BK Boreyko Tries His Hand at Magic: Does he pull it off?

01c62c29d34ede51f7c12ef645d59945I can remember where I was sitting when I saw David Copperfield’s infamous Statue of Liberty trick.  I was right in my living room, sitting three feet from our “big screen” 25 inch television.  I was speechless!  I had my imagination running wild….where in the world did it go!?  Is magic real!? As it turns out, years later, people revealed the logistics behind the magic: it was a revolving stage.  The statute was shown between two pillars, the curtain was lifted to conceal the statute, and as David Copperfield was doing his thing, the stage rotated without audience detection.  When the curtain was dropped, the audience (and those of us watching on television) were staring out into the ocean without even realizing it.

Changing the optic! Pure genius!

With BK’s latest announcement, he’s attempting a similar effort.  In summary, he’s changing the perspective (words) about MLM without changing the model itself.  He’s just rotating the stage while keeping the statute (the model) in tact.

In BK’s video below, he SPRINTS from the MLM category, claiming that Vemma is “more like Amazon and less like Amway.” I’ll start this breakdown with the obvious points first:

(1) Amazon is not a member of the Direct Selling Association;

(2) Amazon does not terminate its affiliates for promoting other MLMs;

(3) Amazon does not bind its affiliates to non-solicitation clauses (commonly done by clients of mine and every other company in the MLM industry);

(4) Amazon does not have monthly volume requirements.  BK makes it clear: “We no longer require our affiliates to buy products.”  Well that’s good to know, because you technically were never supposed to have such requirements anyways.  I know, I know….it’s debatable whether a company can impose a purchase requirement. ViSalus does it (I think).  But in my opinion, I advise all clients to stay away from required monthly purchases. Instead, Vemma is doing what 95% of all other MLMs do: they’re now requiring VOLUME.  Can this volume be achieved via the now optional Autoship? Yep.  Will the majority of reps qualify in this manner?  Probably.  Does this “change” make Vemma more like Amazon and less like Amway?  No. Ironically enough, Amway has ZERO volume requirements for reps to join.

(5) Amazon does not have a genealogy for calculating commissions i.e. there’s no opportunity for recruitment;

(6) Amazon discloses its revenue from customer sales. While BK implies of significant customer activity, we have no way of knowing the numbers.

Affiliate vs. MLM

In his video, BK distinguishes affiliate models from MLMs as follows: affiliate programs are more customer focused and there are no requirements to buy product. Please remember, the entire point of an MLM sales strategy is to SERVE CUSTOMERS. If Vemma was not on this track before, what in the world were they doing? And I’ve already opined on the issue of required product purchases. They never should’ve had those requirements in the first place. Going with a volume requirements puts them in line with most other MLMs out there (keyword being “IN-LINE”…..not ahead).

Real Changes

These are the changes that seem legitimate:

(1) Affiliates are all Customers first. When a “Customer” enrolls another customer, they become an Affiliate and qualified to earn commissions (after they generated the volume via personal purchases and/or sales). This is interesting to me. Do these Customers go on the Affiliate’s front-line i.e. like a personally enrolled affiliate would? If so, Vemma made it more difficult for affiliates to sling participants down in depth. This would legitimately slow recruitment; thus, look more like an Affiliate arrangement. If, on the other hand, these “Customers” are given a position in the genealogy and can benefit from their upline’s actions on a later date, we’re back to David Copperfield’s rotating stage. If the latter is the case, regulators will not consider those people as Customers in the event of an inquiry (my opinion).

(2) There’s a “Custiliate” program. Friend and MLM consultant, Mel Atwood, coined the phrase “Custiliate,” so I’ve got to give credit where credit is due. A Custiliate is a hybrid between a customer and an affiliate. The Customer cannot earn the big bucks but there are some financial incentives available. There’s nothing earth-shattering here. There are numerous companies out there that offer incentives for customers to share the products with other customers. With Vemma, they’re giving customers “credits” that can be redeemed for product sales. This is a good thing and most companies need to implement similar incentives. The key question: will the incentives lead to an increase in customer revenues? If an MLM is selling $1,000 lemonade, the policy would be lipstick on a pig because there would never be legitimate demand for such a product. If Vemma’s product is priced outside of the market, the Custiliate program is window-dressing. If it’s in-line, it’ll help drive the numbers up. This is not proven by making comparisons with Red Bull. It’s proven by customer revenue. It’s that simple.

