LuLaRoe leggings have become popular, and therefore the multi-level marketing (MLM) “business” of LuLaRoe has taken off. I’ve said over and over that multi-level marketing is not a business because more than 99% of participants lose money. But I wanted to take a look at this company specifically, because it’s been getting so much press.
Business Insider promoted the idea that LuLaRoe is making women rich. While there ARE a handful of women who are making a ton of money from the company, only an incredibly tiny fraction of participants can make this type of money. Why? Simple math. If you’re making a 3% to 5% commission on your downline (as you’ll see below), it takes $700,000 of wholesale purchases by your downline to earn $35,000 in a month. (I realize that various bonuses change the math, but I’m using these numbers to simplify things.)
Imagine how many people need to be in the downline and how much they each need to buy to generate this volume. Simple math tells you that everyone below the woman earning $35,000 can’t build a pyramid of this size. There simply aren’t enough people on the planet, and there are only so many customers available for each distributor.
Let’s talk about some of the specifics downfalls to this fake business.
Initial inventory purchases are where multi-level marketing companies make the bulk of their money. The first purchase is almost always the most a recruit will buy over the span of her “career” with the MLM. So the bigger the recruiter can get her to spend on that first purchase, the better for the company and the recruiter.
In LuLaRoe, you MUST buy an inventory package. You can’t take orders from customers and then just go to the company and get what you need. You have to get a package, and you must sell from that. And guess what? You don’t get to choose your inventory. You can make some selections regarding the types of products, but you don’t get to choose the colors or patterns. This means that you inevitably will end up with products you can’t sell because they’re the wrong style, size, or pattern.
The LuLaRoe inventory packages look like this, according to my research:
Package #1 – $4,812 for 336 pieces
Package #2 – $5,365 for 365 piece.
Package #3 – $6,784 for 463 pieces
It is “recommended” that you have about 700 to 800 pieces of inventory on hand at any give time. That’s about $15,000 to $20,000 wholesale cost in inventory. When re-ordering, you must order 33 pieces at a time. That’s about $500-$800 that you must spend each time you order. You can dictate the size and style of the pieces you order, but you can’t specify the print. You get what you get.
The bottom line is that it’s REALLY expensive to get started with LuLaRoe. And then there’s the LuLaRoe inventory problem. Every time you order inventory, you must plan to have items left that you can’t sell. Your unsellable items build up and represent money you will never recover. I suspect many women underestimate the amount of inventory that will go unsold and how much of your “profits” this will wipe out.
Getting Paid on Your Downline
So maybe the money is in recruiting people into LuLaRoe? Well, yes. All MLM companies are endless chain recruiting schemes. The core of the business is continuously recruiting new people. MLM has an extremely high dropout rate because almost no one makes money (and therefore they drop out when they realize that). In order to sustain the company, the remaining participants must keep recruiting in new blood. As you can see from this income disclosure statement, over 78% of consultants receive no commissions/ bonuses from their downline.
As with all MLM, the LuLaRoe scheme is pay to play. You can get paid commissions on your downline, but only if you purchase products too. As you see below, you are “eligible” to earn 5% on your downline’s wholesale purchase (so on a $5,000 initial order, that’s $250), but only if you purchase at least 175 clothing pieces in the month the bonus is calculated. If the average wholesale price of a piece of clothing is $20, that means you have to spend about $3,500 in a month in order to get your $250.
As you can see from this LuLaRoe income disclosure statement, as a LuLaRoe consultant you can expect to make about $85 (on average) per year in commissions. That’s for the whole year! And in order to receive the amount you qualify for in a given month, you have to buy 175 pieces of clothing in that month. So again, you’ve got to spend about $3,500 in a month on clothing to be eligible to receive that month’s portion of your $85 annual commissions.
