MLM Income Claims: Basic guidelines for companies and distributors | FTC (Part 2)

INTRODUCTION

In the last article, MLM Income Claims: Basic guidelines for companies and distributors | FTC, we walked through the Federal Trade Commission’s (“FTC”) recent allegations against Fortune Hi-Tech Marketing (“FHTM”) regarding income claims made by its distributors. In this installment, we’re going to see what it takes to give an adequate disclosure for the claims made.

The format is simple: First, I’m going to lay out what a company needs to provide for its distributors in order for them to give proper disclosures. Next, I’m going to walk through the examples cited by the FTC against FHTM and demonstrate how to make a proper disclosure under the circumstances using the framework provided by the court in Nat’l Dynamics and the FTC’s .com Disclosure Guidelines. The goal of this post is to provide you with practical, blanket instructions to make adequate disclosures. Ready to get started? All right, let’s get down to business.

THE INCOME DISCLOSURE DOCUMENT

The best way for a company to ensure that claims regarding its payment plan are given properly is to put the information on a silver platter for the distributors to use. It’s not the distributors’ job to gather the data; it’s the distributors job to zealously represent your company and all the while properly disclosing the information provided to them. This is why every company should provide its distributors with an income disclosure document: the ultimate, end-all-end-all, “Swiss Army knife” for distributors to give income claims.

At a minimum, an income disclosure document should include:

  1. A statement of the average amount of time per day, week or month spent by the distributors at each rank to achieve the various levels;
  2. The year or years during which the disclosed results were achieved;
  3. A statement of the average earnings achieved by all distributors at each rank;
  4. The Highest and Lowest earnings achieved weekly by distributors at each rank; and
  5. The percentage of distributors at each rank who achieve the average income.

Here is a (very) simple example of what an income disclosure document should kind of look like. This can be done on Excel in 10 minutes:

disclosure chart

These are some specific examples referenced by the FTC in its lawsuit against FHTM.

RECORDED VIDEO PRESENTATIONS

Claim #1:

One distributor claimed in a recorded video presentation that “four months into the business [with FHTM]… I had actually quadrupled what I have ever made as a Registered Nurse.”

Claim #2:

A distributor claimed on her Vimeo site that distributors who reach the National or Executive Sales Manager levels “are making thirty-, forty-, sixty-, seventy-thousand a month.”

Claim #3:

The FTC alleged distributors frequently made lifestyle claims, such as highlighting extended family vacations to exotic locations, driving nice cars, and purchasing large homes with luxurious amenities.

The Answer

If you will remember back to the FTC’s Disclosure Guidelines for Online Marketing: How to get it right (Part 2), we explained that a text income disclosure displayed in the video DURING the claim in addition to a more detailed audio and video formatted disclosure at the end of the testimonial was the best strategy. During the video disclaimer at the end of the testimonial video, an image of the company’s income disclosure document should be displayed with audio narration regarding the average earnings.

Regarding Claim #2, the court in Nat’l Dynamics provides some guidance:

Statements of ranges may be deceptive if the earnings ranges are too large. A consumer presented with a statement that thousands of distributors have earned from “$ to $” is likely to assume that the average lies somewhere near the middle of the range, and that substantial numbers of people have achieved results in the top of the range.

In order to provide an earnings range like the one given above, it must be provided with a “clear and conspicuous” disclosure of the percentage of all distributors that achieved results within the range. If the ranges are from $0 and up, the disclosure only needs to indicate the number of distributors within each range or the percentage of distributors in each range. Luckily, all of this information is provided in our income disclosure document shared above.

RECORDED AUDIO PRESENTATIONS

Claim #4:

The FTC alleged that a distributor on a recorded conference call stated that someone earned over $50,000 in his sixth months with the company alone and that he “earned millions and millions beyond that” in subsequent years.

Claim #5:

Regarding another conference call, the FTC alleged a distributor stated that someone else was earning “over $100,000 a month” after three years with the company.

The Answer

It’s impossible to give an audio disclosure simultaneously as an audio claim (Go ahead and try it out loud to yourself). Since the claim is in audio format, we must provide a disclosure in audio format as well. Using the information provided in the income disclosure document, all earnings discussed should be addressed.

This isn’t a science, so you must get creative in order to find the easiest and most efficient way for you to equip your distributors with the tools they needs to give adequate disclosures. One suggestion is to provide distributors with a script to read before these calls that explains the average earnings. Another option is to provide an audio file to download on your homepage that distributors may attach to the beginning of their audio presentation before they post it.

