It’s a strong title, I know. But it’s true. We all suffer from “self deception” to a certain extent. It’s a trick we play on ourselves to shift accountability. We tell ourselves that we’ll start that diet….next week. We tell ourselves that we lack the time to read and learn new skills. We tell ourselves that exceptional people are just born exceptional. We tell ourselves that we need just a little more education and work experience before we start our own businesses. We give ourselves every possible excuse to maintain our view of the world. Change is scary. It hurts; hence the saying “no pain, no gain.” Yet, there’s no way around it. Change is a prerequisite for progress. Strong leadership is required to ensure that the RIGHT kind of change is being pursued. Right now in the MLM industry, we’re heading in the wrong direction, in my opinion. I’m just calling it like I see it. I’ll admit, I’m part of the problem. I’ve got leadership positions and I’ve done a poor job at communicating the scope of the problem.
So what’s the problem?
We need clearer standards. The MLM industry is cloaked in a veil of ambiguous law where there’s an ocean of gray separating legitimate companies from pyramid schemes. I was prompted to write this article based on the industry’s response to the BurnLounge Final Order (click here for a summary of the BurnLounge decision). Since BurnLounge’s fate was officially sealed when the final order hit last month (pending an appeal), people are now figuratively saying “yeah, I always knew those guys were really stupid. After all, their product could not really stand on its own in the marketplace.” (See comment above about self deception). And now, people are rightfully unnerved by some verbiage in the BurnLounge order. In particular, the Order defines a “Prohibited Marketing Scheme” as:
[A]n illegal pyramid sales scheme . . . in which participants pay money or valuable consideration in return for which they obtain the right to receive rewards for recruiting other participants into the program, and those rewards are unrelated to the sale of products or services to ultimate users. For purposes of this definition, a sale of products or services to ultimate users DOES NOT include sales to other participants or recruits or to the participants own accounts. (emphasis mine).
In other words, according to this Order, it’s illegal to pay commissions on volume consumed by other participants in the downline. This is a practice EVERYONE does, across the board. In fact, in it’s advisory letter to the DSA, the FTC has stated this is fine.
Consequence of the BurnLounge Order?
Before you lose sleep over the BurnLounge Order, keep in mind this definition is not automatically binding for future decisions. It has no authoritative value beyond this Order. But what if a judge with an axe to grind against the industry wants to adopt a similar interpretation of “Illegal Pyramid Scheme?” And what about your future customers? What if they come across this definition? It could easily be interpreted as the law of the land, causing more confusion and disharmony in the industry. Someone could very easily read it and falsely think, “Huh, that makes sense.” Whether it carries authoritative value or not, I’m not comfortable with this definition inked on an Order.
But here’s the kicker. Given the ambiguity in the law, what do we expect? What IS the definition of a pyramid scheme? It’s basically been boiled down to a “you know it when you see it” test. Universally, we all agree that products in the industry need to have the ability to stand on their own in the marketplace irrespective of the compensation plan. So we all admit that there’s needs to be SOME revenue attributable to outside customers i.e. people unaffiliated with the program. In the BurnLounge case, only 3% of its revenue came from customers. How much is enough? There’s no firm answer.
Was BurnLounge really that different?
While we’re coming up with reasons to distinguish BurnLounge from the rest of the companies in the MLM industry, I see more similarities than differences. While they made some very stupid mistakes, whether it be by bad counsel or corporate hubris, at the end of the day, they were buried by their paltry customer numbers.
So how do we respond? How do we improve?
One option is to seek peace. To try to convince ourselves that the owners were simply reckless. The better option would be to seek improvement by having an honest conversation about the problem. While we easily roll BurnLounge under the bus and reference their junk products as the main reason for their demise, we should at least acknowledge, industry-wide, the major importance of accruing revenue from external customers. When proving the marketability of a product, the only metric that really matters is revenue from customers. More is better. While we all agree that BurnLounge was a bad business, we need to have an honest discussion about WHY it was a bad business. And all roads leads to the offering of a legitimate product with true value.
Instead…
We’re trying to “get tough on crime” by passing legislation that would effectively legitimize a model very much like BurnLounge. Instead of shrinking the gray and increasing the standards in the industry, we’re falling back to old tricks, talking about resurrecting old bills to “clarify” the ambiguity in the industry. We all know the FTC and regulators want to see external sales. So why are we even discussing old bills that obliterate all external sales obligations? The DSA model legislation, in my opinion, does not go far enough. In the bill, it carves out an exception for an illegal pyramid scheme as:
(A) Nothing in this Act may be construed to prohibit a plan or operation, or to define a plan or operation as a pyramid promotional scheme, based on the fact that participants in the plan or operation give consideration in return for the right to receive compensation based upon purchases of goods, services, or intangible property by participants for personal use, consumption, or resale so long as the plan or operation does not promote or induce inventory loading and the plan or operation implements an appropriate inventory repurchase program.” (emphasis mine).
