It’s a late-winter weeknight in Lake Forest, and family burdens being what they are, people are late for the seven o’clock get-together. The guests, all of them women, trickle in gradually and take their seats in the living room of Bill and Judy Wingader. The room is tastefully decorated with a chintz sofa, wing chairs, a yellow rug, ersatz flowers in baskets, and a ceramic cat lounging on the hearth.
Judy Wingader, a slim woman of 47 with rust-colored hair and a fair complexion, tries her best to make everyone comfortable–a fairly easy task since she knows the assembled either as friends or through work. Noticing that one woman is having trouble quieting her baby, Judy offers to take him for a walk around the room. “Is he sleeping through the night yet?” Judy asks as she cradles the child.
Judy’s guests have come to see her demonstrate the products of Nu Skin International, a line of skin creams, hair treatments, and nutritional supplements. The members of the Wingader sales force–Judy, Bill (who has sneaked off to church this night), and sons Mike and Steve–are bottom-level distributors.
“Are you willing to try some things?” asks Judy as she and Steve, an eager young man, arm each participant with a washcloth and towel and usher her toward the Wingader powder room. The women form a line, waiting to go in and wash their faces clean of makeup. Then they proceed to the dining-room table, where they take seats before some unusual place settings: a paper plate, a spoon, a small shot glass, and a makeup brush. Mirrors occupy the center of the table.
“This must be some new form of group therapy,” cracks a woman in a blazer.
Steve instructs them to apply a liquid called Face Lift to one side of their faces. “Put on the Face Lift in an upward motion,” he advises. “When you get to your eye, just sweep the stuff around the socket.” One woman says Face Lift smells like M & Ms. Another woman, taking pains not to spill on her Peter Pan collar, says, “The last time I did something like this I ended up with warts.”
Once the stuff has been slathered on, the women are conducted back into the living room, given pillows, and told to lie on the floor. While they wait for the Face Lift to dry, Steve launches his spiel on the Nu Skin collection.
“Here’s the Body Smoother,” says Steve, holding aloft a white bottle. “None of it is greasy. And this”–he shows off a little jar–“is our skin enhancer. I use it as an after-shave. It takes away razor burn. The aloe vera in it is soothing. Now here’s Celltrex, which is stuff for burns. It absorbs water, puffs up the skin, and erases wrinkles. It has avian collagen, which is the most fantastic ingredient.” The women, on their backs, look up blankly. Apparently they have no idea what “avian collagen” is, yet no one asks. (Nu Skin’s avian collagen is a protein derived from the connective tissue of chickens.)
In no time Steve has gotten deep into his tour of the Nu Skin line. He touches on the Facial Scrub, seasoned with finely ground walnut husks, and the extra-gentle Exfoliant Scrub, which contains the “skeletons of plankton” (that is, the remains of microscopic sea life). Then there is Glacial Marine Mud, which Steve says is derived from Canadian glaciers–“because the mud is ground up so fine it reaches more area of your skin.” Judy hails the Moisturizer Mist and the Liquid Body Lufra. “Nu Skin also makes a lot of shampoos,” says Steve. “They use human placental protein. That’s what I said. It’s exactly what you think it is. But we use full-term healthy babies–there’s no fear of AIDS or anything.”
Steve has a full head of hair, and so do the women, but he still touts Nu Skin’s “hair fitness preparation.” He never says the liquid actually grows hair, as the Upjohn Company’s Rogaine does–Rogaine is the only FDA-approved battler against male pattern baldness. Instead, says Steve, the Nu Skin substance “increases the circulation in your hair” and so “encourages new hair growth.” Rogaine, on the other hand, contains drugs, and Steve notes, “We don’t know what effects those drugs could have.”
When the discourse on hair elixirs is over, Steve and Judy tell the women to rise and wash off the Face Lift, which has by now caked on their faces. Come the morning, the Wingaders say, the women’s skin will have experienced a temporary tightening.
Back in the dining room, the guests start to sample the nutritional supplements. Essentials is a diet drink to which you add milk or water; it looks and tastes like an Ultra-Slimfast twin. Steve explains that Nu Skin’s version is manufactured using “sonic drying,” which “blows high-velocity air to turn the product into dry form. Other people use heat to do that kind of thing, but that destroys nutrients. We don’t.” Steve, the assistant manager of a Highland Park health club, explains that he likes Nu Skin’s Appeal–not a diet drink but a nutritional supplement–more than Essentials because it helps him bulk up his muscles.
