Consumer Protection / Journal of Direct Selling Research

Consumer Protection Against Pyramid Schemes

By JDSR Staff

Concern about pyramid schemes is rightly focused on the victimization of consumers. It is also important to recognize that pyramid schemes damage legitimate businesses, which further harms consumers.

Pyramid fraud works like the classic chain letter scheme where an individual is asked to send money to the sender of a letter, and then forwards the letter to others asking for money from them. The scheme eventually collapses when the last recipient of the letter cannot find new recipients willing to send him or her their money.

So, too, with pyramid schemes, are financial transactions not based on the transfer of goods and services of commensurate value, but rather mostly or exclusively on recruiting members into the scheme. Not only do they facilitate the transfer of wealth from one person to another without the consumption of products, and ultimately collapse when no other willing recruits can be found, they create nothing of social value in the process. Worse, they can injure retail enterprises that do not operate in traditional brick-and-mortar stores by undermining consumer confidence in their legitimacy.

The retail channel most vulnerable to consumer doubts sown by pyramid frauds is direct selling. Direct selling is a decentralized form of retail selling in which companies engage a salesforce of independent contractors to sell their good and services to customers they locate, usually in person and sometimes in the customer’s home.

Part of direct selling’s appeal to the parent company are the lower overhead costs of the operation, bypassing, as it does, the costs of shelf space and advertising to compete with established brands, and the expense of employing a salesforce rather than contracting with independent salespeople, who decide for themselves the extent to which they are willing to be involved in the enterprise.

That flexibility is, along with the low start-up costs involved, the main appeal of the enterprise to most independent direct sellers, who are, in effect, running their own small businesses according to a business plan and schedule they designed in accordance with their financial, social and family needs. Most direct sellers work part time to supplement their families’ incomes modestly.

There are direct sellers who aspire to build bigger businesses by recruiting a network of salespeople and share a percentage of their sales, what’s known as multilevel marketing. Lastly, there are individuals who are involved in direct selling solely or mostly because they enjoy the product and want to purchase it at a discounted price for themselves or their family and friends.

Internal consumption is a perfectly reasonable purpose for involvement in direct selling and constitutes a legitimate sale, no different in kind than a salesperson in a brick-and-mortar store who enjoys the products she sells and uses her employee discount to purchase them.

What distinguishes pyramid schemes from legitimate retail enterprises, including direct selling, is how compensation is earned. Compensation in pyramid fraud is mostly or exclusively earned by recruiting others to the scheme. Direct selling compensates distributors for sales of a good or service to ultimate users, who can be the distributors themselves as long as they are actually using the product. Direct selling companies allow unsold inventory to be returned to the parent company for a 90% or more refund.

Internal consumption is recognized as a valid retail sale in state and federal case law, particularly Federal Trade Commission v. BurnLounge (2014). It is exempted from proscribed activities in model anti-pyramid scheme laws in eighteen states, which were based on the recommendations of the Council of State Governments.

Editor’s note: Read full study by Dr. Chetan Sanghvi and his colleagues at NERA Economic Consulting: “An Economic Analysis of the Criteria Used to Distinguish Legitimate Direct Sellers from Pyramid Schemes,” an insightfully relevant study for policymakers today as they seek to protect consumers and legitimate businesses from bad actors masquerading as direct sellers.

Consumer Protection / Direct Selling in the US

Direct Selling Under Scrutiny: Separating Fact from Fiction

High-level academic task force rebuts myths and misinformation about direct selling channel.

By Dr. Patrick Brockett, Dr. Anne C. Coughlan, Dr. Linda Ferrell, Dr. O.C. Ferrell, Dr. Linda Golden, Dr. Charles Ingene, Dr. Lou Pelton, and Dr. Robert A. Peterson

Abstract and Executive Summary

Direct selling (DS) is simultaneously a business model, a channel of distribution, and an activity engaged in by its distributors. In this paper, we provide a framework for analyzing and discuss academic research on the DS distribution model.

We focus in particular on research that develops economics-based analytic models to examine business and legal issues. This focus is motivated by the fact that analytic models are sometimes used as part of the assessment of whether a DS firm operates a legitimate DS channel or an illegal pyramid scheme. These models potentially have a significant economic impact on, and affect the outcomes of legal cases against, the affected DS firms. They may also be cited in the business press and in academic circles, influencing opinions of the viability or legality of the DS business and distribution model. It is therefore particularly important that such research be carefully grounded in sound logical and analytic bases, and that it appropriately reflect whatever key facts about the firm (or about DS in general) are relevant to the model’s scope of analysis.