Since the audio claims were posted on team websites, a hyperlink could also be provided under the audio clip like this: “The average distributor earns $___ per month. Click here for more information and disclosures about the income ranges discussed in the audio presentation.”

TWITTER

Claim #6:

The FTC alleged a distributor posted on her Twitter account about a recruiting meeting, encouraging people to “Bring ur friends & learn how 2 make $100k aYR.”

The Answer

I’m going to preach this until the cows come home: Do not make income claims via Twitter. “But Kevin!” you say, “I can simply insert a hyperlink to a proper disclosure, right?” Wrong! There is simply not enough real estate to provide an adequate income disclosure on Twitter.

FACEBOOK PHOTO

Claim #7:

The FTC alleged that at a national convention, 30 top earners were called to the stage to be presented with a mock check for $64 million to represent the amount of money they earned with the company. Several distributors later shared a photo of the presentation on Facebook.

The Answer

In the caption of the photograph: “Results not typical. The average distributor earns $____ per <week, month, year>. Click the link for a full disclosure.” The link should lead the consumer to a page where they will be provided with an image of the income disclosure document.

CONCLUSION

It’s time for the industry to wake up and smell the coffee.  The FTC is taking these earnings claims very seriously.  And as technology is making it simpler for distributors to make these sorts of claims, the responsibility is increasing for companies to properly educate the field. Looking forward, it’s vitally important to have adequate compliance training and to supply distributors with the up-to-date information that they need to make proper income claims. Most importantly, the information needs to be provided in such a way that they any consumer can look at the information and be able to understand the underlying facts so they may make a fully informed decision.

Herbalife Announces FTC Investigation

Herbalife announced that the FTC has initiated an investigation. While it’s not pleasant to deal with a government subpoena, this gives Herbalife an opportunity to put this issue to rest. Watch the video below to get my thoughts. In summary, I believe the FTC will use the data it collects from Herbalife to sharpen its saw in an effort to create better guidelines for network marketing companies. They’re not going to sue Herbalife (though I’m sure they’re thinking about it). If you’re reading this via email, click here to watch the video. The paper referenced in my video can be found embedded below (or here).
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Zeek Receiver Sues Insiders: Paul Burks and Others Served With Lawsuit

Hat tip to Don Ryan over at ASD Updates for breaking the story on the lawsuit.

 

FTC Responds to Senator Markey’s Letter about Herbalife

MLM LawIn January of 2013, Senator Markey from Massachusetts called upon the FTC to investigate Herbalife. I made three predictions regarding the FTC’s response to Markey’s letter. I predicted: (1) The FTC would respond AFTER Markey’s requested dealing (Feb. 28); (2) the FTC would say nothing about Herbalife’s business model; and (3) the FTC would use this as an opportunity to start a broader conversation to help add clarity to the “gray” in the industry.

Well, there are two ways to look at my predictions regarding the FTC’s response.  I was either 66% wrong or 33% right. I’ll let you decide;)

The FTC’s letter to Markey is below. If you’re reading this via email, click here to read the letter.

The letter is easy to understand and interpret. Basically, the FTC cannot comment about Herbalife (which was the one prediction I got right). This is a quick summary of the letter:

85% of the letter was spent justifying the existence of the agency. I’ve paraphrased this part of the letter: “We’re busy and we’ve had a number of successes recently with respect to pyramid schemes and weight loss claims. While some say we’re dormant, we’re doing our best.”

The remaining 15% contains their response regarding Herbalife. It’s included below. I’ve paraphrased: “Thanks for bringing these concerns to our attention. We’re not able to talk about it. Just FYI, we assess a number of factors before making a decision to take actions. The factors referenced here are nebulous so as not to commit ourselves to anything specific. If consumers are having problems, give them our information.”

I have mixed thoughts about this response. I was hoping for something with more substance…something about their vision for the industry. But alas, we’ll save the discussion for improvements for a later date. At some point, the industry needs some help. The regulators are not able to squish all of the bad guys, which has led to a dirty environment.

With respect to the allegations against Herbalife, Ltd., a number of statutory provisions and the Commission Rules of Practice prevent me from discussing what action, if any, the Commission may take in any particular situation. I can assure you, however, that the information you provided and the concerns you expressed are being carefully considered. In general, in determining whether to take enforcement or other action, the Commission may consider a number of factors, including the nature of the practices at issue; the type of violation alleged; the likelihood of preventing future unlawful conduct and securing redress or other relief; the nature and amount of consumer injury at issue; and the number of consumers affected.