(3) Vemma now pays full CV on customer activity. This caught me off guard. Why in the world were they allocating 50% on customer volume? This would be a dis-incentive for distributors (affiliates) to accrue customers. Why pursue customer sales that yield 50% CV when they can recruit and get 1 to 1 on the volume for their commissions? This is so bad, I’m not convinced I’m right. If they fixed the 50%, good for Vemma. They’re now in-line with other MLMs (again, in-line…..not ahead).

Conclusion

At a time when the industry needs to be more united, BK’s announcement of “big changes” is counter-productive. Will these changes lead to meaningful changes in Vemma’s sales culture, leading to a more customer-oriented company? Or is he just rotating the stage, using the right words and gestures while only changing the perspective?

What do you think?

If you’re reading this via email, click here to view BK’s announcement video.

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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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

Is it better to raid in secret or raid in plain sight?

Epic Era_MLM_Pre-Launch Founding Leaders

If you’re reading this via email, click here to view the video.

The purpose of this article is to explore the current “deal making” culture in the MLM industry. Quite frankly, it’s getting pretty stupid.

Raiding in Secret

Another word for “raiding” is “stealing.” But I’m not taking it that far. “Raiding” typically occurs when a leader strikes a special deal with a new company, violates his contract with his or her existing company, solicits the downline for the next new thing, conveniently fails to disclose the existence of the special deal, generates a decent commission for a year or two, possibly gets sued, seeks out another deal, wash, rinse, repeat. This is what I call “raiding in secret.” It’s a dirty / uncomfortable secret we deal with in the industry. It’s one that rarely gets discussed outside of the inner-circle because both parties instinctively know that it’s wrong. In the scenario of the private deal, there exists an understanding between the company and the recipient that there’s going to be a contract violation somewhere between the networker and their existing (or previous) MLM. This contract violation can even be factored into the contract negotiations i.e. “if you get sued, we’ll cover the legal fees.” I have always known about this side of the industry. There are companies out there like to cut deals and then turn around and sue their own distributors when they leave for other deals. It’s naive for me to think that these sorts of deals will end. After all, there is the occasional special deal that’s legitimate i.e. the networker waits for his or her old contract provisions to expire, starts from scratch and leverages his or her skill to build a large downline FAST. But…that’s rare.

I’ve written about this process in the past in two separate articles. The first is titled Master Distributors: good or bad? In the article, I talk in general about these deals and discuss the importance of disclosing the existence of these deals. In the second article, titled Revised FTC Endorsement Guidelines: Part 1 (Master Distributors),” I talk about the new disclosure requirements published by the FTC when it comes to these sorts of deals. Bottom line: disclosure is key.

Raiding in Plain Sight

Epic has recently announced, very publicly, that they’ve got $100,000,000 available for “experienced networkers.” The payment terms are published in a separate PDF, found below. Basically, if leaders can keep up with various performance metrics, they can earn additional income. While it caps out at $20,000 per month, Epic leaves room for some negotiation:

Are these still not big enough for your dreams and what you know you are capable of? Contact us for details on Epic Performance Programs beyond our $20,000 program.

How is this raiding in plain sight?

Watch the video above, titled Epic Puts $100,000,000 on the table for deals. In my opinion, there’s more to this than “paying for performance.” When you offer networkers $20,000+ per month in addition to commissions in exchange for 120,000 group volume points in six months….you know it’s quite likely (I’m putting it mildly) that the networker is transitioning distributors from another downline. And when that happens, it’s likely the distributor has some contractual restrictions for that kind of activity i.e. non-solicitation, non-compete, etc. There’s a better way to go about building a business. Plus, this sort of activity will invite mass litigation from the industry in general as leaders start migrating towards Epic (if that ever occurs). The claim will likely be “tortious interference,” which occurs when one company encourages people under contract with another company to violate the agreement.

Is this good for the industry?

In my opinion, it’s not. Companies invest years (sometimes decades), thousands of hours and millions of dollars building up their brands and goodwill with its leaders. If all of that effort can be taken by way of a confidential agreement with one of its top leaders, it’s bad for our profession. And what about the distributors in the downline? They’re the people that trust the leader to make good decisions. If they’re not in the know on the special deal, they’re really not in a good position to make an informed decision. They get lost in the shuffle. They get used. Is it in their best interest to uproot their organizations and follow the leader? In most cases, the answer is no.