We first describe direct selling as an economic activity and business model. We contrast illegal pyramid schemes with legitimate DS firms and outline the key definition of an illegal pyramid scheme. This definition is distinguished from the many possible indicia of pyramid schemes that can result from pyramid scheme operation, but do not themselves prove the existence of a pyramid scheme.

We next define and discuss various logical and analytic errors that can lead to the misdiagnosis of a legitimate DS firm as an illegal pyramid scheme operator. While many such error types are possible, we focus on four that we find to be particularly important in evaluating the analytic literature on DS and pyramid schemes:

The “Begging the Question” fallacy, in which the research in effect presumes the existence of a pyramid scheme through its (implicit and/or explicit) assumptions, and as an unsurprising result, concludes the existence of a pyramid scheme;
A variant on the “Begging the Question” fallacy in which the research effectively models a pyramid scheme through its omission and/or misrepresentation of substantive facts on which the determination of legality versus illegality depends;
The “Fallacy of the Converse,” in which the converse of a true if-then logical statement is incorrectly asserted to be true on the grounds that the original if-then statement is true. For example, even if the statement {if a firm operates a pyramid scheme, then one can expect to see some or all of a set of resulting indicia at some point in time} is reasonably true, it is not automatically true that the converse statement {if one observes a set of pyramid scheme indicia at some point in time, then the firm must be operating a pyramid scheme} is also true; and
A special case on the “Fallacy of the Converse,” in which the research ignores standard policies and protections that characterize legitimate DS firms, and therefore starts with an inaccurate premise that these policies and protections do not exist.
All of these modeling errors are substantive. This means that correcting any of these errors overturns the model’s results. Such a model is thus not a reliable tool to assess whether a DS firm does, or does not, operate a pyramid scheme.

We apply this framework to the analysis of a recent working paper, “The Alchemy of a Pyramid: Transmutating Business Opportunity Into a Negative Sum Wealth Transfer” by Andrew Stivers, Douglas Smith, and Ginger Zhe Jin (“SSJ”). We find that this research begs the question, omits and/or misrepresents substantive DS firm facts, and commits a fallacy of the converse by omitting consideration of standard DS firm policies that mitigate a pyramid scheme analysis.

Specifically, SSJ “begs the question” of whether or not a DS firm operates an illegal pyramid scheme by explicitly assuming a pyramid scheme in its list of “stylized assumptions” – which duplicate the conditions for a pyramid scheme defined in the Koscot case. Thus, the authors cannot deliver on their research goal of answering the question “What makes an MLM firm a pyramid?”, because they have already assumed the pyramid scheme outcome from the beginning.

Further, SSJ commits another “begging the question” error in explicitly assuming that the firm in its model commits fraud by purposefully misrepresenting the business opportunity to its prospects and distributors. Because a pyramid scheme cannot persist through time without such fraud, the authors again essentially presume a pyramid scheme outcome.

These first two critiques fully invalidate the SSJ research, whose authors state that its goal is to answer the question: “What makes an MLM firm a pyramid?” One cannot achieve this research goal by assuming a pyramid scheme as the basis for a model that then produces the inevitable result that a pyramid scheme exists.

Nevertheless, other errors further weaken the SSJ analysis. Many substantive facts about DS firms – which are important to the resolution of the model’s claimed purpose – are omitted or misrepresented. Among them are:

Its omission of any income sources to a distributor other than bonus awarded for mere recruitment without regard to sales (such as retail markup income or the economic benefit of personal consumption at wholesale prices);
Its misrepresentation of the basis on which bonus/commission income is awarded by DS firms, by assuming they are only awarded for pure recruitment;
Its omission of products that have market value to consumers;
Its omission of consideration of distributor differences on substantive dimensions that matter for the research question at hand;
Its omission of active choices by distributors concerning what to sell, how hard to work, how to price products for retail sale, how much to invest in training, whether or not to seek to recruit other distributors, or how much to personally consume;
Its misrepresentation of the DS firm’s objective as the maximization of one-period profit, with no consideration of the legal implications of the fraud it implies; and
Its omission of consideration of standard consumer and distributor protections offered by legitimate DS firms.
We discuss other substantive and technical problems with the SSJ model in Appendix B.

