Pyramid Schemes: Defining the Gray, Part I
In the network marketing industry, the law is a mess! It’s confusing, convoluted, and inconsistent across the country. With this five part ebook, I thoroughly describe the current legal landscape surrounding the industry and propose some solutions to help preserve the industry’s image. I’ll be releasing a segment of the ebook each week. As you read it, please feel free to post your thoughts in the comment section here on my blog. The article is also posted on the site for my law practice, The Advocate Group.
And I forgot to mention, I’ve launched my own law practice. I’ll be specializing in regulatory issues surrounding the network marketing industry. It’s a niche among niches and I enjoy it. I think if done properly, responsible companies in the industry are poised to meet the growing demand for viable opportunities. However, companies need to be educated of the legal pitfalls before diving headfirst into a game they may not fully understand. Enjoy!
Pyramid Schemes: Saving the network marketing industry by defining the gray
Tags: amway, dsa, endless chain, ftc, mary kay, melaleuca, network marketing, pyramid schemes, usana
March 29th, 2009 at 4:37 pm
Kevin,
3 points:
1. There is no need to mark up prices to sell to customers, you earn PV/BV.
2. The Dateline story was in 2004, not 2006, and most importantly,
3. The Amway tool scammers make FAR more money from the tools than from Amway, and keep most IBO’s operating at a net loss. You need to address this FACT in any discussion including Amway.
March 29th, 2009 at 9:08 pm
Tex,
Point 1, you’re right. But in order for distributors to earn immediate profit, there needs to be a markup for retail sales. Once their sales are substantial enough and they climb the bonus chart, they can earn commissions. I like Amway’s tiered approach…an approach they implemented in England. I comment on the tiered approach in Part 4 (next week).
Point 2, you’re correct. I apologize for the oversight.
Point 3, proportionality of tool income to product income does not render the tool business illegal. As I’ve written about in this ebook, the focus needs to be placed on the business model: how are the commissions earned? Can a distributor make a living by primarily focusing on selling products to nonparticipants? Proportionality isn’t part of that equation.
March 30th, 2009 at 12:39 am
An immediate profit comes from PV/BV. It is less than the retail markup, but I find most of the U.S. retail prices to be excessive in my lower cost of living part of the country, although they may be more competitively priced in higher cost of living areas. As most people aren’t thrilled with doing retail sales to begin with, and aren’t skilled in the art of selling, selling at retail is a non-starter.
England also “outlawed” ANY tool profit and lowered many product prices substantially, several of them 70% LESS than before the fiasco.
Although not clear, a decent case can be made the excessive and secret tool profit is a business opportunity “bait-and-switch” scenario. It is certainly immoral and unethical, and absolutely is not consistent with the Golden Rule or referring to the people you are taking advantage of as “teammates” or “business partners.” Disclosure laws may need to be altered to make these material disclosures, but it is only common sense, and shouldn’t need a new law.
Regarding making a living primarily by selling, you are throwing out the networking baby with the lack of retail sales bathwater. Very few prospects would probably be interested in being primarily a sales person, and if the tool prices were lowered, it would introduce the proper incentives for the upline to emphasize more customer sales as well.
March 30th, 2009 at 12:57 am
Whether a distributor marks the price up for a retail sale or sells it at cost is not entirely relevant. When I say “retail sale” in the ebook, I’m referring to a sale made to a non-participant. If a distributor can earn income by primarily focusing on selling products at distributor cost to non-participants, I’m good with it. And although you say that very few prospects would be interested in selling, that’s exactly the point behind direct sales…individuals representing a brand and selling to people in their network. If it’s positioned as a “nah, you really don’t need to sell, just recruit….” kind of business, the red flag goes up.
March 30th, 2009 at 12:16 pm
I agree with the retail sale being defined as a non-participant. The only reason I mentioned the mark-up is because you did in your book.
Actually, the FTC has stated lack of retail sales is not an automatic red flag. However, in the case of Amway, the retail sales rule is typically not enforced.
If you suspend your ethical/moral judgment temporarily, it makes business sense to minimize sales, at least in the case of Amway. Think about it, should the upline be interested in their downline spending their spare time with retail sales (makes the upline pennies), or sponsoring (makes the upline dollars, because IBO’s buy tools, customers don’t)?
