I had a parking-lot-story experience yesterday. I was listening to a fascinating story and thinking of you when I parked my car at the grocery store before the story ended. I sat in the grocery store parking lot listening through the end of the story about mistakes made by a well-known direct selling company that thousands of former distributors call a “scam” and an “illegal pyramid scheme.”
Read these 2 articles and see how many business mistakes you can find!
Here’s the link to the public radio story, “Some Women Who Sell LuLaRoe Leggings Allege The Company Was A Pyramid Scheme” (May 9, 2018)
And here’s the link to the original article from Bloomberg, “Thousands of Women Say LoLaRoe’s Legging Empire Is a Scam” (April 27, 2018)
I won’t address all of the mistakes identified in the articles, but I do want to point out 5 of the most serious. The Bloomberg article identifies a bucket load of mistakes that you won’t make!
- Growing too quickly: This company went from start-up to 150K consultants and $2.3 BILLION in annual sales in just 5 years. Do you have any idea what a $2.3 billion company needs to support all customer service, shipping and fulfillment, all operations, accounting, etc.? Without an adequate infrastructure, their meteoric growth crushed the company, yet they continued to enroll new consultants. Had they slowed or stopped the enrollments when they first became aware of their unpreparedness, they may have stabilized and reinforced the infrastructure before getting crushed.
- Focusing on unrealistic income expectations: Companies that promise big money with part-time effort are destined to fail. Yes, people can make big money in most direct sales companies, but big earnings require big effort and time. I was a distributor in one of the fastest-growing MLM companies in history. I was on stage and traveled/partied with distributors making $80K to $120 per MONTH! I suspected that the company was an illegal pyramid scheme, and sure enough, when the feds shut it down and the president left the country with $250 million, the people we enrolled with the lure of big $$ felt betrayed – both by the company and by those of us who sold the big-bucks-dreams. By the way, these big money earners worked VERY hard and they fed their earnings right back into building their downlines.
- Front-loading: Front loading is the practice of requiring or forcefully encouraging the purchase of large amounts of inventory to resell. Distributors spent on average $7K to join and purchase their initial inventory!
- Paying commissions on mandatory inventory purchases: This practice provides the cash flow to fund the big payouts. When the company changed its comp plan to comply with the law, money for commissions disappeared, as did the majority of their volunteer sales force.
- Failure to follow the advice of their attorneys and other industry experts: Any experienced professional service provider in the direct sales industry would have pointed out to the owners the flaws in their program! We’ve seen this happen far too many times, even with our own clients. While we don’t work with companies that want to play money games instead of selling real products to real people, we often hear “I wish I had followed your advice” from those clients who insist on doing things their way.
The article didn’t specifically address the root cause of all of these serious mistakes. I believe that the owners and executives had the best of intentions, but they were way over their heads. I doubt that they had ever managed a company 1/10th the size.
In my opinion, the root cause is their failure to follow (or to seek and follow) advice from industry experts.
A founding owner may be able to get her vision to market, and maybe up to $1 million, or even $5 million in annual sales, but to really grow the company and scale to support that growth, it’s time to bring in an experienced executive team.
I’m positive that the owners and executives of LuLaRoe had input from attorneys and other industry experts. For whatever reasons, their failure to act on the advice of experts may have lost everything for the owners, the distributors, and everyone else supported by what could have been a wildly successful company.