Disclosure: I’m a conservative, free-market man. I believe in the power of the markets. However, in order for markets to work, information needs to be freely exchanged. In the case of these special deals, the public is never made aware of the deals; hence, the public / distributors are at a significant disadvantage. The market is manipulated.

Conclusion

There are no shortcuts to success. When I competed in the decathlon in college, I was met each year with one or two athletes that talked big. They were motivated for a month, bragging about their inevitable success. Within months, they quit. Success is a grind over time. It’s a long, arduous process. Through week after week, year after year of work, the power of compounding takes over. When I see a company trying to skirt around the work, I just shake my head… If you’re not willing to grind it out, you’re not developing the muscles necessary to win. Cutting these sorts of deals to take advantage of the investments made by other companies…it’s dishonorable.

What do you think? We’ve never had a company publish these sorts of deals before. Is it good or the industry? Bad?

+Kevin Thompson

If you’re reading this via email, please click this link.

Mere Puffery or Misleading Promises: How Much of a Scandal Is Trump University for the New York Public?

This article was written by +Kevin Thompson in collaboration with our stellar intern, Amber Lovelady.

Trump - Schneiderman | MLM law

In August, New York Attorney General Erick Schneiderman filed a $40 million lawsuit against Donald Trump for falsely promising as many as 5,000 students a successful real estate career if they enrolled in the unchartered, unlicensed Trump University. Schneiderman alleges that Trump engaged in “deceptive and unlawful practices,” including falsely representing the legitimacy of the school and false advertising in the newspaper and mail. People attended his one free class off those advertisements which led many of them into attending a $1495 three-day seminar, which enticed them into spending from $10,000 to $35,000 into higher-level Trump University programs. At the end, Schneiderman claims these experiences fell way short of teaching participants everything they needed to know about becoming billionaires. Several students are now mile high in debt, without jobs, and quite mad. According to the AG, dozens of attendees have complained to authorities all over the country about what they believed to be a scam.

 

Personal Responsibility?

But was it really illegal? According to Trump, not everyone who participated in these opportunities is as disgruntled as Schneiderman asserts. Trump declares that more than 10,000 students praise the program and 98% of those students in a survey checked excellent to describe their experience. Further, Trump believes Schneiderman is using this suit as a publicity stunt for public office. “They meet on Thursday evening – I get sued by this AG Schneiderman… Saturday at one o’clock,” Trump said. “Think of it. What government in the history of this country has ever brought a suit on Saturday? I never heard of such a thing.”

He’s got a point on the lawsuit being filed on Saturday. It adds a strange element to an already strange matter.

Marketing Claims

Although there are many things Schneiderman alleges in the lawsuit, I find that this case really hinges on the motivation leading people to attend the classes. What were they hoping to gain? Were their expectations consistent with the marketing message?

How were they convinced? Schneiderman suggests it started with false advertisements. In New York, the test for false advertising is whether representations or omissions are “likely to mislead the reasonable consumer from acting reasonably under the circumstances.” Just for the record, this is pretty consistent with the Federal Trade Commissions definition of “false and misleading.” What was misleading? Some of the false advertisements Schneiderman alleges are:

  • Trump claimed he could “turn anyone into a successful real estate investor” and that students would learn “a systematic method for investing in real estate that anyone could use effective” even though dozens of students were unable to finish one real estate transaction.
  • Trump claimed he would “share [his] techniques, which took [his] entire career to develop” when the President of the University, Michael Sexton, could not describe any Donald Trump techniques taught at the university.

Really?

But really, was this misleading to the average American? When you’re watching a commercial where a bikini model vows that you’ll look just like her after a six week, $10 video series, do you buy it? Most of us don’t because we know it’s part of a sales pitch, mere puffery. And for those who do buy it, they know that it’s their hard work with the content that will bring them success. Of course a $10 investment is significantly less than a $35,000 one, but the principle remains. It’s ill-advised, in my opinion, to judge a program based on how customers leverage the content in their spare time. It’s a problem faced in the network marketing industry. Companies get routinely clobbered based on the low success rate of participants. But is that indicative of a bad program, bad product, bad culture…or could it simply be attributed to laziness? It’s hard to pin-point the root cause of failure.

Reasonable Expectations

A reasonable person understands that success takes effort…and lot’s of it. In this case, it was not unreasonable for a person to believe that Donald Trump and his trusted instructors could provide a foundation for real estate investing. It is completely unreasonable, however, for a person to believe that Trump could transform them into a real estate tycoon.