Once you have personally recruited at least 3 people and have ten people total below you, you’re a “trainer” and you can get paid additional commissions. You get the regular 5% on people you have personally recruited, and then can get an additional 3% for people your recruits have recruited. BUT… you can only get these commissions if the downline has purchased 1,750 pieces in the month (about $35,000 total wholesale cost if the average piece is $20) and you have personally purchased 250 pieces (about $5,000 total wholesale cost if the average piece is $20, but the total could be reduced a bit if certain purchases have been made by the downline). Basically, you *could* get commissions of about $1,000 to $1,500 on your downline, but only if the group has spent huge (about $35,000 spent by the group and $5,000 spent by you).
MLM advocates will tell you that you can build a business by helping others to get started. Because it is so difficult to build a profitable and sustainable retail base in MLM, it would seem that you MUST recruit in order develop a strong income. Yet these numbers show how (nearly) impossible it is to build a real income from recruiting into LuLaRoe, since the purchases the downline must make are so astronomical.
Do You Own a Business?
In multi-level marketing, you own nothing. You are subject to a contract with the company that creates a whole bunch of rules for you, but gives the company the ability to essentially fire you at any time. You don’t own your customers. You don’t own the right to get clothing from LuLaRoe. All you have is the temporary ability to sell the products, but that could go away at any time.
LuLaRoe in the Real World
The biggest argument in favor of multi-level marketing is that you can sell the product and turn a profit. That’s a business! Except that’s only a theory. Yes, you could buy a LuLaRoe product for $10 and sell it for $20. You’ve doubled your money! But the reality is different. It is nearly impossible to turn a profit retailing products in MLMs. And that’s the reason 99% of people lose money in MLM.
Here is a real world example of how things work in LuLaRoe. Kristi Trimmer is an established travel blogger with a pretty healthy following. She’s got a much bigger audience than the average person. (So what this means is that she has a lot more people to market LuLaRoe to than the average woman does.) Kristi signed on with LuLaRoe in October and spent $7,000 on inventory for her “business.” She recently recapped her first month with LuLaRoe on her blog.
Kristi reported selling 154 pieces of clothing for $4,716… which became $3,847 after discounts and incentives. Her profit on those sales was $938, as she showed below.
Sounds pretty good for a first month, you say? Remember this… Kristi put $7,000 into inventory and about $500 into other costs. That’s a lot of money invested for less than $1,000 in profits for a month. And Kristi has stated that it would be better to have much more inventory, so she will likely be putting all that money back into purchasing more clothing.
But the bigger problem is the nature of MLM itself. Kristi made these sales because she has a large following. Most people don’t have such an online presence, and so they won’t be able to replicate this. And even with a large following, Kristi only made $938. MLM participants find that they make a number of sales in the beginning, and then it trails off. Simply put, your friends and family make pity purchases to support you in the beginning. Most people will purchase once or twice and that’s it. It is very difficult (and for most people, impossible) to continue this level of activity or increase it.
Further, wildly-patterned leggings are a fad that will fade quickly. Even if they remain popular, you can only have so many leggings. Therefore, a customer is only going to buy a certain amount from you. And it’s not like a retail store where you have constant foot traffic to generate new customers. It is much more difficult to cultivate new customers in MLM.
Even if Kristi’s activity is sustainable, $1,000 net income per month isn’t going to support her. Especially not after she pays income taxes and self employment taxes. Maybe she could double her activity? Net income of $2,000 per month, less income taxes and self employment taxes won’t support her either.
Possibly a better analysis than the net profit shown above would be the cash flow. How much did Kristi spend, and is her cash positive or negative? Here’s how I estimate her cash outlay:
Of course, Kristi didn’t update her blog to disclose her results from November or December. I suspect she didn’t do any better. While she may have sold more, she said she was planning on buying more inventory, so any cash she brought in would surely be spent (and more!) on additional products. She will probably find herself in a cycle of spending more than she’s making month after month, as is typically the case in mutli-level marketing companies.
The Bottom Line on LuLaRoe
LuLaRoe is no different than any other MLM. It’s a grand scheme made to look like a real business. They use the concept of retailing to make it appear to be a legitimate business. But in reality, you’re going to spend thousands of dollars on inventory, profit very little from actual sales, and almost certainly lose money on building a downline (because you have to purchase so much in order to receive a relatively tiny commission check). And this is why I call multi-level marketing a scam.