The SSJ paper concludes with a set of recommendations to control pyramid scheme threats. Because of the shortcomings we find in the model and analysis, we find that any such recommendations similarly rest on shaky foundations and are unreliable as cures for the question at hand.

We use our framework to offer an analysis of a subset of other economics-based analytic modeling papers in the DS area in Appendix A. We emphasize that our goal is not to argue that all such analyses are flawed. Indeed, economics-based analytic models are productively used in many applications and should continue to be applied to analyze firms’ operations, participants’ decisions, profitability, and growth. We hope that assessment of these efforts will be aided by applying guidelines for reliable and applicable scientific inquiry into various aspects of the DS distribution model. Read full paper →

Direct Selling in the US / Journal of Direct Selling Research / Salesforce

Professional and Personal Benefits of a Direct Selling Experience

By Dr. Robert A. Peterson

Direct selling is simultaneously a channel of distribution and a business model that offers entrepreneurial opportunities for individuals to market and sell products and services, typically outside of a fixed retail establishment, through one-to-one selling, in-home product demonstrations, and/or online. As a distribution channel, direct selling is ubiquitous and, in 2016, touched the lives of an estimated 20.5 million Americans. Individuals are drawn to direct selling for a multitude of reasons beyond a desire to earn a living as a full-time direct seller or to earn extra money or make a special purchase as a part-time direct seller.

The research reported in this Executive Summary documents the impact of a direct selling experience on 14 business and professional skills as well as on 13 personal life skills. A substantial majority of the current direct sellers surveyed, more than three-fourths, agreed that they benefitted from their direct selling experience in terms of improved business and professional skills, and that skills gleaned from a direct selling experience transferred to their personal lives. Moreover, there were significant and positive relationships between self-perceived skill levels and self-perceptions of direct selling success and performance in a non-direct selling job. Findings regarding the impact of a direct selling experience on personal life skills in particular suggest that a direct selling experience can have a powerful influence beyond direct selling per se and, as such, can indirectly contribute to the betterment of society.

Four hundred ninety-five current direct sellers and 465 former direct sellers were surveyed for the present research. Findings from this research have several practical implications for recruiting, training, and retaining direct sellers. These findings and implications are briefly summarized below.

Reasons for Joining Direct Selling Company

Twelve (12) possible reasons why the direct sellers surveyed joined their current direct selling company were investigated.^[1] The most frequently stated reason for joining a direct selling company was “I believed that the products are of such value that I wanted to share them with my friends, neighbors, and the public.” Eighty-one percent of the survey participants stated that this was a reason they joined their current direct selling company. The least frequently cited reason for joining a direct selling company was “I wanted a full-time working career;” 35 percent of the direct sellers surveyed gave this as a reason for joining their direct selling company. In general, the reasons for joining a direct selling company can be categorized as “people/social,” “financial” (income/job), and desire for a specific “product.”

The median number of reasons survey participants gave for joining their current direct selling company was seven (7). Thus, on average survey participants stated that seven of the 12 studied reasons were in fact reasons why they joined their current direct selling company. There were no substantive differences across the current direct seller segments studied regarding the number of reasons given for joining a direct selling company.

However, of the current direct sellers surveyed regarding their reasons for joining a direct selling company:
Males were more likely than females to want a full-time direct selling job (54% versus 31%).
Eighty-one percent of the female direct sellers stated that they wanted to purchase their direct selling company’s product(s) at a discount for themselves and/or their family versus 61 percent of the male direct sellers.
Fifty-seven percent of the male direct sellers were interested in the recognition that they would receive for their [sales] efforts compared to 39 percent of the female direct sellers.
Seventy-two percent of the male direct sellers were interested in enhancing their personal development (i.e., becoming more confident, better business-minded) through direct selling, whereas 53 percent of the female direct sellers stated such an interest.
No differences were observed regarding reasons for joining a direct selling company between urban and rural direct sellers, or among direct sellers who had been with their direct selling company for various time periods.
Proportionally more millennial direct sellers (46%) than non-millennial direct sellers (28%) joined their current direct selling company because they wanted a full-time working career. Millennials also wanted to feel more at ease in front of other people relative to non-millennials (56% of the millennials so responded as compared to 32% of the non-millennial direct sellers).