Conclusion

If you sell any kind of informational product, the odds of litigation go up. Consumers can always say “it’s crap, it never worked for me” and you’re unable to fall back on objective metrics like patents, science, etc. It’s one of the reasons why Amway tightened the screws on its tool systems several years ago. Since many consumers were complaining that the information was poorly crafted for their Amway businesses, Amway got more involved with quality-control.

Network marketing companies that sell informational products have it more difficult because the exposure is two-fold: consumers can say the information was ineffective AND they can say they bought the information JUST TO PARTICIPATE IN THE COMPENSATION PLAN. And the latter reason opens the door up for pyramid scheme allegations.

This lawsuit filed by New York is along the same vein as the lawsuits filed by disgruntled college graduates filed against their universities. They were sold a bill of goods, they graduated, they’re jobless. Who’s to blame? And actually, this lawsuit is of the lesser sort because it’s not the disgruntled consumers filing the lawsuit, it’s the government claiming to protect the little guy incapable of protecting him or herself.

Predictions

This case will settle on the eve of trial. Contrary to what the AG is saying, it’s not about the consumers. I do think it’s really about PR for him and a little grand-standing. With that in mind, the AG will settle for a reduced amount, take the favorable PR, Trump will claim a moral victory and the parties will go their separate ways.

If you learned something new in this article, please share.

If you’re reading this via email, please click this link to download the lawsuit filed against Trump University.

Video Response By BK Boreyko Regarding Criticism

I’ve never endorsed any companies on this site and I’m not endorsing Vemma. I know very little about their model. I know that you likely visit this site for generic content regarding the MLM industry, so this post is a little different. But this video was so good, I had to share. The founder of Vemma, BK Boreyko, lays out honest and sincere arguments explaining the legitimacy of Vemma’s model. If you’re not in Vemma, the video is still worth watching because it’ll give you some bullets to use when you face the same question. He keeps it simple, relying on science, investments in infrastructure, business support, market comparables, etc. Candidly, all CEOs in the industry should provide a similar video, giving their people a link to share when they’re hit with tough questions.

One more point worth mentioning: when he lists his social media links, he lists instagram first. I guess that’s where all the cool kids are hanging out these days. Connect with me there at: www.instagram.com/kevin_thompson.

Herbalife Distributors Continue to Win Despite War on Wall Street

This post is for the unsung heroes carrying the Herbalife organization through this difficult period. Candidly, their distributors are dominating! 2nd Quarter Earnings are in for Herbalife. All of the major metrics are up. Despite the war on Wall Street over the fate of Herbalife between several notable players, the Herbalife distributors continue to produce results. In this video, I explain the importance of their achievement. I also give a few predictions about what this conflict means for the future of the industry.

If you’re interested in the financial elements surrounding Herbalife stock, check out the video below. Robert Chapman does a great job explaining the current and potential value of $HLF. He understands the network marketing model AND the markets, which makes his insight valuable. If you’ll recall, Robert Chapman was literally the first professional on Wall Street to question Bill Ackman’s analysis. His article titled “Herbalife: Why I Made It a 35% Position after the Bill Ackman Bear Raid,” let a lot of air out of Ackman’s proverbial tires. It moved the market. I’m proud to know him.

http://video.cnbc.com/gallery/?play=1&video=3000187031

DS Edge Goes Country!

DS Edge - Nashville | MLM Startup
I’m incredibly excited to announce the location of the next DS Edge conference: my city, Nashville, Tennessee! It’s the home of country music and for two days in September, its neighbor (Franklin, TN) will be the home of direct selling.

Come to Tennessee to learn how to start and grow your party plan or network marketing company at the Direct Selling Edge Conference on Thursday and Friday, September 26 and 27, 2013.

This two-day educational conference is the best for new and young direct selling companies because the quality of the content presented is excellent. It is pure education.

Students Deserve Vacations

After two full days of learning, as a student you’ll deserve a vacation, too.

We’ve got plans to take you an optional excursion to visit some of the most famous honky tonks in downtown Nashville after the first day of the conference. Stay the weekend if you’d like to enjoy all that Franklin and Nashville have to offer. In your free time, you can visit the Grand Ole Opry, the Country Music Hall of Fame, The Parthenon, and RCA Studio B in Nashville, but don’t miss the historic sites of Franklin, too.

What will you learn at this conference?

