What Can We Learn from Mary Kay’s Company Information?

An article by guest writer Avital Pilpel

Introduction

Mary Kay is a company that sells beauty products, such as anti-ageing creams, skin moisturizers, lipstick, nail enamel, and so on. Mary Kay offers everybody the opportunity (or is it?) to “own their own business” by becoming a seller of Mary Kay products.

Essentially, like in any other business, one buys product wholesale from Mary Kay, and attempts to sell it at retail to customers. Unlike other businesses, Mary Kay is an MLM—one can not only sell products to others, but to recruit others to sell Mary Kay products as well. Those you recruit—and those that they recruit, etc.—constitute your “downline”. Every time someone in your downline (or your downline’s downline, etc.) sells a product, not only does he receive a commission, but you receive one as well.

Ideally, and if dreams come true, you will make a lot of money by what MLMers called “duplication”: as long as you recruit only a few people and each one of them recruits only a few people, then quickly, due to the math of exponential growth, you will be sitting high on the hog, receiving a commission from hundreds, if not thousands, of your “downline”.

The Company’s Web Site

But does this really work? How much can a Mary Kay distributor can really be expected to make? For this, let us consider Mary Kay’s own web site, which says…

Achievement. Success. The realization of dreams. Mary Kay Inc. was created from one woman’s desire to enrich women’s lives. She began by offering quality products to enhance a woman’s image and a perfect business opportunity to help women earn extra money, enjoy more flexibility and grow as independent business owners. The result is a company that, more than 40 years later, still embodies the core philosophies of its founder: to use the Golden Rule as a business guide and to help women live a balanced life by placing God first, family second and career third.

This is nice. Of course, it doesn’t actually say anything, being mere vague generalities, but it sounds nice. Why is Mary Kay a “perfect business opportunity” for women? Says who? What does “enjoying more flexibility” or “growing as an independent business owner” really mean?

Also highly suspicious is the fact that they tell you that Mary Kay “embodies the core philosophies of its founder” and that those are to “place God first, family second, and career third”. It is no doubt nice that Mary Kay’s founder had this philosophy, but how, exactly, is this relevant to evaluating a business opportunity in terms of risk and reward, possible profit vs. possible loss?

One should be very suspicious of businesses who advertise their commitment to God, family, the American way, or some other “good cause”. Why do they prefer to talk about that than about the business, or the product, itself? Would you buy a suit from a tailor whose main selling point is that he’s a good Christian—or would you try and find a good tailor?

Anyway, reading on…

Mary Kay Inc. is one of the largest direct sellers of quality skin care and color cosmetics in the world.

This, too, is nice but irrelevant. That Mary Kay is making money is no evidence that Mary Kay distributors are making money. The pharaohs of Egypt were immensely rich; this doesn’t mean the slaves who built the pyramids for them were rich. McDonald’s makes tons of money; its workers usually don’t. While it is true that if Mary Kay did not make money its distributors would probably not make money either, the opposite isn’t the case. It’s quite possible for Mary Kay to make money and its distributors to still not make any money.

So, continuing reading along:

Company Facts:

• The Mary Kay Independent Sales Force exceeds 1.6 million Independent Beauty Consultants in more than 30 markets worldwide.
  
• Mary Kay Inc. has averaged double-digit annual growth since the company’s founding in 1963.
  
• In 2005, sales of Mary Kay® products exceeded $2.2 billion in wholesale sales.

Ah, now we’re getting somewhere. Finally some facts!

But, first of all, look at the second line. Is the fact that Mary Kay averaged double-digit growth a good sign? Not necessarily. MLMs always grow quickly, because the distributors in the MLMs always are looking for more and more people to recruit into the pyramid. This hardly means anything about the chances of any distributor to make money.

Now, consider the first and third line. First of all, what does wholesale sales mean? It doesn’t mean how much product Mary Kay distributors sold to others. It means how much product Mary Kay sold to its distributors, who get to buy Mary Kay’s products in “wholesale” prices. In other words, it is how much the distributors bought from Mary Kay.

So, on average, 1.6 million distributors bought $2.2 billion of products from Mary Kay, or $1,375 per distributor (in 2005). This tells us nothing about the distributor’s income; only how much inventory they (on average) bought from Mary Kay. To know how much profit a distributor made on average, we need to know (1) what percentage of the $1,375 of product she bought was sold at retail, and (2) what was the retail price.

