About two months ago, I approached a legislator in my legislative district to run an anti-pyramid bill designed to help clarify the differences between legitimate network marketing companies and pyramid schemes. The bill can be read in its entirety below. The key provisions are highlighted and I’ve inserted a few comments in some places.

Motive

The motive behind the bill is very simple: I want to be a part of the solution in this industry. In my world where things are fairly black and white, you’re either part of the solution or part of the problem. I’ve witnessed first hand what occurs when there’s very little emphasis on selling. Under the influence of a charismatic message and a promising pay plan, distributors end up purchasing items at prices they normally would never pay in quantities they would never consume. People get hurt. Kevin Grimes of Grimes & Reese captures this point well in his article “The Preeminence of Value” where he says,

The significance of value and saleability is that if the products are not salable, there will be no customers. Distributors will only buy the products to earn bonuses and commissions, which has the potential to make the program a pyramid. If distributors cannot make money by selling or moving the products to end consumers, there is really only one other way in which they can make money — by activities related primarily to recruiting additional participants!

It was never my intention of harming the industry. Instead, I’m trying to add some clarity.

Merchandising Cultures

Recruitment is an important function for all network marketing companies. But as we learned in the Amway case from 1979, there must be certain governor chips in place to prevent endless recruitment and to ensure the products are truly marketable. These governor chips are referred to as the “Amway Safeguards.” Clearly, the best metric for a product’s marketability is whether the products are being sold to nonparticipants. Amway’s 10 customer rule, which required that distributors make sales to 10 people before collecting their bonus, was largely responsible for its survival in 1979.

Fast forward to 2007. Again, Amway was under the gun but this time, it was in the United Kingdom. What was the cure? Prior to trial, Amway made some aggressive changes to communicate to the government of its commitment to solving the problem of endless recruitment and its heavy reliance on internal consumption. Amway developed a tiered approach where the first milestone for a distributor was to sell approximately $200 in products. Distributors had to reach this milestone BEFORE they could sponsor another participant. Imagine that. Not only can the distributor not earn an override commission from downline volume, they’re even prohibited from building a downline until they demonstrate a proficiency in selling.

I’m not an advocate of bringing the tiered approach in the U.S. Clearly, Amway made the drastic move to save itself. But interestingly enough, Amway is doing well in the UK and seems to have a very sophisticated sales force. They survived their cancer and the cure was selling.

Customers are Good for Business

There much ado over the definition of “customer.” The Direct Sales Association would like distributors to serve the dual role as customers and distributors. As for the definition of customer that’s in the bill, I completely plagiarized from one of Gerald Nehra’s articles where he defined customer as, “A ‘customer’ is an end user consumer of the products or services of the company, and in this strict definition, DOES NOT have any opportunity to MAKE MONEY with the company through any later action or conduct. “

Spencer Reese of Grimes and Reese seems to understand when he writes,

Too often multilevel marketing companies exclusively emphasize the importance of recruiting new distributors. Others emphasize sales, but only secondarily to recruiting. What is necessary is a paradigm shift from a primary emphasis on recruiting to a primary emphasis on retail sales. It is certainly acceptable to promote recruitment of new distributors, for this is an essential element to growing a business. However, the emphasis on recruitment must be of secondary importance; distributors must be taught that the primary emphasis is on the development of retail sales. This will be difficult for many companies because it removes the inducement to purchase offered by a lucrative compensation plan and forces them to compete with retail brand products based on price, quality, convenience, and uniqueness.
Reese, Spencer; The Personal Consumption Dilemna available at: http://www.mlmlaw.com/saleswatch/omnitrition.html

Customers are good for business and a disciplined approach to accruing customers is good for the industry. Recently, I was sent an email from Squidoo.com that threatened to delete my page because it had the words “network marketing” included on the page. Facebook has recently deleted several fan pages from prominent network marketing companies. The perception of the industry will never improve if its leaders continue to fly under the banner of legal ambiguity. The industry is littered with companies that profiteer in the grey zone and churn through tens of thousands of participants, who then in turn become the next generation of MLM detractors. We know there’s a problem, yet there are very few people doing anything about it. At least now we can engage in a conversation and start talking about a solution.

The bill

The bill is an attempt to define the grey area between good companies from bad ones. If a company has 5,000 distributors and 20,000 customers, they’re obviously an outstanding company. If a company sells $1,000 lemonade and has 1% customer sales, they’re obviously a bad one. As an industry, we need to help bridge the gap between the two. And no, the DSA’s proposed legislation is not an acceptable proposal largely because the latter example of the $1,000 lemonade would be permissible under their bill so long as there’s a return policy.

So what does the bill do? It borrows from language in the Wyoming statute and requires that a “condition precedent” of a customer sale occur before distributors can earn commissions. There’s nothing novel in the bill. It attempts to codify Amway’s retail sales rule, which says that distributors do not earn commissions until they rack up 5 customers or move 50 pv to a nonparticipant. MonaVie has a 5 customer rule. When thinking about the bill, I contemplated inserting a percentage i.e. 50% of a company’s revenue needs to stem from retail sales. Unfortunately, it’s the arbitrary standard that the FTC uses, which is another reason why we really need to clarify this mess before the federal government does it for us. I contemplated having a numbers requriement i.e. 5 customer sales. But that’s too strange and every company is different. Instead, I settled on the loosely termed “condition precedent.” So long as there’s a sales requirement and the rule is enforced, the company would be fine in Tennessee. A company could sell $10,000 lead pencils and be fine so long as their customer rule was enforced.

Doom and Gloom

Not surprisingly, the Direct Sales Association takes exception with the bill. Some of their member companies would have a difficult time with a prerequisite of selling. But their message that “this will put companies out of business” is absurd. Again, the “condition precedent” language was copied from a bill in Wyoming and companies are doing fine over there. Secondly, a sales requirement is not a novel idea. It’s important to remember that outside retail sales have always been required. Ignoring these legal requirements is a bad idea for two reasons: it’s bad for the industry and its bad for consumers.

Opportunity

On the one hand, we complain about the vague legal standards. Yet on the other hand, there are those that get extremely disturbed when there’s an attempt for clarity. When consumers are harmed in this vortex of legal ambiguity, I will refuse to advance a side of the argument that harms people.

There’s an opportunity here. First, read the bill and let’s talk. Second, I’ll be speaking with the Tennessee legislators and members of the DSA soon enough. I’m amenable to talking with John Webb from the DSA or Spencer Reese to hammering out a bill that works.

I also want to invite members of the Distributors Rights Association to chime in and discuss some ideas. I highly respect each of the members on the DRA board and I’ve submitted to their wisdom on multiple occasions in the past. It’s my opinion that the collective wisdom of the DRA is more in tuned with reality and their motives seem pure. Therefore, I would gladly receive their input and I’m amenable to any revisions that they’d like to see in the bill.

No More Rambling

This has been a long post but it’s important. Leadership is a matter of confronting brutal realities instead of enjoying peaceful illusions. I hope that at a minimum, this will spur on a good conversation. Again, I will gladly receive feedback from industry professionals and I’m confident we can draft a bill that serves the interests of the industry while at the same time protecting consumers.

ps, forgive the condition of the website. It’s a little under construction.

Tennessee House Bill 2843