You’ll learn…

  • how direct selling is different from other business models
  • the differences and similarities between network marketing and party plan companies
  • what recent Federal Trade Commission decisions means for you
  • best practices and step-by-step instructions for creating an ethical and effective presence in the social media landscape
  • the legal limits for raising capital and the legal rights inherent with stock ownership
  • the differences between different types of compensation plans and how to assess which plan type is best for you
  • the ABC’s of successful recruiting
  • how to teach others how to sell
  • the key behaviors we need to movivate in, and the building blocks of, compensation plans
  • the science behind compensation plan design
  • how Founder Programs work and why have one
  • how to select the right MLM software
  • why you need to have a distributor compliance system for your network marketing or party plan company
  • all about sales tax, 1099′s, unclaimed property reporting, and state income taxes
  • why one merchant account is not enough
  • simple methods to keep your MLM or party plan company safe from federal and state regulators
  • how the options of pilot programs, soft launches and hard launches can be used to ignite your growth
  • common mistakes of startup companies
  • 20 secrets of successful companies

and more!

Our 8 speakers will educate you in 16 sessions, plus there are 4 round table discussions that you will fill you with even more knowledge to give you the edge you need to be successful.

Personal Appointments

At the end of each day, from 5 until 7 pm, you’ll have the opportunity to meet with conference speakers for 20 minute appointments at no additional cost! Add the four hours up and you’re easily walking away with over $1,000 worth of consultation.

Where is the conference?

The Direct Selling Edge Conference will be held in Franklin, Tennessee (just 20 miles from Nashville) at the Drury Plaza Hotel Franklin on Thursday and Friday, September 26 and 27, 2013.

Built in 2012, the new 338-room hotel offers a daily free hot breakfast, free soda and popcorn, free food at 5:30pm, free local and long distance calls, free parking, and a microwave and refrigerator in every room.

We’ve negotiated excellent rates for you. Only $119.95 per night.

Where Do You Register?

Registration is fast and easy. For tickets, go to http://www.directsellingedge.com.

For lodging, go to https://wwws.druryhotels.com/Reservations.aspx?groupno=2181246

Questions? Call Jay or Victoria at Sylvina Consulting or email [email protected].

What is the Direct Selling Edge Experience?

Here is what you’ll get…

 

Agenda

Our agenda is loaded with information specifically chosen to advance your business.

Reserve Your Seat

At $199 for your ticket and only $100 for each of your companions, this educational conference is a great value. Contact me to obtain a promo code to obtain a discount. Ignorance is more expensive than education. Information is the only asset separating you from your competitors. We guarantee you’ll get the edge you need. If you’re not satisfied with the program, we’re offering a 100% refund, no questions asked.

It’s easy to get to Nashville and the Direct Selling Edge Conference. Conference tickets are available now.

See You In Tennessee

Join me,+Kevin Thompson, and many of the top direct selling professionals at the Direct Selling Edge Conference. We hope to meet you there!

FTC’s Disclosure Guidelines for Online Marketing: How to get it right (Part 2)

This article was written by +Kevin Thompson in collaboration with our stellar summer associate, Jake Perry.

FTC Disclosure GuidelinesIn the last article, FTC’s Disclosure Guidelines for Online Marketing: How to get it right (Part 1), we walked through the Federal Trade Commission’s recently published .com Disclosure Guidelines (fully included below). In this installment, we’re going to walk through five hypothetical examples of common marketing claims made in the MLM industry. The goal of this post is to provide you with practical, easy-to-understand tips on how to make proper claims.

The format is simple: I’m going to give you common fact patterns of how claims are made in the MLM industry. Then I’ll show you what most distributors would WANT to do as far as making disclosures. Then I’ll show what they SHOULD do, as per the .com Disclosure Guidelines. These guidelines apply whether the company is an MLM startup or a well-established company.

Ready? Go time!

UPDATE: This article has been updated after further research.  The .com Disclosure Guidelines are over 50 pages and it never mentions income claims.  The analysis below is based on my interpretation of their guidelines.  

EXAMPLE 1: CHECK WAVING

check

Fact Pattern:

Kyle is very excited about his involvement in a new cosmetics company, Wrinkles-B-Gone. After six months of hard work, he received his first check in the mail for $4,500. Overcome with excitement, Kyle gets an idea. He decides to post a picture on his Facebook profile showing off his check. Kyle figures it’ll be a great way to “flex his muscles” while demonstrating the power of his new company. It is clearly visible in the picture that the check is for $4,500. In his Facebook post, Kyle says, “Boom, playa! Check me out! Want to learn why this company is throwing money at me? Give me a call.”