In addition, current direct sellers differed markedly from former direct sellers with respect to the number of reasons and the specific reasons given for joining a direct selling company. Whereas 35 percent of the current direct sellers stated that they wanted a full-time direct selling job, only 16 percent of the former direct sellers stated that they wanted a full-time direct selling job. This suggests that direct selling may currently be perceived as more likely to be a career option than it was in the past. Moreover, given that the demographic profile of direct sellers may be approaching that of the United States adult population, the “pool” of potential direct sellers may be expanding.

Skill Improvements Due to Direct Selling Experience

The present research examined 14 business/professional and 13 personal life skills that might be improved or fostered by a direct selling experience.^[2] Survey participants were first asked whether they “strongly disagree,” “somewhat disagree,” “somewhat agree,” or “strongly agree” that their direct selling experience was beneficial in terms of improving or fostering each of the 14 business/professional skills. For example, they were asked whether they “strongly disagree,” “somewhat disagree,” “somewhat agree,” or “strongly agree” that “I improved my decision-making skills” (as a consequence of their direct selling experience).

Similarly, survey participants were asked whether they “strongly disagree,” “somewhat disagree,” “somewhat agree,” or “strongly agree” that they had been able to transfer each of 13 skills emanating from their direct selling experience to their personal lives. An example of these skills is “I enhanced my critical thinking ability.” Seven of the skills investigated were included in both the business/professional and personal skill sets studied.

On average, more than three-fourths of the current direct sellers surveyed somewhat or strongly agreed that both their business/professional skill levels improved and that their personal lives benefitted due to skills emanating from their direct selling experience. Consequently, in an absolute sense the current direct sellers surveyed believed that “lessons learned” through their direct selling experience were helpful in both their business/professional careers and their personal lives. Across the seven skills that were common to the business/professional and personal life skill sets, survey participants indicated that the skills they acquired from their direct selling experience were slightly more beneficial to their personal lives than to their business/professional careers.

Even so, despite the high absolute level of overall agreement that a direct selling experience improved or fostered skill levels, perceptual differences did occur between male and female direct sellers. With respect to business/professional skills that were believed to have been improved due to a direct selling experience, proportionally more male direct sellers than female direct sellers believed that their sales skills had improved (88% versus 77%) and that they undertook more [business-related] initiatives (87% versus 73%).

With respect to skills applicable to a direct seller’s personal life, self-perceptions of the eight skills listed below significantly differed between male and female direct sellers, with male direct sellers proportionally more likely than female direct sellers to believe that improvements in the eight skills studied occurred because of their direct selling experience:

Enhanced critical thinking ability (88% versus 74%)
Better at coping with and managing stress (85% versus 69%)
Better at problem solving (90% versus 76%)
Feel more at ease in front of an audience (84% versus 71%)
Better at time management (87% versus 77%)
Improved entrepreneurial skills (90% versus 78%)
Improved decision-making (87% versus 78%)
Better at managing finances (83% versus 73%)

Differences between male and female direct sellers with respect to their reasons for joining a direct selling company and the skill levels gained from a direct selling experience suggests a variety of managerial implications. Additional research is required to understand motivations underlying said differences as well as their implications. For example, direct selling companies might consider instituting, emphasizing, and/or communicating different recruiting, training, and retention programs for men and women.

There were no significant differences in self-perceived skills between urban and rural direct sellers or among survey participants with different lengths of time working with their current direct selling company. Similarly, there were generally no significant differences between millennials and non-millennials with respect to self-perceived business/professional skill levels resulting from their direct selling experience.

However, three self-perceived skills differed between millennials and non-millennials in the context of their personal lives. Proportionally more millennials than non-millennials agreed that their direct selling experience improved their decision-making skills (86% versus 78%), helped them improve their interpersonal relationships (87% versus 75%), and made them more able to cope with and manage stress in their personal lives (81% versus 70%). These differences suggest that consideration be given to creating different recruiting, training, and retention programs for millennials and non-millennials analogous to those for male and female direct sellers. Moreover, similar to the male and female direct seller differences observed, differences between millennials and non-millennials should be subjected to additional research.

