Master distributors: good or bad?

I was reading on Art Jonak’s facebook group, Network Marketing Revolution and a post got me thinking on this subject.

The Good

In this industry, a lot of startups try to seed their businesses with people known as “master distributors.” These are the professional networkers that command a large following and can deliver anywhere between 500 to 30,000 people depending on their scope of influence. These master distributors offer a lot of value because they help young companies capitalize their businesses with excitement, momentum and, more importantly, people. While Company Z might have the best product in the world, they’ll fade into obscurity if they’re never able to attract a committed group of people.

Show me the money

Master distributors are provided a financial incentive to join a business via some sort of special bonus, which is always in addition to their payout via the compensation plan. These bonuses vary but they’re usually a small percentage of the gross revenue from the downline i.e. 1% of gross revenue, 2% of gross revenue, payout from a special position, etc.

The Bad

The master distributor subject is also very controversial. Some companies are choosing to stay away from these arrangements because they’re afraid that when they hire “mercenaries” (a term used by a client, not me), the leaders would be more loyal to the money instead of the company. Master distributors also have the reputation of being “opportunity jumpers” where they stick with a company for a couple of years, recruit a brand new base of followers, and transition them over to the next company. This one particular client of mine had an interesting perspective. He said, “I want to grow an organic base of people that are loyal to our brand. If we start paying distributors to come over, they’re coming for the wrong reasons.” Interesting take and I respect it.

Solution

In my view, there’s nothing wrong with master distributors leveraging their talent for a fee. In fact, I’ve done this type of agreement for multiple clients. If the master distributor commands an audience, it’s clearly worth something for a fledgling business. The problem arises when these “special deals” go undisclosed. As a mentor once said, “If you do something, assume it’ll be written in the sky.” There’s no secrets in this industry and when there’s a special deal, usually people catch wind of it. We’re not in the 80s anymore.

Disclosure is important because when the master distributor is promoting the viability of the opportunity, the prospective members are not eligible for the same opportunity; thus, it might be perceived as misleading. Recently, the FTC has required that paid endorsers disclose the fact that they’re paid by their sponsors. As an example, Michael Jordan says, “Gatorade is awesome!” If he was paid by Gatorade, he would now be required to disclose his affiliation with Gatorade. The rationale is simple: consumers should know that the testimonial might have been influenced by money. The same rule should apply with master distributor arrangements.

Free advice

Am I suggesting that the master distributor disclose this each time they present the plan? “Oh, and by the way, I make a lot more money per recruit than you ever will.” Nope, that won’t work. I would suggest that the company provide a page on their website that discloses which distributors are being compensated in addition to the traditional pay plan. The details are not necessary, just the basic fact that there’s a deal. Therefore, it can never be said that a company was withholding material information from the public that would have been influential in their judgment. Just a thought. What do you think?

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It’s easy to setup a blog that makes it simple to publish content and accrue subscribers. It’s also easy to create a website that explains your product or services. It’s extremely difficult to have a seamless solution that covers both aspects well. Over at The Advocate Group site, it was a great representation of the services I offered but the blog functionality was terrible. Over at Next Generation Law, the blog functionality was great but I lacked the ability to really promote my services in a marketable way.

And then I saw what Ryan was doing… He framed a separate website for his law practice on his startuplawyer.com page. The content there is static and it’s positioned in a way that’s concise and attractive. As for building a community of subscribers, he does that at thestartuplawyer.com. It’s keyword rich, easy to subscribe and easy to interact with readers.

I had the same goals for this site. I wanted to make it easy to produce content while at the same time deliver a message about my practice that’s marketable.

So what do you think? Do you have any suggestions?

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Brief Summary of the Bill

After reviewing the bill, you’ll see that the main provision that has Herbalife nervous (and companies like Herbalife, I guess) is the requirement of a “condition precedent” of outside sales. Please note, the bill does not require a certain number of customers i.e. a “5 customer rule” nor does the bill require a set percentage to come from customers i.e. 50%…..the bill simply has a sales requirement! Just make a sale, any sale, and there’s no issue.

Judge Feess

Herbalife’s business model is currently being scrutinized in the Central District of California. Judge Feess, who I’ve had the pleasure of seeing work in person, is a bright judge. Granted, with respect to one of my former clients, Judge Feess punted on every occasion. But in this case with Herbalife, he’s diving into the issues. In a recent Order, Judge Feess denied Herbalife’s motion to throw out the pyramid claims made by the other party. Judge Feess held, “Herbalife’s entire business model appears to incentivize primarily the payment of compensation that is ‘facially unrelated to the sale of the product to ultimate users …’ rather than based on actual sales to consumers,” (See the Order below, page 16). I’m not suggesting that Herbalife is down for the count. Quite the contrary, they will undoubtedly put on a tough defense and argue that those outside sales do occur (assuming it goes to trial, which it probably will not).

Confusion

When Herbalife is currently being held to a standard in a federal lawsuit that requires outside retail sales, why would they show up and explicitly oppose a bill that has a conservative outside sales requirement? On the one hand during the trial in California, I’m sure they’ll argue that they do in fact accrue revenue from outside sales. On the other hand, they’re arguing that the Tennessee anti-pyramid bill will be bad for their business. In the future, they need to stay home and let the DSA do the heavy lifting. Or even better, they should support a bill that raises the professional standards in the industry. As the saying goes, “The rising tide raises all boats.”