Kyle does not include a disclosure of the average earnings for Wrinkles-B-Gone distributors. The average is $345 per month per distributor.

What Kyle wants to do:

Kyle, in no attempt to be deceitful, would want to provide a naked link to the company’s income disclosure in the caption. He figures, “Hey, they can click on the link and see all of the numbers at their leisure.”

What the FTC wants to see:

In the caption of the photograph: Please click this link to see our average earnings: www.wrinkles-b-gone.com/earningsdisclaimer

Lesson Learned:

The FTC allows marketers to provide a link to a disclosure IF the disclosure is not integral to the claim being made. “Integral” as defined by meridian is “essential or fundamental.”  Is an income disclosure integral to an income claim?  Sadly, the FTC does not give us any examples that involve income claims.  But they did specify that issues related to health or higher costs would certainly require disclosure near the claim itself (not via a hyperlink).  In an example in the guidelines, there was a refrigerator that was unable to maintain a cold enough temperature to prevent bacteria growth.  In that example, a disclosure by the ad itself is required.  Is the risk associated with an earnings claim on par with food borne illnesses?  I doubt it (but I’m open for a discussion).

The FTC further states that disclosures made via hyperlinks are permissible when the data is too complex to disclose next to the ad itself.  With income disclosures, the data can be very complex.  Plus, the average earnings changes each month; thus, making it nearly impossible to get the entire field to properly disclose the averages immediately after their claims.  It’s only practical, in my opinion, to get the field to provide a link to a full earnings disclosure.  Keep in mind, providing the link by itself is insufficient.  The link must be clearly labeled to adequately inform consumers.  Inserting “Please click this link to see our average earnings” sends a clear signal.

If you allow your distributors to make income claims, it’s imperative that you educate them on the proper ways to make those claims.  Also, it’s a good idea to display the income disclosure form at some point during the enrollment process.  This will help “clean up” in the event your leader fails to provide a disclosure.

EXAMPLE 2: Weight Loss Claim

Weight Loss Example -  | MLM attorneyGronk has been using “Slim-Me-Cave” for the past 30 days. Miraculously, Gronk lost 30 pounds in this short period of time. Incredibly happy with this weight loss product, Gronk decides to post a blog on the Internet. In the article, he writes, “I lose 30 pounds in 30 days with Slim-Me-Cave! It best weight loss product!!” The average customer of Slim-Me-Cave loses about 1 pound per week, so Gronk’s results are certainly above average.

What Gronk wants to do:

*Results Not Typical.

What the FTC wants to see:

Typical loss is 1 pound per week for Slim-Me-Cave customers. Results will vary depending on diet and exercise.

Lesson Learned:

Your disclosures must give a “reasonable customer” sufficient information to make a decision. “Results Not Typical” does not provide enough information. When making a testimonial about a product that’s “above average,” the average needs to be disclosed (as per the FTC guidelines). Back in the old days, “Results Not Typical” used to work. But now since everyone is a potential marketer, the FTC wants disclosures to be more specific. Does “Results Not Typical” mean a customer will lose only 20 pounds in 30 days? 15 pounds in 30 days? What results can the average customer expect? When possible, provide the averages.

EXAMPLE 3: YouTube Income Claim

youtube_logo_635

Fact Pattern:

Stephanie is giving a video testimonial on YouTube about the benefits of her network-marketing company’s pay plan. She states that “In this business, when I recruited just 20 people, I was making over $2,000 per week!” In that particular program, the average distributor earns $235 per month.

What Stephanie wants to do:

Stephanie would probably not want to provide an income disclosure at all. I’m just being candid. Rarely in videos prepared by distributors do you see any kinds of income disclosures.

What the FTC wants to see:

The FTC states that the manner you communicate your claim should also be the manner you communicate your disclosure. Therefore, a YouTube video should contain a disclaimer in both video and audio formats. Where should the disclaimer be? Sadly, there’s no clear answer. But if we look at the FTC’s definition of “Clear and Conspicuous,” I think the safest bet is a text disclosure displayed simultaneously to the claim in question in addition to a more detailed audio and video formatted disclosure at the end of the testimonial. Or Stephanie could provide a “visual cue” during the video to communicate to the viewer that disclosures can be found at the end of the video.