Complaints from consumers can provide valuable information that we frequently use to identify deceptive and unfair practices in the marketplace. Therefore, please encourage your constituents to file their complaints with the FTC, in English or in Spanish, by visiting the FTC’s online Complaint Assistant at https://www.ftc.gov/complaint or by calling 1-877- FTC-HELP (1-877-382-4357).

Senator Markey’s Letter to the FTC: Prediction

Recently, Senator Markey from Massachusetts called upon the FTC to investigate Herbalife.  His full letter is included below. Click here to read if you’re reading via email. It’s worth mentioning that that the letter was likely originated by someone at Pershing Square, as observed by John Hempton. Markey has useful letterhead, being a U.S. Senator and all. I digress…

These are my predictions:

  • The FTC will respond. While Markey’s letter called for a response by February 28, I’m guessing they’ll respond after the deadline but by late April.
  • The FTC is not going to respond specifically about Herbalife. Three points worth mentioning here: (1) The FTC lacks the data to provide any meaningful commentary about Herbalife; (2) If the FTC had a problem with Herbalife, they’re not going to announce same at the behest of a Senator; and most importantly (3) Herbalife is not a pyramid scheme.  Ackman is playing another confidence game, and the market has grown immune to his tricks.
  • The FTC is going to take this as an opportunity to start a broader discussion about the network marketing space.  There’s an ocean of gray that separates legitimate network marketing companies from illegal pyramid schemes.  As a result of this ambiguity, fraudulent programs are flying under the guise of network marketing, claiming legitimacy because they’re “just like Amway.”  In my opinion, this is the underbelly of the space that the FTC needs to address, not companies like Herbalife.  What will these guidelines look like in the future?  That’s a different set of predictions for another time.

The video is a short one. I hope you find it informative. If you’re reading this via email, please click here to view the video.

Update: Herbalife’s CEO, Michael Johnson, personally wrote a response to Senator Markey. It’s also included below.

So You’ve Heard I’ve Been Retained?

In this video, I explain what it means when our firm is retained by a network marketing client. The fact that I’m retained should never be viewed as an endorsement of the program. There’s a lot that goes one when I’m working with a client and I make it very clear that my name is never to be used in a promotional sense i.e. “We hired Kevin Thompson and he says we’re a great company.” I want you to have a better understanding of what it means when I’m retained by a client. Watch this video to understand more.

The Cease and Desist

lawyer_joke_accounting_cartoon

If you’ve been in business for very long, there’s a good chance you’ve received what I call an “eat s%@#” letter from a lawyer. These are commonly referred to as “cease and desist” letters and are designed to serve two functions:

  • Intimidate the other side in an effort to get them to stop doing something; and,
  • Put the other side on notice that if the bad behavior persists, they could get sued.

Cease and desist letters are commonly used by network marketing companies when distributors are raiding the downline.  I’ve sent dozens of these letters to disgruntled distributors on behalf of companies, usually with a bit of discomfort while hoping the information I’m fed is accurate.  This is my litmus test I explain to clients before sending a C&D: if they’re willing to spend the money to sue the other party if the letter is ignored, I’ll send it. Otherwise, I’m not interested in allowing a client to take a gamble with my credentials.  I’m not a fan of sending hollow threats.  When someone sees a C&D on Thompson Burton letterhead, it needs to be known that we follow up, otherwise C&Ds are meaningless.

Negative Online Commentary

Negative online commentary is the cost of doing business. If you’re doing anything meaningful, there’s going to be some skeptical people. And if you’re doing something shady, there’s going to be a lot of skeptical people, some of whom will choose to write an article about you or your business. It’s the nature of the internet. We all have the power to publish content at the push of a few keys. While I have several thoughts on how companies should deal with negative online articles, I’m going to focus instead on what they should NOT do: have their lawyers send Cease and Desist letters.

In all of my years seeing online publishers post negative commentary about companies here and there, I have never once seen an author actually heed the C&D (hey, that rhymes). Troy Dooly gets them. BusinessForHome gets them. And now we can add Oz over at BehindMLM to the list. Oz was recently sent a C&D regarding his review about “BidsForMyMeds.” And what was the result? The article was not pulled down. On the contrary, Oz dedicated another article to the business and made the poor lawyer famous. Unless a company is willing to defend itself publicly on a platform it does not control, it should always lead with a hand shake instead of a handgun. Be proactive instead of reactive. I have yet to see an instance where an online author posts blatant lies about a company or person. In that scenario, it might make sense to throw a punch. In nearly all cases, the authors are providing their opinions. As biased as those opinions might be, they’re still opinions and given broad protections under the First Amendment.