Inventory loading is defined as:
The plan or operation requires or encourages its independent salespeople to purchase inventory in an amount, which exceeds that which the salesperson can expect to resell for ultimate consumption or to consume in a reasonable time period, or both.
It might take you a few times to read it to understand the gray area. But basically, if the product gets consumed in reasonable quantities each month, the company is not a pyramid (in most cases). Suppose we sell a membership to a Facebook-wannabe website. In this business, we charge $10,000 per month to access a clunky social network, one that offers half of the features found on a free alternatives. Is it “inventory loading?” The site, after all, is being used. What if we sold $10,000 shots of lemonade? If people drink the lemonade, is it “inventory loading?” Clearly, it’s a case of opportunity driven demand. Clearly, it would be a BurnLounge-esque program where the lemonade is a token product concealing a money transfer scheme. I want to engage in a conversation with the DSA to simplify and tighten the current bill. One thing is for sure: nothing is going to get done on a legislative level without the DSA’s support.
HR 1220
And what about the congressional bill that was proposed in 2003, titled HR 1220 Anti-Pyramid Promotional Scheme Act? In that bill, a similar definition of “Pyramid Scheme” is illustrated:
The term `pyramid promotional scheme’ means any plan or operation in which a participant gives consideration for the right to receive compensation that is derived primarily from the recruitment of other persons as participants in the plan or operation, rather than from the sales of goods, services, or intangible property to participants or by participants to others.
Again, the bill creates a carve-out that would allow a company like BurnLounge to skate by with NO retail sales to customers.
Before we complain about a judge’s dangerous definition of a “pyramid scheme,” we need to acknowledge that we’re not exactly helping ourselves by fighting for fewer safeguards. If we’re not able to get on the same page regarding sensible standards, a judge will do it for us at the stroke of a pen. Somewhere along the way, we’ve been convinced that it’s in our best interest to push for these sorts of solutions. I’m telling you, we NEED to do better.
Saving the industry by defining the gray
When I first started my practice, I wrote an ebook titled “Saving the network marketing industry by defining the gray.” The thesis is right there in the title. The industry needs saving. And it can only be saved by creating clear standards to distinguish good companies from the bad ones. And it’s going to take courage and a little bit of sacrifice.
Conclusion
There’s a lot of people upset at the verbiage in the BurnLounge order. The outrage makes sense. But…I think this Order is just the tip of the iceberg if we’re not able to improve the standards. And in order to improve the standards, we need to stop with the self-deception, pull ourselves out of the box and acknowledge the problem. If we do not find a viable solution to the problem, a judicial body will!
Proposed Solution
The sponsor relationship between a distributor and a new participant is the foundational element in the industry. How a participant is recruited generally dictates how they build the business in the future. The idea of recruiting someone and training them to only get on autoship and recruit more people is broken. In theory, when someone sponsors someone else, they’re committing themselves to teaching that new person how to move product and build an organization. Before they’re allowed to build an organization, it makes sense that they demonstrate SOME proficiency in selling product. Before I teach you how to sell soap, I should at least have some demonstrable results doing the same, right?
Until someone provides a better idea, I’m a believer in a required retail sales rule. Before someone can earn a bonus on downline volume, they must make a single sale each month to a nonparticipant customer. Keep in mind, this is only an idea. It’s not currently the law, so it’s perfectly fine for companies to operate without a retail sales rule. If each distributor were required to sell something, they’d think long and hard before joining a company with gratuitously inflated prices on the products. When Amway got in trouble in the UK, they were saved by their decision to require $200 in retail sales before someone can sponsor other participants. This incredibly high standard is not necessary here, but we can learn from it. In the 70s when Amway got into some heat with the FTC, they were saved largely by their retail sales rule. I drafted a proposed bill for Tennessee lawmakers a couple of years ago. I still think it advances the industry in the right direction.
The alternative: nothing gets done. If you’re not supportive of higher standards in the industry, at least stop complaining when judges create their own definitions.
What do you think?
Does the BurnLounge order concern you? What can we do to improve? If you learned something in this article, please hit the +1 button or “Like” it.