After showing off a final batch of products–the Clay Pack, some rejuvenating cream and soap–Steve and Judy bring the evening to a close. “I can almost guarantee that if you start using our system, you won’t go back to what you were using before,” says Steve. The women begin to place their orders. One buys hair conditioner and shampoo; another, perhaps the oldest prospective customer, opts for hand cream. “Can I take a catalog with me?” one woman wants to know. “Of course, of course,” says Judy, who is heartened by how well the night has gone. She and Steve have sold some items, and perhaps at a later date these customers can be enticed into becoming distributors themselves, part of a network spreading out beneath the Wingaders.
The family has been selling for Nu Skin, a multilevel marketing (MLM) company based in Provo, Utah, only since just before Christmas. They have all kept their day jobs: Steve at the health club, Mike as an accountant, Judy as a bank officer and realtor, and Bill as a LaSalle Street investment banker. Yet when the Wingaders speak of Nu Skin, it is with near-religious fervor. They anticipate developing soon into big-time MLM distributors, drawing large salaries and becoming free of the monotony of their current lives.
“When you’ve done basically the same thing for close to 30 years, as Bill has, you go through a burnout stage,” says Judy. “Besides, if you’re entrepreneurial at all–and we all are–you want to be on the threshold of what’s going on in business. And Nu Skin is. It’s a recession-proof business, because people always want to look good.”
The siren song of businesses like Nu Skin is hard to resist. “These companies prey on our most vulnerable spot, which is making money quick,” says Sally Saltzberg, chief of the consumer-protection division for the Illinois attorney general. “The appeal is hard to overcome, regardless of your education.”
The Wingaders may well end up disillusioned. The average MLM distributor merely supplements the family income, rarely makes that million dollars. In fact, authorities around the country, including the Illinois attorney general, are investigating Nu Skin to see whether it constitutes a “pyramid scheme,” an illegal operation that signs up lots of distributors quickly while delivering relatively small amounts of product to consumers.
For the time being, however, the Wingaders and thousands like them are seeking their salvation in glasses of diet drink and jars of face goop.
One day in late October, Bill Wingader got off the train at the Milwaukee Road station in Lake Forest to find a card stuck on his windshield. “The Ultimate Opportunity,” read the headline. “For the first time in your life you have the chance to position yourself on the ground floor of the most innovative, creative new company in America. Right now you are only 24 months away from financial independence.” Bill was advised to call the number at the bottom.
Bill had never before responded to such a come-on. He says, for the record, that he likes his job as a municipal-bond underwriter. “It gives me the opportunity to be a problem solver–I’m trying to find ways for municipalities to finance a school or water system. I can help people and earn a good living at the same time.” He makes a six-figure salary.
Still, Bill says, he was curious enough about the financial rewards promised–and bored enough with his long commute and the predictability of bond underwriting–to make a phone call. He got a recording, in a man’s voice, that purported to be on behalf of “a group of business executives who have chosen to give up the corporate rat race.” The man said that “within a few short years” you could triple your present income. “One last thought,” the man concluded. “If you had been listening to this very recording in 1954 and heard about flipping hamburgers and golden arches and a clown, would you have left your name and number?”
Bill left his particulars, and shortly the man on the recording, Hugh Drum, called back. The two arranged to meet. A day or so later Drum, the former owner of a telephone-service company, picked up Wingader at the train station in Winnetka and took him to his house on Green Bay Road. There Drum outlined for Wingader the financial possibilities of Nu Skin and multilevel marketing in general. “This can give you financial independence and a lifetime income,” Drum said, and Wingader left excited. But when he made his own presentation to Judy, she was skeptical. “I didn’t appreciate a business opportunity being presented to my husband without my being there,” Judy recalls.
Bill called the Better Business Bureau in Salt Lake City and asked about Nu Skin. “They said the company was clean as a whistle,” says Bill. Soon after that Judy met with Drum, tried the Nu Skin line herself, and came away a believer.
The Wingaders’ two grown sons live at home, and Mike quickly joined his parents in their enthusiasm. But Steve, the elder, resisted. “My dad really got into this, and he’d mention it around the house all the time,” says Steve. “I’d say, ‘Look, this is a pyramid scheme.’ I thought to myself, what is he thinking?” One Saturday afternoon in December, when father and son were watching TV, Bill besought Steve to give him a good listen. “In what my dad told me, I saw the opportunity,” says Steve.