In an absolute sense, a majority of all direct sellers studied, current as well as former, believed that both their business/professional and personal life skills were improved by their direct selling experience. From a relative perspective, though, current direct sellers believed that their direct selling experience improved all of the business/professional and personal life skills studied to a significantly greater degree than did former direct sellers. Moreover, self-perceived skill level differences between current direct sellers and former direct sellers were in general greater for personal life skills than for business/professional skills. For example, the largest difference between the two groups occurred for the self-perceived personal life skill “I am better at interpersonal relationships.” Seventy-nine percent of the current direct sellers somewhat or strongly agreed with this skill statement as compared with 52 percent of the former direct sellers who somewhat or strongly agreed with the statement. Such differences in perceptions may reflect better company training programs now than in the past, differences in the demographic makeup or motivations of the two groups, or a combination of differences in training programs and the demographic makeup or motivations of the two direct seller groups. Additional research is recommended.

Direct Selling Success

Survey participants were asked, “How successful do you consider yourself compared to other independent contractors in your direct selling company?” Based on a 7-category rating scale anchored by “much less successful” and “much more successful,” 45 percent of the survey participants who were current direct sellers rated themselves as successful (i.e., they responded “5,” “6,” or “7” on the scale). Using the same approach, only 25 percent of the former direct sellers considered themselves successful direct sellers. As before, this perceptual difference may be due to better company training programs now than in the past, differences between the two groups—including actual success—or both company training and direct seller characteristics. Indeed, to the extent that perceptions reflect reality, the self-perceived performance of former direct sellers may be a reason they left direct selling.

Responses to each of the 27 business/professional and personal life skill statements were significantly and positively related to responses to the self-perceived success scale (p<.001) for the current direct seller sample. Similarly, summary indices of business/professional and personal life skill responses respectively correlated significantly (p<.001) with self-perceived direct selling success. This means that survey participants who believed their direct selling experience improved their business/professional and personal life skills also believed they were more successful direct sellers than other direct sellers in their company. Again, if perceptions reflect reality, this implies that a direct selling company should target skill improvements during recruiting and training since doing so should benefit the company financially and its direct sellers both financially and personally.

Performance in Non-Direct Selling Jobs

Eighty percent of the survey participants who were current direct sellers stated that they also had a job other than direct selling. (This reinforces the conclusion that direct selling tends to be a part-time pursuit.) These survey participants (and former direct sellers surveyed) were asked whether they agreed or disagreed with the statement, “Because of my direct selling experience, I perform better in other, non-direct selling jobs,” using a 4-category rating scale ranging from “strongly disagree” to “strongly agree.” A substantial percentage of the survey participants who were current direct sellers and who held a non-direct selling job—84 percent—noted improved performance due to lessons learned through their direct selling experience. As might be expected, given differences in reasons for joining a direct selling company and self-perceived skill levels between current and former direct sellers, the percentage of current sellers (84%) believing their direct selling experience helped them perform better in a non-direct selling job was significantly larger than the corresponding percentage (66%) observed for former direct sellers. Likewise, proportionally more male direct sellers (90%) than female direct sellers (80%) believed their direct selling experience helped them perform better in a non-direct selling job.

Self-perceived performance in a non-direct selling job was significantly and positively correlated with self-perceptions of direct selling success. In addition, survey participants holding a non-direct selling job also believed that skills emanating from their direct selling experience improved their performance in their non-direct selling job. Moreover, survey participants who stated that one reason for joining a direct selling company was to improve their personal development (i.e., become more confident, better business-minded) also believed that skills emanating from their direct selling experience enhanced their performance in a non-direct selling job.

Finally, each of the 27 business/professional and personal life skills studied was significantly and positively correlated with perceived performance in a non-direct selling job. This finding corroborates the suggestion that a direct selling company target the improvement of skills of its direct sellers since doing so is beneficial to both the company and its direct sellers. When recruiting direct sellers, a company can communicate that even if a direct seller does not remain in direct selling, he or she can obtain skills that will improve performance in a non-direct selling job. Simultaneously, individuals considering a direct selling job may use that job to gain valuable skills that can be applied in a non-direct selling job as well as in their personal lives.