March 31st, 2009 at 6:27 pm
Quite frankly, I think that Kevin’s points bear the most relevance. He has analyzed the current state of the laws and has determined that there are no ‘bright line’ tests. Just the contrary. That said, there are certain flags that point to a pyramid vs an acceptable network marketing structure. The toolkit issue does not seem very germane-first, if the argument is that toolkits are the ‘money-makers’ and most people do not join MLMs for the purposes of creating a sales base to generate income-then what are the toolkits used for (if not for retail sales?), and second, most MLMs (as Kevin’s e-book points out) are designed to reward both retail sales and recruitment of a ‘downline’. The ones that are merely designed for the latter purposes raise flags. While this may not be an automatic ‘red flag’ perhaps, the point is that these types of structures are more likely to generate closer scrutiny.
March 31st, 2009 at 7:13 pm
Hilory,
I agree the laws are fuzzy. I don’t know if this is due mainly to lack of knowledge, the nature of how new companies change the “landscape”, or some other reason.
I’m not sure what you mean by “toolkit issue”, what I mean by tools is the various meetings, books, CD’s, websites, voice mail systems, etc. There is more than ample evidence showing the Amway upline folks make multiple times more from these sources than from Amway, which makes the issue HUGELY germane. In fact, given the above, the tools are by definition multiple times more germane than the Amway business itself, because they result in not only multiple times more profit for the upline, but net losses for most IBO’s. Therefore, I submit there is no single factor more germane than the tools.
The tools are used, besides making a huge profit, to educate and motivate the downline, and the “how to” portions are directed mostly how to sponsor others.
Most MLM’s may be designed to reward both retail sales and downline recruitment, but how they are actually performed is, at least in the case of Amway, 95+% downline recuitment and <5% customer volume. I explain why in my previous post.
When some terminated TEAM folks disclosed the confidential <5% number a couple of years ago, one would think evidence of increased scrutiny would have been made publicly available by now. It hasn’t been.
By the way, I am a current Amway IBO, and have been for 16 years. 12 of those years were spent getting ripped off by the upline, the last 4 in creating an improved tool system and promoting shutting down the tool scam in various ways. I don’t pretend to be an expert for other companies, but feel I am one of the most, if not THE most, informed people regarding how Amway and the LCK’s (Lying Cowardly “Kingpins”) work.
March 31st, 2009 at 8:13 pm
Very well said, Hilory. What’s your background? You have a good grasp for the concepts. Tex, I read your earlier comment about the incentives favoring recruiting because tool sales depend on distributors, not customers. I understand your issues with tool companies (you’re very vocal about them). However, instead of constantly gunning for tool companies, why not allocate some blame to the mother-ship? At the end of the day (and you’ll learn this in Part IV), the network marketing company is held responsible for the behaviors of the field. He who controls the carrot controls the direction.
March 31st, 2009 at 11:33 pm
Kevin,
I prefer the term “advocate” more than “very vocal.” If you read my latest blog entry, and I have voiced similar complaints many times in the past for Amway knowing about the problem and not taking action, you would know I hold BOTH sides responsible: google “tex” and “amway”, and go to the main page. I know Amway was held responsible in the UK, but that doesn’t do much for us in the U.S.
May 8th, 2009 at 1:56 pm
The problem with the Amway business and tool business is that it is promoted as a bait and switch scam. One the one hand, you have these Amway “diamonds” flashing jewelry, fancy clothing, luxurious vacations, Mercedes Benz and other toys. They say come join us and have what we have. It is simple they say.
Then these diamonds will tell you that the secret to achieving said lifestyle is to attend functions, listen to their cd’s daily, use voicemail. All of these things benefit these diamonds financailly while impoverishing the downline.
In the background, nobody actually sees the financials of these diamonds, who very likely make most of their income from the system and not from Amway. This is the problem with the business. This and the fact that Amway has too much baggage for most people to overcome and be successful.
May 18th, 2009 at 5:34 pm
Just to be clear, and I’m sure it’s obvious, the inane person posing as “IBO_FB” in the post above is not me.