Scope of the First Amendment

When you’re thinking about calling your lawyer to send one of these nasty-grams to an online meanie, it’s important to understand the limits of First Amendment protections. Below, I’ve inserted some notes from one my talks a few years ago with respect to the First Amendment and blogging. Bottom line: save the Cease and Desist for those occasions when the damages are real, you’re justified and you’re fully prepared to go the distance. Otherwise, throw water on the fire instead of gasoline by reaching out human-to-human and engaging in a conversation. Keep your emotions under control.

If you’ve received a C&D, how did you handle it?

Beginning of my notes

DEFAMATION

A statement is defamatory if it “tends to injure the plaintiff’s reputation and expose the plaintiff to public hatred, contempt, ridicule, or degradation.” Phipps v. Clark Oil & Ref. Corp., 408 N.W.2d 569, 573 (Minn. 1987).
The defendant must have known or should have known that the communication was false. The statement must also have been a statement of fact.

Defamation Per se

Some statements are so defamatory that they are considered defamation per se; and the plaintiff need not prove that the statements harmed his reputation. The classic examples of defamation per se are allegations of serious sexual misconduct; allegations of serious criminal misbehavior; or allegations that a person is afflicted with a loathsome disease.

What Constitutes Injury to Reputation?

The plaintiff must establish proof of damage to reputation in order to recover any damages for mental anguish; see Gobin v. Globe Publishing Co., 232 Kan. 1, 649 P.2d 1239, 1244 (1982).

Libel-proof plaintiffs

Some plaintiffs have such poor reputations to begin with, they are considered “libel- proof.” A plaintiff is “libel-proof” when his reputation has been irreparably stained by prior publications. At the point the challenged statements are published, then, plaintiff’s reputation is already so damaged that a plaintiff cannot recover more than nominal damages for subsequent defamatory statements. Marcone v. Penthouse Int’l Magazine for Men, 754 F.2d 1072, 1079 (3rd Cir. 1985).

Defenses to Defamation

Truth is an absolute defense.

If the communication is designed as a parody where a reasonable audience would not confuse it as factual, it is not actionable. Falwell v. Hustler Magazine. In Falwell, the Supreme Court held, “At the heart of the First Amendment is the recognition of the fundamental importance of the free flow of ideas and opinions on matters of public interest and concern. The freedom to speak one’s mind is not only an aspect of individual liberty – and thus a good unto itself – but also is essential to the common quest for truth and the vitality of society as a whole. We have therefore been particularly vigilant to ensure that individual expressions of ideas remain free from governmentally imposed sanctions.”

In the mid-80s, Hustler magazine printed a satirical advertisement talking about Jerry Falwell’s “first time” with liquor. The advertisement was a play on words that made it seem like Jerry was talking about his “first time” with his mother. Since the advertisement was clearly a parody and one where a reasonable audience would know that the statements were not factual, Jerry Falwell lost his lawsuit.

“Actual Malice”

If the Plaintiff is considered a Public Official or Public Figure, they have to prove that the Defendant acted with malicious intent to harm the Plaintiff. It’s an extra element that makes it more difficult for public figures to file suit against their detractors.

What’s a Public Figure/Official

In general, Public Officials are individuals that hold public office while public figures are individuals that are in the forefront of particular issues.

Large, publicly traded companies are typically treated as “public figures” for purposes of First Amendment cases. If a citizen lashes out at Comcast and communicates false statements. Comcast would have the additional burden of proving that the individual acted with malicious intent to harm the company.

Opinion defenses

The First Amendment protects statements of opinion, as distinct from statements of fact, against claims of defamation. A statement is an opinion when:

(1) the statement is genuinely believed; and
(2) that there is a reasonable basis for that belief; and
(3) that the speaker is not aware of any undisclosed facts tending to undermine the accuracy of the statement.

Prefacing a sentence with “in my opinion” is not always the cure. Statements of opinions can be actionable when one of the above factors is absent.