In brief, a substantial majority of the current direct sellers surveyed in this research—more than three-fourths of the individuals surveyed—agreed that their direct selling experience improved their skill levels for 14 business/professional skills and 13 personal life skills. Self-perceived skill levels were in turn related to perceptions of direct selling success. To the extent that current direct sellers believed that their direct selling experience improved their skill levels, they also believed that they were more successful than other direct sellers in their company.

Additionally, those direct sellers surveyed who also held a non-direct selling job believed that their direct selling experience improved their performance in this non-direct selling job. And, analogous to self-perceived direct selling success, the more direct sellers believed that their direct selling experience improved their business/professional and personal life skills, the better they perceived their non-direct selling job performance to be.

While these direct selling experience-related benefits existed across all direct sellers surveyed, certain groups of direct sellers (i.e. male direct sellers or millennial direct sellers), appeared to differ in the benefits gleaned from their direct selling experiences. As such, based on the present research, a direct selling experience can lead to personal as well as societal benefits that go beyond the economic value of direct selling per se. At a minimum, the present results suggest that an individual’s perceived self-efficacy can be enhanced due to a direct selling experience. Read full paper →

^[1] See the DSEF report “Professional and Personal Benefits of a Direct Selling Experience” for a list of all reasons studied.

^[2] See the DSEF report “Professional and Personal Benefits of a Direct Selling Experience” for a list of all skills studied.

Industry Reports / Journal of Direct Selling Research / Salesforce

Join, Stay, Leave: A Study of Direct Selling Distributors

By Dr. Anne T. Coughlan, Dr. Manfred Krafft, and Dr. Julian Allendorf

This paper uses a unique dataset of over 13,000 individual direct selling distributors from dozens of firms, at a wide variety of stages in their direct selling experiences, to investigate the motivations to join, stay, and leave a direct selling distributorship. We build on the literatures in sales force management and compensation, economics, organizational behavior, psychology and sociology to develop hypotheses both about each of these key decisions a distributor makes, as well as the interlinkages among the join, stay, and leave junctures in the distributor’s life cycle. Our analysis shows that many insights from these underlying academic research paradigms are robust to the direct selling situation, while others are not supported—suggesting that direct selling has many parallels, but is not a replica of, other non-direct-selling sales channels.

We find that individuals join as direct selling distributors for a variety of reasons, many of which combine multiple aspects of direct selling that a cluster of distributors finds attractive. Only a small proportion of joiners sign up purely for personal consumption of the direct selling firm’s products—but a great majority do join for this and other reasons as well. We further find that stated reasons for joining are frequently replaced by other motivations for staying as a direct selling distributor, consistent with the idea that distributors join without always knowing what direct selling will offer to them; they learn in the process of doing it. We also link certain traits as well as certain joiner and stayer types to the likelihood that a distributor will leave the firm; but interestingly, we do not find that a distributor’s reasons for joining have a relationship with his/her likelihood of leaving. Thus, the join/stay/leave life cycle path does show linkages from each stage to the next, but its failure to directly link join reasons to likelihood to leave is consistent with the learning that naturally occurs as distributors develop. Read full paper →

Managerial Implications:

Keep it easy, inexpensive to join, & easy to leave.
Poll your new distributors to learn their join-type and cultivate those who identify as social sellers and enthusiasts.
Communicate realistic expectations, do not over-promise—important for both “stay for business+social” and for “low intention to leave” distributor types.
There are many reasons for joining, staying
and leaving.
Clearly communicate Rules of Conduct—direct ship has made inventory loading much less likely.
Poll stayers for signs of intention to leave because nature and nurture are both at work.
Invest in training/mentoring distributors in skills that increase productivity and retention: selling, landing new customers, recruiting/mentoring.
Cultivate financially successful stayers (retail sellers, income earners) à lower turnover.

Policy Implications:

Not all motivations are financial—there are many reasons for joining, staying or leaving a direct selling company.
Policy requirement to offer “preferred customer” status isn’t inherently good: most do not join solely for product discounts, but most do mention product discounts as one benefit.
Allow flexibility in ability to enjoy different direct selling distributor roles, at any given time across distributors and over a given distributor’s life cycle (social, not just income, can connote “success”).
Turnover is not diagnostic of poor performance or pyramid scheme threat—turnover is most likely in first year, when “learning on the job” about one’s fit with direct selling happens.
Judging a direct selling company by distributor income, “losses,” or turnover is not diagnostic of viability of business—even leavers do not uniformly blame the company.