Selling Mary Kay—Insanely Optimistic Scenario

Let us give Mary Kay the benefit of the doubt. Let us imagine that, for a moment, every single product that a distributor bought from Mary Kay was later sold in retail, just like it’s supposed to work. This is highly unrealistic, but just suppose there are, in fact, magically, a sufficient number of customers willing to buy retail for every distributor’s entire stock—and none of it ends up as unsold in someone’s basement.

So now let us see. What is the relation between the wholesale price the distributor bought the product for, and the retail price they sold it for (if they did)? Looking at Mary Kay’s web site doesn’t help, as all prices are given in “suggested retail” only. In theory, of course, it could be that everything the distributor bought for $1 is then sold at wholesale for $101, in which case the average profit per distributor per year is going to be $137,500, which is nice… but not too realistic.

We need, then, to decide about what the difference between retail and wholesale is here. I am, again, giving Mary Kay the benefit of the doubt. Let us imagine that the wholesale price is not one half, or one third, but one fifth of the retail price. On this very generous assumption, we get that the average distributor sold $6,875 worth of product, making $5,500 a year profit.

What, then, is better: selling Mary Kay, or working at McDonald’s? A minimum-wage job pays $5.15 an hour. For a 40-hour week (160-hour month), this comes out to $9,888 a year. In other words, working in the absolutely lowest paid legal full time job is almost twice as good of an opportunity as being a Mary Kay “business owner”—under insanely generous assumptions about Mary Kay’s profit margin and amount of stuff sold.

Put another way, in order for selling Mary Kay to be comparable with a minimum wage job and make $9,888 profit a year from $1,375 of wholesale product, she has to sell the $1,375 of product for $1,375+$9,888 = $11,263, or a markup of ($11,263/$1,375)*100% = (about) 819%. Does this sound realistic to you?

Selling Mary Kay—More Realistic Scenario

But things are actually worse than that. We assumed ridiculously unrealistic profit margins and amount of wholesale material sold in the Mary Kay business. Far more realistic is to assume that the wholesale price is, about, one half to one third of the retail price; and it is far more realistic to assume that—as we noticed before—there is every reason to believe that finding paying customers is very hard, so that at least 50% or so of the wholesale product is simply not sold and is a loss.

Note that if the wholesale price is half the retail price and half of the product is sold, the Mary Kay business owner can expect to make no profit at all; she sells 50% of what cost her $1,375—or $687.50’s worth of wholesale product—for twice of what she paid, or $1,375. Unfortunately, since she already paid $1,375 for the product, her net profit/loss is $0. If the retail price is three times the wholesale price, we get a yearly profit of ($687.50*3)-$1,375 = $687.50, or about $60 in profit a month—that is, $2 a day.

That is less than what one would make working two days a month in McDonald’s for minimum wage. That is only twice the level of what the UN calls “extreme poverty” ($1 a day)—and we mean here poverty according to the third world’s standards, not the USA’s standards. It is probably less than one could make begging in the streets for a week per month, or emigrating to Indonesia to become a subsistence farmer (average income in Indonesia is ca. $800 or so).

Summary

In sum, even under insanely optimistic scenarios, “doing” Mary Kay is about half as profitable as doing the worst possible (legal) job in the country, a minimum wage job with no extra time or other perks. Under more realistic scenarios, owning a Mary Kay business is somewhere between subsistence farming and begging on street corners in terms of profitability.

It is not surprising Mary Kay teaches you to put God and family before your business. After all, who’s going to bother to put a business whose profit would probably be somewhere between begging and a half-time minimum-wage job first in their lives?

About the Author:

Avital Pilpel holds a Ph.D. in Philosophy from Columbia University, NY, and a B.S. in Mathematics and Humanities from Hebrew University at Jerusalem, Israel. He is currently a post-doctorate research fellow at the University of Haifa, Israel. Dr. Pilpel states that his research interests are in “philosophy of science, rational choice, and, in particular, critical thinking–or lack thereof. This is what drew me to investigate MLMs, which show a curious mix of “rational” goals (desire to make more money, spend time with family, etc.) with irrational means (if I only buy more of this overpriced stuff, I’ll be RICH!)”