— end notes –

Dawn Olivares, Operations Officer for Zeek Rewards, Pleads Guilty To Two Counts of Fraud

Dawn Olivares, operations officer at Zeek Rewards, pled guilty today to two counts of criminal charges for her involvement with the ponzi scheme. The SEC broke the story this morning in an article titled “SEC Charges Woman and Stepson for Involvement in ZeekRewards Ponzi and Pyramid Scheme.” The copy of Dawn’s guilty plea is signed below (hat tip to Don Ryan over at ASD Updates for finding the document). She pled guilty to both counts levied against her: Count 1 = Securities and Wire Fraud. Count II = Conspiracy to Defraud the IRS. Both counts carry a maximum penalty of 5 years imprisonment. The charges were filed and a plea was entered the same day, which tells me this was all negotiated between Olivares and the federal authorities. We’ll see what kind of penalty shakes out of this. See below for an excerpt from the SEC’s press release:

The SEC alleges that Dawn Wright-Olivares and Daniel Olivares, who each now live in Arkansas, provided operational support, marketing, and computer expertise to sustain ZeekRewards.com, which offered and sold securities in the form of “premium subscriptions” and “VIP bids” for penny auctions. While the website conveyed the impression that the significant payouts to investors meant the company was extremely profitable, the payouts actually bore no relation to the company’s net profits. Approximately 98 percent of total revenues for ZeekRewards – and correspondingly the share of purported net profits paid to investors – were comprised of funds received from new investors rather than legitimate retail sales.

If you’re reading this via email, click here to download a copy of the guilty plea.

Article on Seeking Alpha: Ackman’s Folly With Herbalife: 7 Assumptions That Led Him Astray

I published an article on Seeking Alpha yesterday. SA is a site dedicated to stock analysis. As a wannabe-tech nerd, I think their site is brilliant. People interested in a stock can subscribe to receive updates when articles are published about the specific stock. If you have the mobile app, you’re notified when new articles are live. Herbalife has been a widely discussed stock over the past year. It’s been almost a year since Bill Ackman gave his first presentation about Herbalife. In this article, I outline the seven assumptions that caused Ackman to miss big. The article got 90+ comments on day 1. Some favorable, some not-so-favorable.

Check it. Chime in. Share.

Bill Ackman’s Folly With Herbalife: 7 Assumptions That Led Him Astray

Direct Selling: The Great Equalizer and Opportunity

This article was written by the former President of the DSA, Neil Offen. It was published in Direct Selling News magazine. The article was so well-written that I requested permission to republish on my site. In the article, Neil dispels of several myths about network marketing and he casts a strong vision on ways to improve its reputation. I’ll gladly share my site with anyone willing to LEAD the industry in a better direction. At a time when the industry is being attacked by people with a financial incentive to bring it all down, this content is important and it’s very worthy of your attention. +Kevin Thompson

By Neil H. Offen

Neil Offen New Perspectives Direct Selling

It has been slightly over two years since I retired after 40 years with the Direct Selling Association (DSA), first as a staff attorney and lobbyist and eventually as President and CEO. In addition, I was there at the creation of the Direct Selling Education Foundation (DSEF) and the World Federation of Direct Selling Associations (WFDSA), serving as Vice Chairman and Secretary General, respectively, of those two organizations.

I have spent some 42 years in our industry—the reality is that it’s a method of distribution more than an industry per se—representing it, protecting it, promoting it and policing it. To say the least, I have seen much change, much adaptation, and much growth and innovation during that period. At the same time, I have seen the industry’s core values remain focused on empowering people one individual at a time, seen it being led by women and men of integrity and high moral character, and seen a continuing commitment to and passion for our distributors by corporate management.

I have also witnessed a spirit of service by our industry and its companies, their personnel and their representatives in the field in the various communities in which they operate. Given all of the good that our industry represents, it is disappointing to see the negative attacks on it. At this juncture in the road, the direct selling industry faces the question: Do we let our critics define us or do we take steps to make sure we better control our own reputation?

To explain what I mean, I will be focusing on four areas. One disclaimer that I need to make at the outset is that I am speaking for myself and only myself. I am not representing the DSA, the WFDSA or any other entity.

The four areas I will discuss are the industry’s attributes, the negative myths and canards leveled against it, the actions that can harm the reputation of the industry, and finally, what I see as possible solutions and courses of action that will continue to protect, promote and enhance the reputation of the direct selling industry. I use the terms sales personsconsultantsdistributors and representatives interchangeably throughout the article.

Do we let our critics define us or do we take steps to make sure we better control our own reputation?

Direct Selling Attributes: What Are They?

