No one can tell you with certainty how keep your direct sales business out of the crosshairs of regulatory bodies. No two rulings (or settlements) are identical. As circumstances change, regulators change their focus. But we see regulators going after certain practices again and again, and from that we can draw some common sense conclusions. We’ve covered these issues on MLM.com before—so none of this is news—but we wanted to bring them all together into one list.
I’m not a lawyer and this article should not be taken as legal advice. Talk with your attorney about these tips. This is by no means a guarantee of safety. But we think you would be wise to consider these ideas going forward with your company.
1. Don’t let customers register as distributors
Unless someone plans to build a business, consider signing them up as a “preferred customer.” This tops our list for two reasons. First, most companies currently have lots of “distributors” who are functionally customers—they signed up just so they could receive a discount, and they do not actually participate in the business opportunity. Second, the FTC has taken a hard stance against this practice, refusing to allow companies to claim that any of their registered distributors are functionally customers.
Having demonstrable end consumers is an important defense against being labeled a pyramid scheme. On the other hand, not being able to show end consumers is likely to be used against you if a regulator investigates your company. The MLM of today needs a preferred customer category—individuals who want the discount but who are not building businesses—because it allows you to point to verifiable numbers of end consumers.
2. Don’t require personal purchases
Most companies have personal volume requirements in their compensation plans. That is, most companies require distributors to make some amount of personal purchases in order to receive commissions. This is dangerous for the same reason that it’s dangerous to register customers as distributors; requiring that your people make a purchase every month looks, to regulators, like evidence of a lack of real consumers.
You can deal with this issue in a number of ways; one way that we have discussed before is that you modify your personal volume calculations to include purchases made by the distributor’s personal customers. Setting things up this way allows distributors who want to buy monthly to do that—and still use that volume to qualify—while allowing distributors to remain qualified in another way if they don’t want to buy. It also gently incentivizes sales to customers, but we’ll talk about that more later.
3. Don’t require autoship
Autoship is an incredibly useful tool for companies selling consumable products. That’s just as true for traditional retail companies as it is for MLMs. We can debate all day whether or not regulators should be allowed to restrict the right to offer autoship, but we cannot blind ourselves to the writing on the wall about autoship requirements.
The FTC went after both Vemma’s and Herbalife’s autoship programs. Before their ex-parte TRO and asset freeze, Vemma didn’t require autoship, they just promoted it heavily enough to catch flack. The Herbalife settlement prohibits autoship outright—a drastic measure, considering how common subscription services are outside the MLM sphere.
If you want to keep your autoship program, the best way to ensure your ability to do that is to stop requiring it for commission qualification (if you do currently require it). Kenny Rawlins outlined several ways to incentivize autoship without requiring it, which is absolutely what we recommend.
4. Do track in-person sales
If your distributors are buying extra product to keep on hand for in-person sales, start tracking those sales. While in-person sales have always been common in the industry, tracking them is a new issue that we’ve so far only seen in the Herbalife settlement. It’s something that’s only recently more plausible to do and it ties back to the same concerns about end consumers. Tracking in-person sales gives you yet another number to point to if the FTC comes knocking.
In the past, companies have pointed to the staggering technical difficulty of collecting data on in-person sales. There are just so many of them happening and forcing distributors to record them was seen as cumbersome and likely to cut back on sales. But point-of-sale technology has advanced to where it can be plausible, even easy to track in-person sales. Devices like Square allow salespeople on the go to capture all the same data that traditional retail businesses have captured all along.
All that distributors need is a mobile tool that lets them capture the data. Having that can also make their lives easier by allowing them to take credit card payments in one-on-one sales situations. While you might hesitate to require that distributors track in-person sales, it’s a good idea to incentivize them to do so, which leads us to our next tip.
5. Do incentivize sales to customers
Build strong incentives into your compensation plan for servicing customers. Most companies pay commissions on sales to customers—what we’re talking about here is upping the incentive. As we’ve already pointed out several times before, end-consumers matter. So does being able to prove that they exist. This tip may not be especially important for all companies. Party plans, for example, have always focused on customer acquisition. On the other hand, some binary plans have a strong built-in disincentive for customer acquisition—if volume isn’t generated inside the binary tree, the distributor doesn’t get the primary binary commission on it.
Depending on how your company is set up you’ll want to use different approaches for incenting distributors to make sales to end-consumers, but you must make this a priority for your company. Vemma and Herbalife are both required to hit certain distributor-to-customer ratios. Vemma’s distributors will receive no commissions on volume of which 51% doesn’t come from customers. Herbalife is expected to hit a two thirds customer volume ratio. These ratio requirements could be huge penalties for a company that has never incentivized sales to customers—the entire salesforce would have to change radically and quickly in order to keep earning. Avoid that pain, and hopefully the investigation altogether, by making it more profitable for distributors to acquire customers in the first place.
6. Don’t make any claims you can’t prove
This one should go without saying, but you should not make claims of any kind that you cannot prove with real data. Illegal claims might be about how much your distributors can earn, or about the flashy lifestyle your distributors might expect, or about the kinds of health benefits your products might provide. No matter what kind of claim you’re making, you need to make sure that it’s within the limits of the law. This goes for you—the company owner—and for your distributors.
Companies and distributors making unprovable claims about income, lifestyle, and health benefits has long been a problem in our industry. But it’s worth repeating, and regulators seem to be taking it even more seriously. For example, Vemma is not only forbidden from making claims they can’t prove, but also from using any kind of wealth or luxury imagery—even if that imagery comes without any text directly suggesting that distributors stand to gain that wealth or luxury.
Saying, or even implying that distributors can get rich quick just isn’t a safe strategy for your company to pursue. Stick to the facts when it comes to income, lifestyle, and health benefits.
7. Do train your distributors
Develop a training program and require completion of that program before anyone can participate in your opportunity. Herbalife is now required to train their distributors. This isn’t just a matter of offering training materials—Herbalife must keep records proving that everyone earning through their compensation plan has been trained. While training didn’t come up in the Vemma case, Vemma might not have found themselves in court in the first place if they had had a better training program that taught their distributors about legal compliance.
It’s not enough to have a policy against illegal claims and other illegal activity. You must teach your distributors the tenets of that policy and what it means to comply with it. The training program outlined in the Herbalife settlement goes beyond constraining claims. Herbalife has to teach their distributors business basics—like calculating profits and losses. It might be good to implement something like this in your company, but at the absolute minimum, you should develop and require completion of a training program aimed at keeping your distributors honest and in compliance with the law.
8. Do monitor your distributors’ behavior
Monitor what your distributors are saying and doing when they are out in the world representing your company. Training your distributors to follow company policies is an important step toward keeping your salesforce honest, but it just isn’t enough anymore—you have to keep tabs on them too.
This could mean several things. Have employees—think secret shoppers—check in to observe your distributors’ sales tactics in person. Suspicious regulators will absolutely be checking in. You need to do the same. Monitoring your salesforce also means keeping an eye on what distributors are saying online. Like tracking in-person sales, as technology advances, it’s becoming more plausible to monitor what your distributors are saying and you must have processes in place for doing just that. If building a team to do this kind of work is outside your wheel-house, seek a third party to fill that role. Vemma now has a court-appointed monitor watching its distributor force. Monitor your employees yourself; it will hopefully help keep someone else from monitoring them for you.