Grace vs. Law: challenges faced by MLM companies when correcting distributor behavior

I wrote the article for the Obtainer Magazine last year.  The Obtainer is an international magazine dedicated to writing about the direct sales industry.  The article was well received by their readers and it’s now included below for your enjoyment and education.  How should a MLM company go about disciplining a distributor? Read below to find out!

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“Trent “Never Say Never!” Jackson has been an outstanding distributor for several years for a wellness MLM called “Mind Your Business.”  He’s built a $2,000 per month income, he’s diligent, ambitious, personable, attends all of the meetings, never missed an autoship, shows a great plan and throws fabulous demo parties.  With all of the MLM startups in the industry these days, they all want committed guys like Trent.  Later, Trent gets approached by his good friend, Geoffrey Gullible, and gets pitched about “Dewey Cheatham & Howe” business.  DCH is the latest and greatest cash investment program.  They’re an MLM with a unique selling proposition: they sell dollar bills for fifty dollars.  With each distributor that goes on a three dollar monthly subscription, the sponsor gets a substantial cash prize each month!  Trent is interested.  He thinks to himself, “Wow, if I can only transfer 20% of my MYB downline, I could be making some serious cash with the DCH compensation plan.  There’s no better business than one that sells cold, hard cash!”  Trent starts making some phone calls to people in his downline, he tells people about the awesome DCH pay plan and he talks a little trash about his other MLM.  He says, “Everybody wants money, and we’re selling it!  Who’s coming with me?” He’s successful in recruiting several key leaders from MYB and the rest is history.  Mind Your Business’s compliance department hears news of Trent’s behavior and calls a meeting.  What should MYB compliance do about Trent?  Do they lead with grace or should they lay down the law?  

Educate or Terminate

As crazy as it seems, these are the kinds of choices compliance departments make everyday in the MLM arena.  An entrepreneurial spirit, usually the greatest character trait that leads distributors to join a company, can sometimes be a challenge for MLMs seeking to retain the interest of a multi-talented group.  Regarding Trent from our fact pattern above, compliance departments will need to decide if they want to terminate, suspend or simply warn him about his behavior.  And doing nothing is always an option, too.  In my experience representing dozens upon dozens of MLMs, young and old, I see a common question when addressing compliance issues: do we educate or terminate?

In my opinion, compliance departments should be designed to serve two important functions: education and protection.  First and foremost, they exist to train distributors of the proper behavior when marketing the product and income opportunity.  When the sales force is properly educated, it leads to good behavior in the field, which leads to fewer complaints and better longevity for the company.  Secondly, when their education efforts fail with certain people, compliance departments exist to levy penalties to  protect the companies from legal troubles.  Remember when your father would say, “It’s for your own good…”  That’s not the case here.  When distributors get disciplined, it’s done for the good of the business.

Distributor Discipline

If you’re reading this as a distributor, I’ll share with you the top three reasons that lead companies to take corrective action.  Reason number one: distributors soliciting people in their downline for another MLM.  When a company provides support for its distributors to build the business, the distributors are positioned to learn the identities of a lot of people they never would have met but for the opportunity offered by the company.  The company has a legitimate interest in preventing its downline from being raided by other companies offering sweetheart deals to key leaders.  In the “Mind Your Business” scenario, Trent was leveraging his contacts in his MYB downline to build his Dewey Cheatham & Howe business.  It happens a lot in the space.  Reason number two: distributors making aggressive product claims, usually on unauthorized websites.  In their zeal to build a large business, some distributors can become too aggressive with their product claims i.e. “This pill cures cancer!”  If the company does nothing to curb aggressive claims, regulators will attribute the wrong acts of the field to the company.  If there’s a pattern of wrongful conduct and zero enforcement, it’s a recipe for problems.  Reason number three: distributors making aggressive income claims.  As with reason number two, in their haste to create momentum in their downline, distributors might resort to over-inflated income claims i.e. “earn millions of dollars in days with our new, revolutionary pay plan!”  It’s not common across all companies; however, it happens enough to where companies uniformly issue policies designed to prevent the behavior.  When regulators attack a company, they almost always quote distributors making aggressive (and unauthorized) income claims.

Survival of the Smartest

As the saying goes, “An ounce of prevention is worth a pound of cure.”  The best way for MLM companies to orchestrate solid behavior in the field is through proper education.  And education starts with having clear standards published in the polices and procedures.  I know, I know….nobody reads the polices and procedures.  But when there’s behavior occurring that reflects poorly on a MLM, it’s always best when a company can cite a specific provision in the policies and begin the education process.  I always compare the policies and procedures to the US Constitution…people might not have it committed to memory but it’s always in the background influencing behavior.  Clear policies is a good first step with education.  Secondly, companies should consistently communicate important standards to the field through all of its communication channels.  As an example, if a MLM is selling a supplement with an anti-inflammatory ingredient, they need to habitually remind the field to refrain from marketing the product as a treatment for arthritis.  As the great Napoleon Hill wrote, “Any idea, plan or purpose may be placed in the mind through repetition of thought.”  Without measures designed to lead to education, companies should never be surprised when there’s consistent bad behavior across multiple downlines.