All of us working in direct selling believe in its positive attributes. I’ve listed here those truths about the direct selling opportunity that I believe are most powerful:

  1. It empowers people. Its diversity is without bounds. It offers opportunities for people to set their own objectives, great or small, through full- or part-time efforts, for career opportunities or merely for supplemental income. It is an industry that directly ties reward to effort. It does not discriminate based on race, gender, national origin, religion, age, physical condition, educational background, political beliefs or financial resources;
  2. It provides unlimited flexibility for the individual to achieve her or his own   goals and control the time spent in the business as well as how that time is spent;
  3. It drives micro-enterprise development wherever it operates—in a world seeking and needing such enterprises—and is a robust, grassroots source of business skills education, guidance and training;
  4. It motivates people through providing recognition, quality products and services, technical resources and an overall nurturing environment with ongoing symbiotic support;
  5. It provides opportunities with minimal capital investment or risk of loss;
  6. It provides consumers with outstanding product warranties and guarantees in each marketplace in which it operates;
  7. Its rules and standards, through company policies and through the independently administered direct selling associations’ codes of ethics, protect both salespeople and their consumers from abuse;
  8. It is a simple business, though not necessarily an easy one, and due to the independent contractor status of each salesperson, it allows great ease of entry and egress;
  9. It is global in nature and borderless in promotion of common core values and ethical standards;
  10. It is innovative, adaptive and technologically friendly;
  11. It has a strong public service and corporate social responsibility orientation at both the corporate management and the individual distributor levels;
  12. It offers social contacts in a world where more and more people are becoming isolated from one another;
  13. It is cause-oriented where its distributors believe in the product or service or opportunity and that they are helping to fill a valuable need of friends, family, neighbors and the public at large; and
  14. It is a source of social and economic stability and opportunity within all its markets

“Direct selling motivates people through providing recognition, quality products and services, technical resources and an overall nurturing environment with ongoing symbiotic support.”

Myths and Canards

Several untrue assertions regarding our industry permeate the Internet and mainstream news media. The following are some of the misstatements or outright lies often attributed to our business model.

Myth No. 1: All—or almost all—people who participate in direct selling lose money.

In my experience, the reality is that an overwhelming majority of people who join a direct selling company to sell products and build a business do profit from it. DSA research shows that over 80 percent of business-oriented recruits have very modest goals when joining a company and the vast majority, whether still with the firm or no longer in the industry, have their expectations met or exceeded. The distributors earning the highest level of income are the business builders who typically spend significant time on the business selling, recruiting, motivating and training distributors and consumers in their organizations. They generally constitute between 10 percent and 20 percent of the salesforce. There is nothing wrong or unethical about this model, and this is similar to most non-direct selling retail sales organizations.

In addition, the industry has implemented safeguards against financial loss. The biggest protection against financial loss for all participating in our business is the unconditional product money-back guarantees for consumers and, for sales people, our minimum 90 percent inventory buy-back. All DSAs require their member companies to offer buy-back protection to all their distributors. Membership in a DSA is an added protection from abuse for sales people, potential sales people and consumers.

“DSA research shows that over 80 percent of business-oriented recruits have very modest goals when joining a company and the vast majority … have their expectations met or exceeded.”

Myth No. 2: Self-consumption by sales persons is a problematic practice.

In fact, there is no binding precedent that establishes that a set amount of sales must be sold to persons outside the sales organization. The seminal FTC/Amway case in 1979 created a “70% rule,” but that rule only applied to the requirement that the distributors certify that they had sold at least 70 percent of their inventory in the prior month before they could be permitted to buy additional inventory. (Note: This case was long before the industry adopted the 90 percent inventory buy-back standard as part of the DSA Code of Ethics, which occurred in the mid-1990s.)

Our industry’s standard of the buy-back removes the possibility of inventory loading if the firm is bound by the buy-back and it is properly administered. A distributor who purchases a product to personally consume it is a “consumer,” and there is nothing inherently wrong with paying compensation on these product sales.

Myth No. 3: Multilevel direct sales firms will fail due to geometric progression and turnover rates.

This simply may seem logical mathematically, but only if you start with the assumption that everyone is purchasing products solely to qualify to earn large amounts of compensation by creating a network and earning compensation on similar downline purchases. It does not occur in the real world because the assumption is faulty. Most persons signing up as salespeople in our industry are either seeking to buy product at a discount or for supplemental income, putting in less than 11 hours per week, and not that much in every week.

