Profit-and-Loss Disclaimers and Disclosures: Testing a Regulatory Framework for Multi-level Marketing

Regulators, including the U.S. Federal Trade Commission (FTC), are taking an increasingly close look at the earnings representations made by multilevel marketing (MLM) companies when they recruit and train their independent contractor workforce. Prior research has found that MLM firms frequently use atypical earnings claims in their marketing materials and that they generally do not provide objective data on past participants’ revenues and expenses to prospective or current participants. While not typically disclosed, profit-and-loss data are especially salient in MLM as participants have a high probability of experiencing a loss. One potential regulatory response, currently being discussed within the FTC’s trade rule creation process, is to mandate that MLM companies provide profit-and-loss information to prospective and current participants. Using a lab-in-the-field artefactual experiment, this study measures the impact of disclaimers and disclosures—individually and in combination—in an MLM context using 305 adult subjects (60% women) at a state fair. Results indicate that profit-and-loss disclaimers and disclosures significantly alter consumer judgments, bringing them closer to objective reality, and lower interest in the proffered MLM opportunity. Sources of consumer vulnerability are identified that align with past research (e.g., low levels of financial literacy and numeracy). Additionally, lack of understanding of economic profit, as a concept, impairs consumer judgment regarding economic prospects in MLM. Findings inform disclosure and disclaimer design and suggest a potential “front and back” of label approach—one that combines embedded disclaimers with longer form disclosures—to mitigate consumer harm from misrepresentations in the MLM industry.