Table of Contents
Introduction
In October 2019, the Multi-Level Marketing (MLM) firm AdvoCare International, which offers nutritional supplements, weight-loss products, and energy drinks, was ordered shut down by the Federal Trade Commission (FTC). The Federal Trade Commission (FTC) came to the conclusion that AdvoCare was running as a pyramid scheme, which is against the law in the United States.
Because of this violation, the court ordered the corporation to pay a fine of $150 million and to suspend all activities. This article will analyze the pyramid scam that was AdvoCare, how it was brought down by the Federal Trade Commission, and what the case means for the multi-level marketing business.
What is meant by the term “pyramid scheme”?
A pyramid scheme is a specific kind of con in which potential players are asked to make a financial investment in order to join, with the assurance that they would make a profit if they bring in other people to participate in the plan.
The plan is organized in the form of a pyramid, with those at the top getting the most money and those at the bottom, who have difficulty recruiting new members, receiving very little or nothing at all. Instead of relying on the purchase of goods or services for revenue, the scheme must continually bring in new people to participate in order to be profitable. In most countries, including the United States, it is against the law to participate in a pyramid scheme.
The business strategy used by AdvoCare
In 1993, AdvoCare was established as a distributor of various items related to health and wellbeing. The items were sold by the firm via a network of distributors who also ended users of the company’s services. Distributors have the potential to generate income in two ways: by selling items to their consumers and by convincing other people to become distributors under their brand. The firm said that distributors could generate a sizeable revenue by recruiting a big number of other distributors to work under them in the distribution chain.
Distributors of AdvoCare received commissions not only on their own sales but also on the sales of other distributors that they recruited since the company’s compensation plan was based on a multi-level marketing (MLM) model. This resulted in the formation of an organization in the shape of a pyramid, with a few distributors at the very top making the bulk of the money, while the vast majority of distributors at the very bottom find it difficult to make any money at all.
The probe conducted by the FTC
In 2019, the Federal Trade Commission opened an inquiry into the business practices of AdvoCare. According to the findings of the inquiry, AdvoCare was running a pyramid scheme, with the majority of the company’s income coming from the recruiting of new distributors rather than the sale of actual items.
The Federal Trade Commission concluded that AdvoCare’s incentive structure incentivized distributors to spend more on recruiting new customers than they did on actually selling AdvoCare’s goods. Incentives were also included in the strategy to encourage distributors to make significant purchases of goods for their own use rather than selling them directly to end users.
The Federal Trade Commission came to the conclusion that AdvoCare made deceptive and fraudulent promises regarding the prospective earnings of its distributors. The company claimed that distributors could earn a substantial income by building a large team of distributors beneath them, but in reality, very few distributors made any money at all.
The company claimed that distributors could earn a substantial income by building a large team of distributors beneath them. According to the findings of the FTC, fewer than one percent of AdvoCare distributors made more money than they spent on fees and other associated costs, while the vast majority of distributors actually lost money.
AdvoCare’s answer
AdvoCare has indicated that it would modify both its business strategy and its pay plan as a result of the inquiry conducted by the FTC. The corporation put an end to the recruitment of new distributors and initiated a program to reimburse consumers who had suffered financial losses as distributors. In addition, the FTC was to get a fine of $150 million from AdvoCare, which the company agreed to pay.
The repercussions for the multi-level marketing sector
The case of AdvoCare has important repercussions for the multi-level marketing business. It is the most significant lawsuit brought by the FTC against a multi-level marketing organization to date, and it sends the message loud and clear that pyramid schemes will not be allowed. Instead of basing their compensation plans on the recruitment of new members, MLM organizations will need to guarantee that their reward plans are based on the sale of the items or services they provide.
The case also underlines the need for customers to exercise caution if they are contemplating becoming a member of a multi-level marketing (MLM) firm. While there are some real multi-level marketing organizations out there, the bulk of MLM businesses are actually pyramid scams disguised as multi-level marketing opportunities. Before making an investment of time or money, consumers should do extensive research on any multi-level marketing firm.
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