What about Trent?

So what should we do about Trent, our protagonist from the fact pattern above?  Do we show him the door or extend some mercy?  In my opinion, I would advise the company to lead with grace, not law, and try harder to understand.  If Trent actually violated the agreement and caused harm to the business, the company should approach Trent with a cooperative spirit and try to meet with the intent of strengthening the relationship, not weakening it.  After all, Trent was and remains a committed distributor for the company, which makes him a valuable asset if he could get back on track.  If Trent refuses to get in compliance with the agreement and continues to solicit, termination might be appropriate.  If he acknowledges the behavior and makes a statement that he’ll get back in compliance, he should at least get a warning or a temporary suspension if the harm was strong. By handling all distributor disputes consistently and fairly, good companies can create a history of conduct that they can show regulators in the event they get in trouble for distributor misdeeds.  When a company says “We never condone this kind of product claim,” it’s always more believable when there’s a history of enforcement that backs up the statement.

Patience

Companies should never forget that for most distributors, it’s their first attempt at owning their own businesses.  They’re going to make mistakes and mistakes are part of the learning process.  If the company is too strict with their policies, compliance will never be an issue because all of the distributors will take their talents elsewhere.  And distributors should always remember that they’re engaging in a partnership with the MLM company.  As with all partnerships, there’s some giving and taking, which means distributors should trust their company and listen accordingly when the company is trying to curtail some behavior.  It’s a delicate balance between the company and the field when trying to enforce standards.  It’s more art than science and the ones that get it right enjoy decades of prosperity.

FTC Targets Acai Seller

The Federal Trade Commission has filed a complaint to stop LeanSpa, a weight loss company that has allegedly used fake news websites from affiliate marketers to promote its acai products.  LeanSpa parties apparently used affiliate marketers to drive interest to their program.  Allegedly, the affiliates used “fake news sites” to fein credibility about the products and drive traffic to the main site; thus, earning themselves commissions.  In its press release, the FTC states,

The complaint alleges that the defendants hired affiliate marketers who used fake news websites to promote the defendants’ products. The fake news websites used domain names that appear to be objective news or health sites, such as channel8health.com, dailyhealth6.com, and online6health.com. . . The fake news sites had links to the defendants’ own websites, where consumers were offered trial samples of two weight-loss dietary supplements: an acai-berry product and a colon cleanse product. The affiliate marketers earned a commission for each consumer who landed on their sites and signed up for a trial.”

There are three things that stand-out with this lawsuit that are relevant for the MLM community.

First, never outsource the creation of marketing materials without proper guidelines.

In the case mentioned above, the FTC highlighted the marketing practices leveraged by the affiliates.  The affiliates were obviously creating their own marketing materials, leading them to pretend to be objective reporters and using with legitimate-looking domain names. Although they were not agents of the company, the behavior still got the company in serious trouble.  With MLM companies, it’s more complex than a simple affiliate model.  With a MLM model, it’s specifically designed to not only recruit and retain first level affiliates, it’s designed to empower those individuals to sponsor and train other people. It’s an affiliate model on steroids.  With this in mind, it’s imperative for companies to at least maintain approval-rights before a leader can develop MLM training.  This includes restraining the field’s ability to create internet landing pages.  It seems harsh, but it’s the irresponsible 1% that can lead to the ship burning down.

Second, when making endorsements, affiliates must disclose their relationship

In the past, I wrote about the revised FTC guidelines.  In these guidelines, the FTC makes it painfully clear that when there’s a financial connection between an endorser and a business, the endorser is obligated it disclose the relationship.  Specifically, it requires disclosure when: “When there exists a connection between the endorser and the seller of the advertised product that might materially affect the weight or credibility of the endorsement (i.e., the connection is not reasonably expected by the audience), such connection must be fully disclosed.”  With LeanSpa, the affiliates were trying to pretend to be objective reports, which put the company at substantial risk.

Third, avoid the “Negative-Option Continuity” plan

This one is just plain common-sense.  A negative-option plan is one where a participant is automatically enrolled in an autoship and they need to specifically opt-out. With LeanSpa, apparently people were enticed into purchasing small samples of the product.  However, they failed to realize that they were also committing to a monthly $80 purchase of inventory. If a MLM business has an autoship program, it’s vital to ensure the distributor specifically chooses to participate in the program.  Do not allow the sponsor to enroll the distributor into an autoship program without express consent.  And be candid about the financial commitment involved.

Bonus: Playing dumb never works.

It would be easy for a company like LeanSpa to say, “we’re not able to control how these people market our products.”  At the end of the day, the FTC is not going to buy the argument. Companies cannot reap the benefits of misrepresentation without accepting responsibility from the methods by which the benefits were obtained. While it’s hard to run a tight ship, it’s incumbent upon every MLM company to do it right given the high stakes. MLM compliance departments are very important.

What are your thoughts?  Do you see any poorly run websites out there run by distributors?  How should the company monitor the web to prevent it?