Distributors are skilled at giving the Nu Skin sales pitch, which begins with a hymn to the wisdom of MLM in general and Nu Skin in particular. “Think about the baby boomers,” says Bill, a baggy-eyed man of 50, one evening in his living room. “They are completely different from their grandparents. They don’t want to get old, especially the ladies. When they see wrinkles, it’s a panic situation. Health is important to them.
“Baby boomers are also rejecting the American dream as far as their work habits are concerned. Do they want to work for 40 years for a gold watch, a little bit of pension, and a wave good-bye? Nope. Many, many boomers want their own businesses. But to have a company all of their own requires a substantial amount of capital and help from a bank.
“Now we get to this being the age of network marketing. John Naisbitt says so in Megatrends. Alvin Toffler writes about it in The Third Wave. By the end of the 90s, 50 percent of nonfood consumer products are going to be moved through multilevel systems. In network marketing each person moves a small amount of product, so none of it is what I consider onerous. And yet the company can bring products to market a whole lot cheaper. In terms of legitimate earnings, Nu Skin is extraordinarily powerful.”
For the distributor, the power derives from the commission system. You can become a Nu Skin distributor for $35 plus tax; then there are the costs of any sales aids and any product you acquire to sell. Bill Wingader launched his operation for about $1,200–an uncommonly large initial outlay, which he spent on product, sales aids, the company brochure, business cards, and a phone recording.
Nu Skin advises distributors to mark up the items 43 percent. In addition, you are encouraged to sign up other distributors–friends, associates, anyone you can enlist–and when they make their wholesale purchases, you draw at least 5 percent in commission. If your personal wholesale purchases are $500 a month or more, you get paid 8 or 9 percent commission. If you attain $2,000 a month in group wholesale sales, and boost that figure to $3,000 a month within three months ($500 of which must be your own personal sales), you climb to the level of an “executive,” and then the percentages you earn off the distributors directly beneath you–in MLM lingo, your “downline”–may reach 24 percent. (The marketers above you are naturally your “upline.”)
“You can make a lot of money as an executive,” Bill explains, “but there is a rung beyond that that is the most remarkable phenomenon in American business.” The arrangement is this: Say you become an executive and one of your underlings becomes an executive, too. As that “breakaway” executive builds an organization, you, the person up above, can draw 5 percent off the wholesale sales of your breakaway down the downline to a total of six levels. According to Bill this is an exceptional deal even for an MLM–because of the number of levels on which Nu Skin pays off to an executive on breakaways and because of the high percentage–5 percent–it pays on each level.
The ultimate position in Nu Skin is the “blue diamond” executive, a person whose downline consists of at least 12 breakaway executives, each of whom dips down six levels. “The top earner in Nu Skin makes $627,000 a month,” Bill says. “In the last month, I have met a man who earns $250,000 a month, and another man earning $177,000 a month.”
The Wingaders aren’t doing nearly that well. Bill and Judy’s downline consists of sons Mike and Steve, a colleague in the bond business, a club manager, and a part-time student. The Wingaders’ Nu Skin income is only $100 a month, yet they’re gung ho to become executives. They have borrowed sign-up tactics from Hugh Drum and other seasoned distributors: the Wingader sons distribute cards on windshields, a polished recording greets the people who respond, and the Wingaders then arrange a one-on-one meeting. Meanwhile the family sells the Nu Skin line in regular demonstrations in their home for friends and associates–what the MLM industry terms their “circle of influence.”
The Wingaders are also living testimonials to Nu Skin. Bill uses the hair-fitness liquid and the shampoos, applies the skin enhancer as an after-shave, and diets with the help of Essentials. “I’ve always had problems with my complexion, and the skin-care stuff has done me wonders,” Steve exclaims. Judy is a big customer, and so is her elderly father, who relies on one of the diet supplements.
Bill says he doesn’t expect his sweat equity in Nu Skin to pay for a year or two, but he is comforted by the company’s position. According to him, Nu Skin saw annual sales of $57 million in 1989 and $325 million in 1990. He predicts the 1991 figures could hit $700 million. The company is at a pivotal stage that Bill calls “momentum,” when sales are poised to burst upward. “This is a window of opportunity for someone to get in,” he says. “This is the period when the most millionaires are created. It’s exciting now. I’ve been introduced to guys who are making lots and lots of money, and they are no better than I am. This is not bullshit.”
Businesses that sell goods or services directly to consumers, without physical stores and regular advertising, are attractive to participants because they are “co-preneurial,” says Neil Offen, president of the Direct Selling Association, based in Washington, D.C. “You’re in business for yourself but not by yourself. The company provides the research and development, the manufacturing and the recognition, and you do the marketing and sales. You become successful as a team.”
