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by on September 1, 2010 7 Comments

Training Fees and monthly service fees: be careful.

I’m going to start this article with the conclusion: training fees and monthly service fees, when used to beef up a company’s compensation plan, are usually an attempt to support an anemic business model operating with low margins. It’s not a disaster if you see these “pay to play” fees. However, if a regulator takes exception with a particular company, an inappropriate monthly fee adds another bullet to the gun.

So what do I mean when I say “beef up the compensation plan?” This happens when companies charge a monthly fee (i.e. $30 a month) or a one time training fee (i.e. $500 training fee) from each rep in order for them to remain eligible for commissions. In exchange for this fee, the distributors get back office support, training and usually wholesale pricing on products and services. The money can be used to “beef up” the plan when its collected by the company and inserted into the commission pot. As an example, if a company charges $30 a month as a service fee and the distributors get a percentage of the service fee for each personally enrolled rep, it can spell trouble. However, if the monthly fee is more like a subscription fee and the subscription has relevance for people beyond the network, it’s a more palatable story.

The problem with injecting a pay plan with monthly fees is simple: the only way to tap into that money is via recruiting more distributors. When there’s no real market for the product or service for nonparticipants (people outside of the network), the transaction is viewed mainly as a money transfer from new investors to older ones. When Burnlounge was shut down by the FTC, they were pursued largely because their commission structure was allegedly fueled primarily by the usage fees paid by the distributors, not via the sale of their products. It’s a problem.

The old MLM mantra remains true: Companies should never pay commissions on sales aids. “Service fees” or “membership fees,” when there’s no real market for the fee outside of the distributor base, falls in line with this old mantra. What do you think? Can you think of any way around this rule?

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  • http://MLMHelpDesk.com Troy Dooly

    Kevin,

    Would it be better for companies running on tight margins and who charge fees, to not add beef up the comp plan, directly, and instead run, let's say 90 day contests where trips or one-time payouts occur?

    Would this relieve some of the regulatory concerns?

    As always great food for thought!

    Living An Epic Adventure,

    Troy

  • Kevin Thompson

    Troy,

    I like your idea. It would depend on what the contest was trying to accomplish. If the reward was tied to the sale of product, it would be fine. If the reward was tied to enrollments, coaching fees, etc, it would be a problem. Great suggestion. There should always be a way to sanitize a deficiency with a little creativity.

  • http://www.21Ten.com Richard Bliss Brooke

    Or… we could just stick to what cleans up our industry. If you cannot find a product or service that really does have value; that really is in demand by customers vs distributors then how about you go trash someone else's industry?

    Our industry desperately needs to be sanitized with integrity not creativity. It is creativity that creates the grey areas.

    It is a good thing ( sort of) that AGs offices are so clueless about how companies operate and how comp plans really work. If they had the time in learn the ropes they would put most service companies and buying clubs out on the street.

    This would be bad for those companies but good for our industry.

  • Kevin Thompson

    Richard, we should hang out! I agree with you. I tell entrepreneurs almost daily that the MLM model is designed to introduce unique and innovative products into the marketplace. If there is very little margin to work with because the product is already readily available, they should consider other channels because people will get harmed. I agree that integrity is more important than creativity. The problem, in my opinion, and most disagree with me about this btw, is a complete lack of oversight. It is too easy today for people to run bad, unsustainable businesses without consequence. Thanks for sharing, Richard. Glad to see you here.

  • http://TonyMichael.com Tony Michael

    Kevin,

    Great article, I wish every distributor in the industry would read this so those who are in companies with business models that are either weak, out of compliance, or just flat out illegal could be educated on the reality of what they are building and promoting.

    My only concern/question about the article (small point) is the final paragraph. It has been my understand from legal council that paying commissions on a sales aid, or anything deemed to be a sales aid is not just a bad idea, but actually illegal and grounds for a regulator to shut a company down.

    That would apply for fees charged for an "online shopping mall", websites to sell travel, or any website/tool designed to sell something else but is NOT an end user product/service would ultimately be deemed a "sales aid".

    I'd be curious to hear your opinion on this, since you're the attorney and I'm not.

    Richard is 100% correct, no big surprise that he's been an enduring industry icon for the length of time that he has. What makes our industry work, and work well is using our powerful model as a means to bring a product or service to the marketplace through word of mouth and paying commissions to those who spread the word.

    If the product/service a company is wanting to market does NOT have the margins to pay commissions, tacking on additional fees to support a compensation plan is the basic definition of an illegal pyramid scheme. The reality is in that capacity, their product/service is irrelevant without the compensation plan.

    A product should justify a compensation plan, not the other way around.

    Thanks for the excellent post, and I look forward to more from you.

    -Tony Michael

    PS: Troy, you know I respect you my friend and I think you do a lot of great things for people in our industry, but the reality is no matter how many contests, promotions, etc. a company runs… If their business model can not support paying commissions on their product/service they are only delaying the inevitable.

    That company will end up going out of business either because there is no real profit in what they are doing, or if they are charging the additional fees and paying commissions on those they will end up getting shutting down by a regulator.

    That is why every single network marketing company selling travel or an online shopping mall has either gone out of business or been shut down. And the FEW exceptions to that rule, just haven't been around long enough.

    I won't name names or point fingers, I'd just say anyone who thinks they have an exception… let's both sit back and watch for a little bit.

    Success leaves clues, and so does failure.

    Doesn't mean they are "bad companies" or "bad people", in many cases they are great companies with great people… just a bad business model.

  • http://www.themlmattorney.com Kevin Thompson

    Great points, Tony. I will try to be brief. Yes, paying commissions on a sales aid is certainly indicative of pyramiding. If the sales aid has no market beyond the actual network, it's a transfer of money. As for website fees, etc, it depends on the circumstance. If a business is selling a "membership program" and there's a monthly fee, it would be legitimate if the monthly membership program had relevance for customers. However, if the website fees you are referring to only pertain to….well, website support and tech support (stuff only relevant for distributors), then yes, it's a problem.

    I hope that answers your question. Thanks for your post and welcome to the site.

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