The FTC tried to make the geometric progression argument to the Second Circuit Court of Appeals in the Ger-Ro-Mar Inc.  vs. FTCcase back in 1975. Ger-Ro-Mar sold bras and lingerie. In the words of the Second Circuit Court of Appeals:

“We find no flaw in the mathematics or the extrapolation [presented by the FTC] and agree that the prospect of a quarter of a billion brassiere and girdle hawkers is not only impossible but frightening to contemplate, particularly since it is in excess of the present population of the Nation, only about half of whom hopefully are prospective lingerie consumers. However, we live in a real world and not fantasyland (emphasis added).”

As stated above, the reality is that a majority join a direct sales firm either after having been a customer or wishing to buy its products at a discounted price. Most sales people and most direct sales firms market low-ticket, consumable products, and my educated guess is that over 50 percent of such sales people are sales people in name only. They buy the firms’ products at a discounted price for personal consumption and do not sell products or recruit other distributors. This percentage of “discount buyers” may approach over 90 percent of the salesforce of some firms and account for over 90 percent of product sales.

As with any sales organization, the industry experiences a high rate of turnover in its salesforce, but people join and leave a salesforce for a variety of reasons. For example, if a woman was working only one month before Christmas to earn Christmas present money, she would contribute to the high turnover rate even though she might return year after year for decades during the Christmas season. In addition, based on data that I have seen over the years, many sales people sell for more than one direct sales firm during the year, either simultaneously or at different times. I believe that between 10 percent and 20 percent of the sales organization falls into this category, thereby overstating turnover rates.

One final point on the geometric progression canard: I believe that the turnover rate of retail store personnel and franchise employees is very high. Strange that we don’t hear more about that and the fact that some work in retail stores because they are given employee discounts as part of their compensation plan. According to recent data, retail store employee discounts are often extended to the employee’s family and even sometimes to friends.

“The percentage of “discount buyers” may approach over 90 percent of the salesforce of some firms and account for over 90 percent of product sales.”

Actions That Can Harm the Reputation of the Industry

The reputation of our industry can be negatively impacted by a number of factors including the following:

1. Misconduct by a Member of a Salesforce

As sales people in any industry, most participants in direct selling conduct business in an ethical and consumer- and recruit-friendly manner. It is unfortunate but true that the reputation of the industry is negatively impacted if a participant inappropriately markets products or the income opportunity in a misleading way. Given the millions of participants in the direct selling industry, even the acts of a small percentage of participants can create significant reputational harm. Examples of acts that can damage the industry’s reputation include:

  • Exaggerated earnings claims made to prospective recruits;
  • Exaggerated or false product claims;
  • High-pressure recruiting and sales tactics; and
  • Excessive non-corporate training/motivational expenses.

2. Business Practices

It is also important that companies properly evaluate business initiatives and compensation incentives before they are implemented to make sure they do not motivate or incentivize problematic behavior.  For example, I believe that compensating the salesforce for sign-up fees—which is one strong indicator of a possible pyramid scheme—as well as sales kits and aids, samples, and training fees and materials can create an incentive that increases the cost of the investment to join the business and the associated potential risk of loss to a new participant.

“It is important that companies properly evaluate business initiatives and compensation incentives before they are implemented to make sure they do not motivate or incentivize problematic behavior.”

3. Enforcement of Distributor Policies and Codes of Ethics

If a company fails to diligently monitor the activities of its salesforce and enforce its ethical standards, regulations and policies, it will ultimately contribute to inappropriate actions that damage not only the reputation of the company but also the industry. A large number of participants join our industry each month, which makes it an imperative that companies adequately train the salesforce on marketing claims, legal requirements and the industry’s code of ethics. Companies cannot be passive in this effort.

My Vision

Having touched upon some of the attributes, myths and problematic practices, let me now turn to a view of the future that maximizes our positive attributes and potentially helps quash some of the negative stereotypes and myths that presently afflict us. Here are my high-level recommendations for the industry that I believe will further strengthen the industry and its reputation.

1. Continue to Enhance Consumer Protective Measures

I believe our industry has done a remarkable job developing consumer and distributor protective policies and codes of ethics. The industry standard of a 12-month return policy plays a critical role in protecting distributors from inventory loading risks. Unconditional 100 percent consumer product money-back guarantees should continue to be encouraged.