According to the DSA, there are some four million Americans–80 percent of them women–in direct selling today, racking up company revenues of some $11 billion a year. Multilevel marketing companies account for slightly more than 50 percent of that volume, Offen says. Among the MLM giants, all started roughly 30 years ago, are the Amway Corporation, a Michigan firm that sells everything from vitamins and cosmetics to air filters; the similar Shaklee Corporation, headquartered in San Francisco; and Mary Kay Cosmetics of Dallas.
In terms of receipts, the direct-selling industry accounts for less than 1 percent of all retailing, says Offen. And though direct-selling revenues have been growing at a respectable rate of 6 percent a year, he doesn’t see any exponential takeoff in the near future–despite Bill Wingader’s predictions.
Nor does Offen anticipate that large numbers of distributors in multilevel marketing companies will make huge salaries. “Many people just do it to buy Christmas presents for their families,” he says. “Or they work at it part-time to augment the family income with $5,000 to $15,000. Maybe 1 in 100 makes a six-figure income.” The average distributor for Mary Kay earns just short of $5,000 a year, according to a company spokesman. Offen says of the DSA: “We condemn companies that make outrageous earnings claims.”
Nu Skin International was founded in June 1984 on a $5,000 investment by Blake M. Roney, then a recent graduate of Brigham Young University. “He had studied the situation and the market possibilities,” says Jason Chaffetz, Roney’s administrative assistant and the company spokesman. “Obviously he had looked at other multilevel companies.”
Roney is now 33. A company brochure describes him as the father of three, married to a registered nurse. “Combining the Nu Skin products with our superb marketing plan is a win-win formula,” writes Roney in the brochure. “It is a formula that will allow you to be your own boss, set your own hours, and fashion your own destiny. How far you take the Nu Skin opportunity is determined by you–the sky is the limit.”
Roney wasn’t available for an interview. “He’s a very open person,” says Chaffetz. “I’m sure he’d love to talk to you, but he’s a little shy. It’s also his attitude that he doesn’t need press–positive or negative–to be successful.”
Nu Skin began by hawking four products; now its line runs to more than 50 items. “Our philosophy is all of the good, none of the bad,” says Chaffetz, by which he means that the ingredients in Nu Skin products are all good for you, with no “cheap and sometimes harmful fillers.” The company hypes not only avian collagen and plankton skeletons but moisturizers called NaPCA and hyaluronic acid, “royal bee jelly,” which is secreted by worker honeybees, and “jojoba,” an extract from a shrub native to the southwest. Nu Skin also sells motivational audiotapes on subjects like marshaling your creativity, losing weight, and not surprisingly, thinking positive. These “subliminal” tapes feature the sound of waves as background and are meant to be played at low volume.
Nu Skin’s prices are “very comparable to what you’d find in a retail store,” Chaffetz says. The Face Lift is $32 for a two-ounce jar, for instance; the Exfoliant Scrub is $10.50 for two ounces.
The company is based in a converted 1920s-era apartment building in Provo, but it plans to move by the end of the year into a brand-new ten-story corporate headquarters now under construction. Its current architectural showpiece is a warehouse that cost $8 million. Chaffetz touts the recent hiring of Gregory Newell, a former U.S. ambassador to Sweden; he will oversee Nu Skin’s expansion overseas. The company’s deepest market penetration domestically is in California and Florida, “though we see pockets all over the country,” says Chaffetz, including Illinois. The company reportedly is served by 40,000 distributors under 425 “executives.”
Chaffetz says the firm is free of debts, but he will not confirm the claim of $325 million in sales in 1990 attributed to the company by Bill Wingader. “That’s purely speculative,” Chaffetz says. “Sometimes distributors get a little excited.” As to the top Nu Skin executive drawing $627,000 a month, Chaffetz says, “It’s actually more than that.” Two leading executives Wingader names–Richard Kall and Jerry Campisi–are too busy to be called for an interview, according to Chaffetz.
As to whether Nu Skin’s marketing plan is more profitable for distributors than the plans of its competitors, as Wingader had claimed, Chaffetz begs off. “I can’t draw any sweeping conclusions,” he says.
