On Guests 1: Multilevels, Markets, and You

Not surprisingly, the first guest blogger on my site is the smart to my stupid, my lovely wife Liz. Liz is a Research Scientist for Washington State University, and is completing her dissertation in Disability Health Studies at UNC’s School of Public Health. She’s a genuine expert on statistics, policy, and the power of numbers in human lives.

By night, she fights crime.

Somehow, this combination brought her to Reddit. A poster was making arguments in favor of LuLaRoe, a multilevel marketing company (translation: pyramid scheme) that lets you buy their clothes so you can… sell them? There’s a $5,500 “investment” required up front, and you have to order more from them every month. The person promoting the company was advertising it as a ‘work from home’ opportunity for moms– aka ladies with no free time. Liz used the numbers provided to put together a best-case scenario for the unfortunate souls that fall into LuLaRoe’s clutches.

At least this pyramid monster is straightforward about his intentions.

The original poster did not reply back.

With her permission, I’ve excerpted her post below. While these specific numbers do not apply to every huckster, shyster, and snake-oil salesman in corporate form, feel free to apply the lesson herein more broadly.

First, here are her numbers. I have trouble trusting anyone who doesn’t want to share their data, so I don’t know why I’d ask my readers to.

Here’s her post. Enjoy.

That chart from LuLaRoe is bonkers and makes no sense as a table. I am procrastinating and did some math. Here are my assumptions, I tried to err on the side of generosity:
The LuLaRoe chart suggests that you can charge about $27.72 per piece (Gross Sales Per Month, divided by four, then divided by pieces per week as per their chart). So I rounded up to $28.

An initial cost of $5500 and 381 pieces works out to about $14.44 cost to the seller per piece, I rounded down to $14.

I honestly have no idea how to estimate how long you would deal with each piece from start to finish (ordering, receiving, storing, selling, delivering, travel, taxes, social media, and bookkeeping) but I estimated it at thirty minutes a piece (which I think is pretty low? I thought five hours a week was probably the lowest you could do for a home business).

Taxes on self-employment income run about 35%.

[...]I did the math at selling 10 pieces per week, 20, 30, etc. up to 100. If you sold ten pieces a week, you would have replaced the initial $5500 in twenty weeks (five months). (In other words, your gross income would cross the $5500 threshold at that point and not sooner.) If you sold 100 pieces per week, you would have replaced the initial $5500 in only two weeks.

(I also think the whole "pay yourself back" thing is kind of a distraction because it doesn't really account for the time costs. Assuming my assumptions are okay, you'd work for free for 98 hours before hitting the break even point, regardless of whether you got there in two weeks at 100 pieces a week or five months at 10 pieces a week.)

After the break even point, assuming the same prices, costs, and times, you could do from $136 net revenue per week (10 pieces) up to $1356 net revenue per week (100 pieces). That works out to about $27 an hour, pre-tax.

So here are some scenarios for a year, ranked from least to most profitable.

Get started, immediately quit. You are in the hole $5500, LuLaRoe is up $5500 (minus their manufacturing costs, etc.).

Get started, work until the break-even point, quit. You have neither earned nor lost money, LuLaRoe is up $5500, and you are out 98 hours of work.

Get started January 1st, sell 50 pieces a week and hit the break even point within a month. Earn $72,800 in the year (2600 pieces at $28 a pop) and pay 35% of it in taxes (leaving $47,320). Spend $29,120 on inventory (2600 pieces at $14 a pop). Net revenue is $8,736 for the year, working out to $8.40 an hour for 52 weeks of 25 hours a week.

Get started January 1st, sell 100 pieces a week and hit the break even point within two weeks. Continue to work 50 hours a week, 52 weeks a year, selling 100 pieces a week (debatable as to how doable this is while also providing childcare). Earn $145,600 in income (5200 pieces at $28 a pop) and pay 35% of it in taxes (leaving $94,640). Spend $72,800 on inventory (5200 pieces at $14 a pop). Net revenue is $21,840 for the year, working out to $8.40 an hour for 52 weeks of 50 hours a week.

That is a lot of risk to take on and a lot of hours to be in the bottom quartile of earnings for the U.S. with no health insurance. [...] I would proceed with caution.