The DSA Code of Ethics establishes a baseline of important ethical practices for companies to follow. It is important that we continue to evaluate whether there are additional measures that can be adopted to further enhance the protection of consumers and distributors. The following are areas where I think additional protections may be beneficial to consumers, distributors and the industry:

Compensation Summary: I believe the industry should adopt and implement an industry-wide standard of transparency and disclosure regarding various relevant aspects of compensation earned by its salesforce members. Many of our companies already make such disclosures, which provide prospective recruits with protection from misleading claims that could be made by a participant in the salesforce. No one can criticize us if we provide full disclosure of earnings. Presenting prospective recruits with detailed distributor earnings data during the recruiting process as well as on our websites and in our literature will eliminate most of the risk of the salesforce exaggerating the opportunities we are offering.

It is important that such disclosure be complete and provide sufficient information to furnish a fair overview of the earnings potential. Creating an industry standard will assist other companies and provide a norm they can follow. Once in place, all companies taking this transparency approach would be free from any charges of financially misleading members and prospective members of the salesforce.

Minimizing Risk of Loss: A critical component of the industry’s code of ethics is its 12-month inventory return policy, which was adopted to reduce the risk of loss for new participants. Salespeople utilizing the return policies should be able to do so easily and expeditiously. The industry also needs to remain diligent in monitoring and evaluating trends and developments in business practices and activities of direct sellers to identify additional measures that should be adopted to ensure the industry always has comprehensive measures to protect consumers and distributors.

For example, I recommend that it should be made more clear that the current buy-back policy includes other purchases by new participants in the business such as sales aids, training costs and starter kits. I believe that DSAs should promulgate code provisions to codify some of the best practices in the industry, including restricting payments on certain types of compensation.

“I believe the industry should adopt and implement an industry-wide standard of transparency and disclosure regarding various relevant aspects of compensation earned by its salesforce members.”

 

2. Educate Our Constituencies

  • Members in the DSAs should take the opportunity to participate in industry research and surveys done by outside third-party firms retained by DSAs so that the industry will have accurate and credible data for use with the press, governmental entities, academia and other constituencies.
  • Member companies can further increase their focus on educating their salesforce and customers regarding compliance policies and codes of ethics. Having a salesforce that is knowledgeable about the code of ethics—and their responsibilities under such code—is important to the long-term success of our industry. Member companies should have the necessary compliance staff and provide the training to accomplish this. I believe the head of this function should report to the CEO or general counsel. Companies should also have a whistle-blower system in place.
  • Member companies should work to further improve their customer relations departments with a philosophy of total consumer and distributor satisfaction and excellent service. This is not just good business, it’s also smart business.
  • There should be ongoing and significant public education efforts portraying the industry as it truly is, through public relations efforts based on solid data and useful information, public service activities, promotion of quality research, excellent use of social media channels and targeted projects to educate key influencers in society (e.g., legislators, regulators, the financial press, the “style” and general news media, academia, think tanks and consumer protection organizations). We have an opportunity to tell “our story,” much more effectively. This will require substantially increased financial commitments by the companies to those efforts.
  • Annually, the WFDSA global “best practices” exchanges will ensure our industry is operating in all our markets on a consistent basis, at the highest ethical levels, and with the most effective ways to protect our corporate interests through taking the high road in building and sustaining our reputation, image and brand. Strengthening DSAs across the globe strengthens our industry. All industry firms should belong to the national DSA in the countries in which they operate.

Conclusion

Now is not the time to relax in our efforts to be a consumer-friendly, consumer-protective industry. This is critical to our long-term success and the success of the people who rely on this industry for income opportunities and life-enhancing products. We must constantly evaluate our business trends and practices and be willing to take additional steps to protect our industry and its participants.

Having worked in 50 countries throughout my career, I have seen that the DSAs that are most successful are those with the support of the majority of companies in the country. I believe strong DSAs are critical to success, and I can’t emphasize enough that all industry companies should be members of the association in the countries in which they do business to most effectively do the job necessary on behalf of the industry.

“Now is not the time to relax in our efforts to be a consumer-friendly, consumer-protective industry”

Our business model not only works, but it is also a good thing for free enterprise, society and individual freedom. Its success is built on maintaining existing and establishing new personal relationships based on truth and trust. We and our sales people want happy customers and satisfied recruits. We and our sales people want to be good corporate citizens and contribute to society. In other words, we and our sales people want to do well while doing good.

The original article is published on the Direct Selling News website. Direct Selling News is the trade magazine serving direct selling and network marketing executives since 2004. Subscriptions are available in the App Store and Google Play Store via this link: http://directsellingnews.com/index.php/dsn/app