Nu Skin’s rivals, however, defend their own marketing strategies. Though Mary Kay only pays back upper-level executives down three levels, its bottom-level distributors mark up their wholesale price not 43 percent, as Nu Skin suggests for its products, but 100 percent. “Our system is based on rewarding sales to the consumer,” says Barbara Beasley, executive sales vice president for Mary Kay. “Nu Skin’s system is based on recruiting other people into Nu Skin.” Shaklee has a markup schedule similar to Nu Skin’s but its focus, says Chuck Healy, vice president of strategy development and annual plan for sales, is on handsomely rewarding the distributor one level up for encouraging the sales of underlings. Shaklee, like Mary Kay, pays incentive bonuses down only three levels; the percentage yields from each level are pegged at between 1 and 7 percent.
The upshot, says Jeff Babener, an attorney in Portland, Oregon, who represents many MLM companies: “You can earn good money with Mary Kay or Amway or any of these companies.”
“The blue diamond network is like a powerful computer,” says Tim Frisby to a roomful of his Nu Skin distributors–and potential recruits–on a Tuesday night at the Arlington Heights Hilton. “It has the capacity to change lives, but without the training and support to exploit it to your purposes, you won’t be successful.”
Frisby heads a distribution network that descends four levels, making him an “emerald” rather than a blue diamond executive. “But I’m a blue diamond executive in my mind,” Frisby is wont to say. Hugh Drum is part of Frisby’s downline, and thus so is Bill Wingader; both men have come to the hotel for Frisby’s weekly sales-motivation meeting.
“Are you at that point in your life when you want to change something?” Frisby asks. “Are you under stress? Stress is life threatening. It destroys your immunological system. If we are under stress, we become candidates for heart attacks and strokes and cancer.
“Nu Skin is the opportunity to take control of your life. Consider all those blessings that our founding fathers fought for–life, liberty, and the pursuit of happiness. I don’t know how you can be happy if you are broke and under stress. It doesn’t matter who you are. One of my distributors is a doctor who got rid of his five clinics to sell Nu Skin full-time; another is a cleaning woman tired of spending eight hours a day on her knees. They each had a desire to change their lives.”
Frisby used to be the sales vice president for a family-owned machine-parts company. But the firm was sold, and in September 1989, after five years under new management, Frisby departed “to do something different with my life,” he says. “I was looking for freedom. I wanted a business I could run anywhere in the world from my sailboat, a business without limits that wouldn’t take much capital to start up.”
What he wanted fit the framework of an MLM, and in February of 1990 he answered a blind ad in the Tribune that for some reason grabbed him. A few days later he got together with an accountant from the Quad Cities, a distributor for Nu Skin. “When I saw the marketing plan and the demographic factors, I realized this was what I was looking for,” Frisby recalls. But it was only after Frisby’s wife Mardi tried some Nu Skin cream on “an awful skin condition” that had resisted treatment–and the condition improved–that Frisby became a disciple.
Frisby’s operation is based in his spacious white brick house in Inverness. His downline consists of six executives and 1,000 distributors, in Illinois and beyond. He hints that his annual paycheck runs to more than $100,000.
He’s built his network by proselytizing constantly, whether to a stranger on a train or a clerk in a retail store. “With anybody I meet,” Frisby says, “if I look at the person and he seems nice, I’ll make an approach.” What the target sees is an avid, pale-faced man of 45 with a Nu Skin pin in his lapel. “Do you have stress in your life?” he inquires. “Are you free?” With salesclerks he observes, “You know, you have a great attitude. That’s the second most important element of success in life.” When the clerk asks what the number-one element is, Frisby says: “The right vehicle.” That gives him an opening to talk about Nu Skin; and in the end, he passes the person his card.
Frisby carries some Nu Skin hand lotion on his person at all times. “Give me your hand,” he says to a prospect, and while he’s rubbing in the lotion he’s also talking. “There’s nothing like the Nu Skin products to revolutionize the skin,” he tells them. He recalls the time he was having his teeth cleaned by a dental hygienist. When Frisby spied the woman’s rubber gloves, he said to her, “I’ll bet your hands are dry under those gloves.” Before long he had tried the lotion on the hygienist and was after the dentist.
“This can get uncomfortable,” Frisby says. “You have to do things that push the limits of your comfort zone. You have to deal with skepticism and rejection.”
Of the people who take Frisby’s card, only a smattering call him; of those, fewer still sign on as distributors; and of those who do become distributors, he estimates that 75 percent drop out. “This is a numbers game,” he contends.
And it’s a numbers game with a slant, because Frisby says success depends on hiring wholesome distributors. “I say: ‘Don’t sign up anyone you wouldn’t want to be your lifelong friend, who you wouldn’t be willing to have over for dinner with your wife and kids.'” Once a distributor is on board, Frisby sees himself less as an overlord than as a mentor, a teacher passing on his hard-earned selling techniques in three and a half hours of training every month, then coaxing the neophyte to a mutually beneficial success.