Questions

If you think I’m missing some important information that would change my opinion, please share. Was it a momentary lack of situational awareness on their part? Does it make sense for them to simultaneously argue that they comply with standards on one end of the country while arguing against similar standards on the other.

Herbalife v. Ford_Summary Judgment order

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Courtesy of Vermin Inc @ Flickr

Logic Game

Imagine if there was a network marketing company that invented the MP3 player. Assume this MP3 player has the usual bells and whistle of a typical player. Now imagine that they still sold this product for $600. Do you think they can make it in the industry? How can their distributors make customer sales?

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How do you measure intent?

In 2004, the FTC attempted to clarify some concerns from the Direct Sales Association with respect to the issue of internal consumption. The letter is short and can be read in its entirety below. There’s one thing that’s noticeably absent from the letter: the basis upon which the FTC distinguishes the good companies from the bad ones. Still, there are some good nuggets to pull from the advisory letter.

Much Ado About Internal Consumption

In fact, the amount of internal consumption in any multi-level compensation business does not determine whether or not the FTC will consider the plan a pyramid scheme. The critical question for the FTC is whether the revenues that primarily support the commissions . . . are generated from purchases of goods and services that are not simply incidental to the purchase of the right to participate in a money-making venture. A multi-level compensation system funded primarily by such non-incidental revenues does not depend on continual recruitment of new participants. . .

Translated in English, I read the above paragraph to mean that the “intent” behind the distributors’ consumption of the product is an important factor. If distributors are purchasing products merely to participate in the pay plan, there’s a serious problem. If distributors are purchasing items for the inherent value, it’s a different story. So how does the FTC measure intent? What’s the appropriate metric to use to read the collective minds of the sales force?

The FTC expresses its disdain for recruitment schemes when it further says, “A multi-level compensation system funded primarily by such non-incidental revenues does not depend on continual recruitment of new participants, and therefore, does not guarantee financial failure for the majority of participants.” Clearly, the FTC understands that programs that require endless recruitment in order for distributors to turn a profit are unsustainable and harmful. How does the FTC determine if a program is an endless chain that requires constant recruitment? In my view, the answer depends on the marketability of the product. If the product is unmarketable, then the only way to advance in the program is to focus on recruitment and exhaustive internal consumption, which brings us to our last and most important part of the letter.

Forced Inventory Requirements…a big no-no

On page 2, the FTC solidifies its position that “intent” is very important when distinguishing good companies from the pyramids when it writes:

The Commissions recent cases, however, demonstrate that the sale of goods and services alone does not necessarily render a multi-level system legitimate. Modern pyramid schemes generally do not blatantly base commissions on the outright payment of fees, but instead try to disguise those payments to appear as if they are based on the sale of goods or services. The most common means employed to achieve this goal is to require a certain level of monthly purchases to qualify for commissions. While the sale of goods and services nominally generates all commissions in a system primarily funded by such purchases, in fact, those commissions are funded by purchases made to obtain the right to participate in the scheme. Each individual who profits, therefore, does so primarily from the payments of others who are themselves making payments in order to obtain their own profit. As discussed above, such a plan is little more than a transfer scheme, dooming the vast majority of participants to financial failure.

Although it’s not explicitly written above, the word “intent” is there in spirit. If a company has a forced inventory requirement, it’s an immediate red flag because it’s an indicator that the product is serving as a subterfuge of the money transfer scheme. Additionally, it’s an indicator that the product lacks marketability and that the business depends upon constant recruitment of new participants to engage in the inventory requirements. Imagine a company that sold $1,000 bottles of lemonade and required its distributors to purchase a product a month. Clearly, the bottles of lemonade would be considered token products designed to conceal the money transfer scheme. Most companies are not foolish enough to have inventory requirements in order to participate. Additionally, most companies have some type of sales requirement to demonstrate that their products are in fact relevant for nonparticipants.

Measuring Intent…how do regulators do it?

So what are some common sense ways to measure the collective “intent” of the sales force?

• Is there a prerequisite of selling before the commissions are paid out? This is known as one of the “Amway Safeguards” where the distributors earn commissions from downline volume only after hitting their retail sales quota. It demonstrates that the products are truly marketable because they’re moving to people outside of the compensation plan.
• Do former distributors continue to buy the products? I know of several people that continue to purchase products from prior MLMs because they love the value of the product. If the answer is “no,” it would indicative that the distributors were purchasing the items largely to participate in the pay plan.

What do you think? What are some ways to measure the “intent” behind internal consumption?

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FTC Staff Advisory Opinion – Pyramid Scheme Analysis

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Multilevel Marketing Law

There’s never been a better time to start a network marketing business. There’s large demand for unique products and viable opportunities. But with mounting pressure from state and federal regulators, the industry is not very forgiving of mistakes. Kevin Thompson has extensive experience in the industry and helps entrepreneurs launch their businesses on solid legal footing.

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I’m excited about this new website. After playing around for a year and experimenting with different themes, layouts and domains, the new web address and layout is the culmination of the lessons learned. Although I really liked the old site, The Advocate Group, the domain was not “keyword rich” and the site itself was not suited well for frequent content. I like the theme at the old site and I plan to still use it for my law practice, unofficially named “The Law Office of Kevin Thompson.”

I’ll be creating and posting content here at The MLM Attorney (“TMA”) and I look forward to connecting with more people on this platform. Be sure to subscribe to the RSS feed and stay plugged in.

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