Without question, it’s now required (in my opinion) that distributors end their videos with a properly formatted video segment. At the end of the testimonial video, a separate video disclosure should be included to illustrate the average incomes. The video file should include an image of the company’s income disclaimer (usually in spreadsheet format). While the image is on the screen, there should be audio narration regarding the average earnings. If a company is going to permit distributors to use YouTube to promote their businesses, the company should provide this kind of file freely on its website AND educate distributors on how to use it.

While it sounds complicated, it’s not difficult for companies to provide this sort of video file. However, if the company is unwilling to properly arm the distributors with sufficient tools to make good claims, they should restrict distributors from using YouTube (which is not realistic AT ALL).

There are several questions this kind of hypo raises:

Should companies require leaders to insert a clear and conspicuous textual disclosure to appear on the screen when the claim is being made?

It depends. In a perfect world, yes, it’s a good idea to provide the disclosure during the claim. But in reality, most reps lack the technical skill to do this right. This is what we know: disclosures should be as close as possible to the claim being made. Is it sufficient to provide a video file containing a full disclosure at the end of the video? In my opinion, the answer is yes. But in the abundance of caution, it would be better if there were a text disclosure provided during the video in addition to a video file being used at the end.

Is it a good idea to even allow reps to make these sorts of claims to begin with?

Are you able to produce a quality disclosure for your distributors to use? Do you trust your distributors to “color within the lines” and end their videos with a video? Do you have a solid compliance department to catch and correct the distributors that do this poorly? If the answer to those questions is “yes,” then you’ve got a shot. If, on the other hand, you answered “no” to any of those questions, it might not be worth the risk.

Lesson Learned:

If you are going to allow reps to make videos that contain income claims, be careful! When it comes to videos, it’s difficult to walk the tight rope. When it comes to income claims in videos, there’s not much margin for error. With this in mind, I would advise companies to require tight compliance. At a minimum, companies should provide distributors with a professionally produced video file that all distributors can include at the conclusion of their videos. If you know leaders are going to make claims in YouTube videos, or any other video platform, it’s wise to properly arm them with adequate disclosures. A video file will give the needed audio disclosure as well as additional visual disclosure to the income claim in question.

EXAMPLE 4: YouTube Product Claim

Product Claim Example | MLM attorneyFact Pattern:

“Sports Minded” is a company that sells organic products that improve mental focus during physical activity. Adam is a distributor for Sports Minded and he decides to do a self published a YouTube video to give a testimonial about how he can now focus for 8 hours straight while playing golf without additional supplements. However, studies performed by Sports Minded indicate users can experience an average of 4 hours of improved focus. Adam is being honest regarding his experience with the product. He’s like Mr. Miyagi for 8 hour straight! Since it’s a true statement about his personal experience, is he required to provide substantiation and disclose the average results?

What Adam wants to do:

Adam would likely try to provide a disclosure via a hyperlink in the video description, in text at the end of the video or in a brief audio message at the end of the video.

What the FTC wants to see:

They want a “clear and conspicuous” disclosure that contains the average results. Just like with the income claim example above, the disclosure needs to be in both audio and visual format.

It would be ideal if the distributor had the skill to inject the disclaimer immediately after making the claim i.e. “I know that the company says the average person experiences 4 hours of increased focus, but that was NOT the case for me!” In order for this to happen consistently in the field, the company needs to take compliance education very seriously.

Lesson Learned:

As you can see with all of these disclosures, it’s a lot more art than science. We previously mentioned that the manner you communicate your claim should also be the manner you communicate your disclosure. Technically, the FTC wants to see the disclaimer in both audio and visual formats (even for videos produced by the field). With that being said, it’s unrealistic to expect sales people to get this right when they’re making product testimonials. And I think the FTC understands this (I’m at least hoping they do). With product testimonials, I think a text disclaimer inserted into the video would be a sufficient disclosure. But this approach would NOT be sufficient for income claims. Because money clouds judgment, the FTC is much more strict in that category (and they should be).

EXAMPLE 5: Tumblr Blog

Tumblr - MLM exampleFact Pattern:

Mary publishes an article on Tumblr about “N-ERGY SAVER,” a utility service MLM where customers can save money on their electric bills throughout the year. Mary, a representative, claims that she saved $50 per month by signing up with the company. While Mary’s claim is 100% true, the company’s data shows that the average homeowner saves $15 per month on their electric bill.