“Really, Nu Skin is the perfect synthesis of the Judeo-Christian ethic and free enterprise,” says Frisby, himself a practicing Catholic. “We help each other and at the same time we are rewarded in the free market. We don’t scam people or take advantage of their anxiety, and we have the capacity to change their lives.”
In June of 1989 Hugh Drum was involved in a traffic accident that gave him a bad blow to the head. He and his wife Judy owned a company that installed telephone systems. Suddenly, in his late 40s, he was experiencing symptoms as a result of the accident that made his work difficult–he forgot where he was going, or he fell down inexplicably. “I’d land on the ground before I knew I was going to be there,” he says.
In October 1989 a doctor diagnosed Drum as having Parkinson’s disease, a condition apparently induced by the accident. “I realized I could end up in a wheelchair in three years,” he says. “I wanted to get into a business that Judy could run if something happened to me.” Drum was weighing the merits of MLM–a cousin in Boston was an Amway distributor–when he found a card on his windshield in the Grant Park garage. He called the number from his car phone, and two days later he was meeting with Frisby at the Columbia Yacht Club.
Overwhelmed by Nu Skin’s potential to give them economic independence, Drum and his wife passed on their phone firm to their employees; they’re now Nu Skin executives. They use all the standard Nu Skin techniques to line up distributors–cards on cars, product demonstrations, conversations with strangers–but Drum, a stout man with riveting eyes and a hearty laugh, has added some refinements of his own.
Waiting in a movie queue or for a table at a restaurant, he hands out pennies. “Here’s a penny for my thoughts,” he says; when the person with the penny turns the coin over, there’s a smiley face with Drum’s phone number for the mouth. If that doesn’t work, Hugh hands the person a business card, which depicts Caesar about to go into battle and a disappointed machine-gun salesman standing behind him. “No-no,” says Caesar. “I can’t be bothered to hear any crazy ideas. We’ve got a battle to fight!”
The Drums have signed up scores of distributors, among them Bill Wingader. (Hugh calls Bill “a dream distributor, an obvious entrepreneur.”) About one-third of their recruits have quit, yet the Drums’ corps still has about 75 people. The Drums’ son, daughter, and son-in-law are among them, as is a couple who were acquaintances; otherwise, the Drums knew none of their crew beforehand. Drum keeps everybody juiced up by running twice-monthly sales training sessions at his house, and he’s always available for consultation by phone. Moreover he’s adept at building cheap pine shelving to contain samples.
A set of such shelves, crammed with product, sits against a wall in Roger Shimanovsky’s small Niles apartment, where he lives with his wife Carrie and their toddler. Roger and Carrie are free-lance bookkeepers who became Nu Skin distributors last June after finding a card on their car. “I’m always looking for an angle,” says Shimanovsky, 29, a former car and carpet salesman who has toyed with other MLM ventures. What Nu Skin offered him was “time freedom,” he says. “My wife and I haven’t taken a vacation in five years. I want the ability to walk away from some of my clients.”
Shimanovsky thinks constantly about ways to maximize his profits. He talks to Drum by phone at least once a day. “I gave up television,” he says, “except right before I go to bed. All day long I’m thinking: ‘What am I doing with Nu Skin? What should I be doing?’ When I get up in the middle of the night, I’m thinking about Nu Skin. I guess that’s when you know you’ve got the bug. This fills up my mind where it might have been bare.”
Steve Busa, of Lakeview, became a distributor for Drum after his fiancee, Patrice Maheras, vouched for the quality of Nu Skin creams and moisturizers. “Patrice wouldn’t get involved with this stuff unless it was super,” Busa says. “She’s a Marshall Field’s-type girl.” Busa, 33, a sometime singer and keyboard player and an account executive for a video-production house, has previously sold fuel additives, patio enclosures, and thermal windows. Now he considers himself a cut above that: “I used to think of myself as a salesman. Now I think of myself as a communicator. With products this good, I just say a few words–I walk the walk and talk the talk. Then I shut up and get out of the way.”
Margaret Goebel, a 53-year-old nurse in McHenry, learned firsthand about self-motivation when she cared for an ailing member of the family of insurance magnate W. Clement Stone, the lord of positive thinking. She got involved with Nu Skin when she checked out a motivational tape from a video store and one of Hugh Drum’s cards fell out. Selling Nu Skin suits Goebel fine: “Nursing is a good baseline for me, because I can talk about skin and healing. I used to sell insurance on the side, and then I could talk about people’s fractures and operations.”