Direct Selling in the US / Industry Reports / Journal of Direct Selling Research

The Economic Impact of Direct Selling Activity in the United States

By Dr. Robert A. Peterson

Direct selling is a business model that offers entrepreneurial opportunities to individuals who, as independent contractors, market products and services to consumers, typically outside of a fixed retail establishment through one-to-one selling, in-home product demonstrations, or online. Direct sellers are called distributors, representatives, consultants, associates, or various other titles. They may participate in direct selling in various ways, including selling products and services themselves or through their sales organizations, providing training and leadership to their sales organizations, referring customers to their company, and purchasing products and services for personal use. Compensation is ultimately based on sales and may be earned through personal sales and/or the sales of others in their sales organization.

In 2022, direct selling generated $40.5 billion in retail sales in the United States—the second-highest in direct selling history—and involved an estimated 6.7 million individuals who were actively engaged in building their own direct selling businesses and/or earning supplemental income.

Despite its ubiquity and contribution to the economy, the full economic impact of direct selling in the United States has not been formally or comprehensively assessed for nearly a decade. Therefore, the purpose of the present analysis was to estimate the economic impact of direct selling activity in 2022 through the application of an input-output economic model. Given the retail sales generated by direct selling (i.e., its Direct Effect), the model (implemented by means of IMPLAN^® software and data) estimated the:

Indirect Effect (upstream or supply chain sales) due to direct selling and
Induced Effect (downstream sales due to household spending) associated with the Direct and Indirect Effects.

These three effects—Direct, Indirect, and Induced—collectively represent the economic impact of direct selling activity on the nation’s economy. In addition, the analysis estimated the fiscal (tax) implications of direct selling activity in the United States.

Executive Summary

An input-output economic analysis of 2022 direct selling sales activity was undertaken using IMPLAN^® software and data obtained from the federal government.^[1] Direct selling (retail) sales data were provided by the Direct Selling Education Foundation. The purpose of the analysis was to estimate the economic impact of direct selling activity in the United States in 2022. To provide a context for interpreting the 2022 economic impact of direct selling activity, the economic impact of direct selling activity in 2004, 2010, 2015, and 2016 was also investigated.

Results are reported in terms of Direct, Indirect, and Induced Effects using a measure of gross economic output sales dollars. Gross economic output refers to the cumulative value of production. Unlike Gross Domestic Product (GDP), gross economic output includes intermediate goods and services. (GDP is synonymous with total output less intermediate inputs.)

Using the Direct Selling Education Foundation estimate of $40.5 billion in direct selling (retail) sales in 2022 as a starting point, the total economic impact of direct selling activity in the United States in 2022 was estimated to be $111.4 billion. The $111.4 billion economic impact consisted of:

The Direct Effect of direct selling, $40.5 billion
The Indirect (upstream or supply chain) Effect of direct selling, $31.0 billion, and
The Induced (downstream or household) Effect of direct selling, $39.9 billion.

Because of (1) the analytic approach and (2) the nature of the industry (i.e., the widespread use of independent contractors), the total estimated economic impact of $111.4 billion should be considered conservative.

The derived multiplier emanating from the IMPLAN^® analysis was 2.75. This multiplier means that nationally $1.00 in direct selling (retail) sales produced an economic impact of $2.75 in 2022. The 2022 derived multiplier is 18 percent larger than the 2016 derived multiplier (2.34) and 24 percent larger than the 2010 derived multiplier (2.21). These increases were primarily due to increases in the Induced Effect across the respective years.

In 2022, the economic impact of direct selling activity produced an estimated $9.5 billion in federal taxes and $6.0 billion in state and local taxes, or $15.5 billion in total taxes. This represents an increase of $4.9 billion (a 46% increase) in tax revenue from 2016. The total value of direct selling activity (i.e., the Direct, Indirect, and Induced Effects) added to the nation’s Gross Domestic Product in 2022 was estimated to be $111.4 billion, which represents an increase of $28.3 billion from 2016 (a 34% increase). Read full paper →

^[1] IMPLAN® is widely used in industry and government analyses. See www.implan.com.