Self Deception: a cancer holding the MLM industry back

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.

  • Pastor Dickie

    KT, good video. I always enjoy your work. I saw your video with Walt at the brewery and thought you did a great job. What can be done to protect people from companies that operate like predators? I pray that you can have a positive impact on this industry and truly make a difference for those good companies that have great products and want to help people.I agree with you that the bad companies are having a terrible impact on this. God bless you Kevin. Pastor

  • Scott McLane

    Great article Kevin… With hordes of people seeking to supplement or replace their incomes due to the changes in the economy, this is the perfect opportunity to elevate the image of this often maligned industry. A network marketing home business would seem to be the perfect solution for many, but, for some reason, the “offering of a legitimate product with true value” seems to be the last thing an interested person can find. And, if a MLM attorney states, “there’s an ocean of gray” enveloping the industry, what chance does a new person have to cut through the hype and find a legitimate opportunity. Do people really need $300 worth of juice every month?

    The idea that a “legitimate product” is missing in so many companies does not so say much for the industry in general. Even in businesses offering seemingly quality products, potential customers often get bombarded with the biz opportunity. The overemphasis on making money, often presented as “easy money,” is so short-sighted because the long term success of any business is always the product or service. Hype never stands the test of time. While network marketers might want to ignore and dismiss the BurnLounge case as a bad company, doing bad business, public perception of the industry as a whole would probably agree with you that there are “more similarities than differences.”

    Why not keep it simple? Instead of elevating prices to increase monthly sales volumes… How about a legitimate product with mass appeal… Just the idea that a person has to wade through hype and gray area to find a legit network marketing opportunity does not bode well for the industry in general. Thanks for your honesty…

    • Kevin Thompson

      Great feedback, Scott. Thanks! It all begins and ends with good, marketable products.

  • http://MLMHelpDesk.com Troy Dooly

    Kevin,

    This is a subject we have ignored long enough. I agree 100% we need some solid clarification. I believe the moves in the past have acted as stepping stones to where we are today. Now it is time to make the clarification of exactly what a legit network marketing plan should be.

    I’ll stand with you my friend…

    Living An Epic Adventure,
    Troy

    • Kevin Thompson

      You’re the man! Thanks.

  • http:www.mlmconsultant.com Rod Cook

    I say that all MLM compensation plan designers that do not figure customer acquisition into MLM Pay plans should be shot! Did you know that you can use customers in the Binary compensation pay plan to reduce binary creep and keep the binary from paying out too much! The US Patent office should be shot for throwing out my customer driven compensation plans!! Customers have great use in fixing matrix plans by taking them out of the matrix tree and feeding them in via distributors… That is my revolutionary Infinity width Matrix. And it all is the fault of MLM Attorney’s for approving pay plans that do not include customer benefits!

    Rod Cook
    http://www.mlmwatchdog.com
    http://www.mlmconsultant.com/mlm_legal_Binary_Customers.htm

    • Kevin Thompson

      I know you’ve been a champion for custom acquisition for a very long time, Rod. Thanks for spreading the good word. How do we unify the power players in the industry to standardize it? That’s the real challenge.

  • http://kschang.blogspot.com K. Chang

    Having tracked a pyramid scheme that pretended to be MLM (TVI Express), and MLM industry for a few years, studying the writings about MLM by MLM lawyers such as Mr. Grimes, Mr. Nehra, and Mr. Thompson, and corresponding with many industry experts such as Rod Cook, Robert Fitzpatrick, and so on, my conclusion regarding the industry is that it is ALWAYS in danger of slipping over the edge into illegality. And I applaud Mr. Thompson’s “long view” of the industry and danger of self-deception.

    The problem is basically the murky divide between “customer acquisition” and “downline acquisition”. Getting paid to acquire customers is fine, but getting paid merely to recruit people, who in turn are also paid to recruit people, is a pyramid scheme. So what is the dividing line between customer, and downline?

    The difference is simple: one is outside the company, and the other is INSIDE the company. That’s the FTC position on “outside sales”.

    Every other day I see companies that tries to marry MLM with some sort of business, from internet ads to penny auctions to jewelry to cellular service. Many of them never even bothered consulting an attorney (such as you), and most simply thought if I slapped a MLM comp plan on this it’ll look so much more attractive. Many simply decided to word their comp plan as “membership” which gives access to whatever it is they offer, but if that member recruit more members, that member will get paid for THAT. THAT basically turned their LEGAL business into ILLEGAL pyramid scheme.

    Furthermore, IMHO The whole idea of “autoship” is an attempt to erode the definition of sales by expanding “self-consumption” and artificially generating “sales”.

    Furthermore, there is this fundamental disconnect between what MLM is supposed to do vs. what is its ultimate outcome. MLM’s ultimate goal is to build up a network where everybody sells stuff EXCEPT you, so you enjoy “passive income”, right? But doesn’t that directly run COUNTER to the idea that it’s about marketing, i.e. SELLING THINGS?

    I realize this is your forum, but I would like to point at my little essay, which I titled “Five Fatal Flaws of MLM”, and I would very much welcome constructive criticism. Much of the concerns mirrors yours.

    http://kschang.hubpages.com/hub/Networking-Marketing-is-doomed-to-failure-its-all-about-the-dream-not-reality

    • Kevin Thompson

      K. Chang,

      Good to see you on here. I appreciate the feedback. I can tell you’ve done your homework regarding the laws in the industry. Might I ask about your ultimate motive? Are you seeking to reform the space? Join a company? Start a company?

      • http://kschang.blogspot.com K. Chang

        I’m an economic skeptic that have had relatives in MLM but didn’t like the idea. I don’t hate it completely (I’ve seen the crazies, and the determined on both sides) , but I’ve also seen the amount of destruction a fake MLM can do (TVI Express is believed to have sucked in over 1 BILLION Rand in South Africa alone, according to news there) and fake MLMs would not exist without real MLMs to hide among.

        I would love to see some reform in the space, as much as you do.

  • D.White

    Hi Kevin.

    Firstly, thank you for being one of few learned people out there providing some leadership and constructive advice in this area. I am new to mlm and more specifically I have recently joined zeek rewards as an affiliate. I am pleased to see that Mr. Chang, a persistent adversary of zeek rewards, has popped up in your Discussion thread. I too, have been curious about Mr. Chang’s (& others at Behind Mlm) motives for intently paving a road for the demise of zeek rewards.

    I think I recall hearing that you are assisting Zeek Rewards on compliance issues. As a new affiliate that is very excited about the zeek business model and it’s potential to evolve into something of a household “name”, are you able to shed any light on the controversy surrounding Zeek Reward’s ability to escape the definition of pyramid / ponzi scheme. I ask this because if we are not able to address this issue, more and more forums like behind mlm will continue to gain traction on this issue of zeek rewards.

    I appreciate any feedback you can provide on this topic.

    • Kevin Thompson

      Thanks for the kind words. I do not represent Zeek, I represent their competitor, Bidify. As for Behind MLM, the problem with most MLM critics is that they resort to personal attacks and they only talk about problems without discussing solutions. I’m not seeing this kind of slime on the Behind MLM page, so I’ll continue to check it out. As K. Chang demonstrates here, assuming he’s part of the Behind MLM effort, they’re amenable to engaging in a normal conversation, which is rare among the skeptics.

  • Porkchop

    Kevin, What happened with your proposed Tennessee bill? Did it become law?