But Goebel has other and often higher priorities than Nu Skin. She helps her husband, who owns a trucking company, run a salmon-fishing charter out of Waukegan. She teaches a course in counseling addicts, and she’s remodeling her kitchen. She loves nursing: she’s a night charge nurse in a hospital. “Fortunately or unfortunately, I have worked pretty hard, and I make a fairly decent salary,” she says. “For me [Nu Skin] will always be a sideline. I have other fish to fry, and besides, I’ve never been a heavy-duty seller of anything. So I’m not busting down doors for Nu Skin–my life’s work is elsewhere.”
Drum has recruited a half-dozen Korean distributors, one of them a beauty-parlor operator in Albany Park who prefers that her name not be used. She says that, beyond sales to customers, her Nu Skin trade has sputtered to a halt. “The first couple of months were good,” she says. “I even signed up a couple people under me, but then they stopped selling. I couldn’t push them. I felt sorry. I’m not good for selling, either. My personality isn’t right. If all the time I’m talking about shampoo, my friends will want to stay away from me.” Yet Drum encourages her–in part, she suspects, because as Nu Skin’s international markets develop, she could help create distributorships in Seoul.
Other distributors in the Drums’ network are not considering foreign branches. Wingader seems intent on building an empire as big as Frisby’s, enabling him and his family to give up their current jobs. Busa would like to equal in Nu Skin revenue the $1,700 a month he and his fiancee require for their living expenses, though he doesn’t make anywhere near that amount from Nu Skin yet; ultimately his ambition is to produce a record album of his own work. “If I’m making seven or eight grand [a year from Nu Skin] after a couple years, I’d be pretty satisfied,” he says. Shimanovsky, who currently clears less than $1,000 monthly from Nu Skin, would like to equal his bookkeeping gross–of up to $8,000 a month–before two years are out.
Drum and his wife want to make $12,000 a month by November, and of course thousands more as time goes by. Drum, who like Frisby is a sailor, would like to travel around the world on a multihulled boat–which moves in a relatively flat fashion, a necessity for a Parkinson’s sufferer. “Judy and I planned to leave in 1989,” he says, before he had the accident. “We’ll do it someday, thanks to Nu Skin.”
The MLM industry does not have a savory reputation: for decades many people have assumed that its practitioners are engaged in a scam. And it’s true that a number of MLM companies have been successfully prosecuted for shady practices, most notably Kascot Interplanetary in the early 1970s. Glenn W. Turner’s firm peddled cosmetics door-to-door; its slogan was “Dare to Be Great.” What Turner proved greatest at was inviting fraud charges; at one time the sharecropper’s son faced actions in 50 states, and eventually he went to prison.
In 1986 Herbalife International (marketers of herb-based pills, powders, and solutions) paid out $850,000 to settle a suit brought by the California attorney general. The suit charged Herbalife with making false curative claims for its products and with being a pyramid scheme. As part of the settlement, Herbalife distributors now have to guarantee sales to at least ten retail customers a month. These days Herbalife appears to be in good health. “Our problems were years ago,” says Herbalife spokesman Julaine Konselman. “We are in 12 countries. We have no problems with the attorney general or the FDA.” In 1990 annual sales were $140 million.
Neil Offen of the Direct Selling Association says that in a legitimate MLM company “when commissions are paid, they are basically paid on product being sold and utilized.” A company starts to look like a pyramid scheme when it pays most of its commissions to distributors for signing up other distributors. Under a pyramid scheme, the hype is primary and the product secondary; the product stagnates, and the consumer and bottom-level distributor can both lose out if the company goes belly-up.
The rule of thumb on what constitutes a pyramid scheme comes from a 1978 ruling by a Federal Trade Commission administrative-law judge. The judge said that the Amway Corporation did not qualify as a pyramid because the firm paid commissions to distributors only if they sold at least 70 percent of the product they’d purchased during a given month; they also had to sell to at least ten customers.
Despite the so-called 70-30 rule, every state characterizes a pyramid scam somewhat differently. California’s strict “endless chain statute,” for instance, requires that all income paid to distributors in an MLM company must be derived from retail sales to consumers. Illinois law defines a pyramid scheme as one whose money flow is “primarily based” upon signing up other marketers, not “primarily contingent” on the flow of goods and services to consumers. In 1988 that law was reinforced by a decision in the Illinois Appellate Court involving Unimax, a firm that used distributors’ sign-up fees to set up a buyers’ club.
