LLR clothing, they must pay in roughly $5,000 for a starter kit, which gives them their first set of inventory as well as a coach or “upline” to help them through the process. Those who have downlines do get extra cash on top of commission from selling clothes.
Many women see much success from selling LuLaRoe clothing, but many still question its validity. LuLaRoe describes itself as an MLM, but several pyramid schemes disguise themselves as MLM’s or direct sales companies too. So, let’s take a look at what characteristics to look out for in pyramid schemes based on information provided by the Federal Trade Commission and see how LuLaRoe compares:
- Pyramid schemes issue commissions based on the number of people you recruit, not on product sales to consumers. LuLaRoe distributors do earn money from clothes sold to customers, but they also receive bonus checks and commission for the number of people on their team or downline. You continue to move on to the next level with the more people that you recruit under you.
- The FTC mentions that pyramid schemes require you to purchase a lot of inventory. In LLR, you do need to purchase inventory regularly in order to continue to make and increase sales. Your initial investment does also include a starting inventory. Although you do not necessarily have to pay more than $5,000 to get started, it may be advised to do so in order to be more successful. You also only have control on the styles of clothes you want to carry but not on the colors or patterns.
- In order to stay on good terms with a company that is a pyramid scheme, you may feel or be obligated to buy items that you do not necessarily need. As a LuLaRoe fashion consultant, you may need to buy extra items like hangers and a nice camera to help with your marketing images, but this is not required to stay in good standing with the company. They do actually also provide you with many marketing tools you will need to get started like images and tips on using social media to grow.
LuLaRoe likely inhabits the gray area between being a pyramid scheme and an MLM. Making money with LLR is not impossible, but you do make more when you recruit people. Because much of your profit can also come from directly selling products to consumers, the clothing company may be a valid opportunity. Just know that with any direct sales position, you are directly responsible for your own success.
Before signing up for any MLM “opportunity,” make sure to ask a lot of questions to ensure you are not actually ending up in a pyramid scheme. Determine the claimed primary source of making a profit, see if the products they offer sell well and what the profit margin is, and map out whether or not recruiting is the only way to make money (regardless of what they say).
If you are a LuLaRoe fashion consultant, or you have a strong viewpoint about this business model, please leave us a comment below or share this article on social media.
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