What Mary wants to do:

She wants to tell her story! She wants to say “I saved $50 a month with this service and so can you!” Since it’s a true story, Mary sees nothing wrong with her sharing her personal experience.

What the FTC is looking for:

The FTC wants to see a disclosure in close proximity to her claim. So if she has written text about her savings with N-ERGY, she needs to include a disclaimer in the same font and format as the text that triggered the claim. The disclaimer can say “The average homeowner saves between $10 and $20 per month, depending on their energy consumption patterns.”

BONUS EXAMPLE!

bonus

Fact Pattern:

Same as Example #2, except suppose Gronk wants to make the same claim via Twitter.

What Gronk wants to do:

I saved 30 LBS w/ Slim-Me-Cave in 30 days! bit.ly/f56/productinfo [linking to the product page that includes the average results]

What the FTC wants to see:

Twitter allows for 140 characters per tweet. If there’s sufficient space for a disclosure, it’s ok to use to twitter. Otherwise, it should be avoided. With Gronk, providing a link is insufficient. But the FTC provides a little hope in this category: as long as the average results are provided in the tweet, twitter can be used. The FTC provides an example of a permissible weight loss claim below:

Untitled

Should Twitter be allowed for income claims?

No! There’s just not enough real estate to provide an adequate income disclosure. As I mentioned above, providing a hyperlink by itself is insufficient.

Lesson Learned:

Twitter is tricky. If the distributors are properly trained, they can use twitter for good product testimonials. But with respect to income claims, Twitter should not be allowed AT ALL.

Conclusion

It’s going to be tough for network marketing companies to walk this tight rope. On the one hand, they want to give their distributors the freedom and flexibility to aggressively market the products and pay plan. On the other hand, they need to “pump the brakes” to ensure that the distributors are doing things right. In my opinion, the real challenge is going to be with online video. While it’s very easy for anyone to create a video with a webcam, it’s very difficult for people to insert proper disclaimers during and/or after the video. In the future, proper education in the field is going to be absolutely crucial. Companies that commit to field education are going to be the ones that pass the scrutiny. Companies that take their hands off the wheel and expect leaders to get this stuff right are walking on thin ice. The FTC’s expectations are out there. Ignorance is no longer an excuse.

BREAKING NEWS: FTC’s Case Against Fortune Hi Tech Removed to Kentucky

FTC - FHTM case transferred to Kentucky | MLM AttorneyIn February of 2013, the FTC filed a lawsuit against Fortune Hi Tech Marketing. The lawsuit was filed in Federal Court in Chicago. The FTC is alleging that FHTM operates as a pyramid scheme. As mentioned in my last article, the FTC passed on the scalpel and picked up the sledgehammer. Basically, they departed from their traditional, math-based pyramid scheme arguments and went for a more generic approach. This new strategy is even worse than the other one. If it sticks, it represents a significant threat to the industry. Based on the FTC’s argument, rewards triggered via distributor consumption are illegal recruitment bonuses. This is a very important case.

Time for the Update

FHTM filed a motion to get the case transferred to federal court in Kentucky. Kentucky is the home state for the company and most of the principals. The judge in Chicago punted the file to Kentucky. The factors considered when deciding on such a transfer include:

(1) site of material events relative to the case;
(2) relative ease of access to sources of proof;
(3) convenience of the parties litigating;
(4) convenience for the witnesses.

This is big for two reasons. First, the judge in Chicago thought so little of the case that he sent it south. If he wanted it, he could’ve kept it. Second, the law in Kentucky is clearer with respect to pyramid schemes. It states:

Pyramid distribution plan” means any plan, program, device, scheme, or other process by which a participant gives consideration for the opportunity to receive compensation or things of value in return for inducing other persons to become participants in the program;
(5) “Compensation” means payment of any money, thing of value, or financial benefit conferred in return for inducing others to become participants in the pyramid distribution plan. Compensation does not include payment based on sales of goods or services by the person or by other participants in the plan to anyone, including a participant in the plan, who is purchasing the goods or services for actual use or consumption…..

Again, the FTC was initially arguing that commissions triggered via internal consumption are illegal bonuses. But the statute in Kentucky says the exact opposite. This case is FAR from over. There’s likely going to be a hearing next week in Kentucky regarding the injunction over Fortune Hi Tech. If FHTM wins, they’re back in business. The judge’s reasoning for sending the case to Kentucky is included below.

If you’re reading this via email, please click this link to read the judge’s opinion.