“When we bring an action, we have to prove the word ‘primarily,'” says Sally Saltzberg, director of the consumer protection division of the Illinois attorney general’s office. “But let’s put it this way: If you’re making your bucks off the inducement of additional persons, then it’s a violation.” Saltzberg points out that, ironically, when a suit against a pyramid scheme prevails in court, the bottom-level distributors end up the victims: they’re stuck with the inventory. They enjoy no protection against any losses, since under the law they are considered perpetrators of the fraud along with their superiors.
Currently, Saltzberg says, the Illinois attorney general is investigating Nu Skin for possible violation of the pyramid-scheme statute; other state attorneys general are also probing the company. On March 22 the office of the Michigan attorney general notified Nu Skin, in a cease-and-desist order, that it is ready to file suit against the company for being a pyramid scheme. The crux of that case, as detailed in the order, is that Nu Skin pays bonuses to distributors on wholesale sales to their downline without sufficient checking to see that the product reaches buyers. “Nu Skin puts no emphasis on the retail sale of product,” says Chris DeWitt, a spokesman for the Michigan attorney general. “If you aren’t moving product to the outside world, you have a pyramid that will collapse.”
Because Nu Skin has made no medical claims on paper for its products, technically the company does not fall under the purview of the federal Food and Drug Administration. However, most major personal-grooming companies do voluntarily file details on their products with the FDA. Nu Skin hasn’t done so. The FDA has inspected Nu Skin’s operation in Provo, according to Paul Teitell, the supervisory consumer-safety officer in the FDA’s Salt Lake City office. He says: “Anything further about what we found and what kind of activities we found we aren’t able to talk about.”
Nu Skin is not a member of the Washington-based Cosmetic, Toiletry & Fragrance Association, though it has recently joined the Direct Selling Association. For that membership Nu Skin underwent a yearlong screening process. At the time the DSA determined that no investigations were proceeding on Nu Skin. DSA lawyers slipped into sales meetings in Maryland and discovered no bloated earnings claims. Under the regulations of the Federal Trade Commission and various states, a distributor is allowed to tout a company’s top earners, says Offen, but the claims must be put in context. A distributor should point out that 20 percent of distributors generally make 80 percent of the commissions, he offers by way of example, and that the rest get by with significantly less. “Nu Skin has told us they will terminate people who make outrageous claims,” Offen says.
“We’re making every effort to eliminate claims like that,” says Nu Skin spokesman Chaffetz. “We have on numerous occasions terminated distributorships and placed people on suspension.”
Chaffetz puts little stock in the charges against Nu Skin as a pyramid scheme: “It definitely concerns us, but we’ve been in business since 1984 and have sold hundreds of dollars of product–we haven’t done that by breaking the rules. We require that people log their retail sales and sell their product.” He points to the fact that distributors who want to earn a bonus must drum up $100 a month in personal sales and have five retail customers a month as evidence that Nu Skin keeps product flowing to consumers. In addition, he says, less than 1 percent of Nu Skin’s line is ever returned from the distributor to the company–“so people are using it.” As for the FDA snooping around Nu Skin, Chaffetz says, “They regulate the cosmetics industry, and we open our doors to them. We are in full compliance.”
Nevertheless, company attorneys promised the Michigan attorney general on April 17 to provide a proposal by May 8 that would offer ways to rectify any abuses. Meanwhile Nu Skin has premiered a line of kids’ bubble bath, sunscreen, and shampoo called Jungamals. A February sales convention in Provo was keynoted by Ronald Reagan and Bill Cosby.
“[Nu Skin] is no more a pyramid scheme than IBM,” says Bill Wingader. “Product is passing through. I think I’m fairly well able to explain that to people, if they will listen.”
Tim Frisby welcomes the investigations. “I view this as positive,” he says, “because once they finish with us, they will give us a clean bill of health.” Investigators are always disappointed, he insists–one attorney involved in probing Nu Skin in Florida allegedly was so bowled over he ended up a distributor. In Frisby’s mind, Nu Skin is an ethical company that keeps administrative costs low and does not either force distributors to load up with product before signing on or stockpile inventory.
He acknowledges, however, that the negative perceptions of MLM persist: “People perceive that you are making money off them–that you are exploiting their friendship–or that the thing you’re involved with is a scam or a scheme. That doesn’t upset me. All I can do is say, ‘I know how you feel, now let me tell you about this company . . .'”
Art accompanying story in printed newspaper (not available in this archive): photos/Kathy Richland.