The Herbalife settlement is out. We’ve had time to examine its contents. We have compared this settlement with last year’s Vemma case. Several of the particulars the FTC went after in each case are similar. One similarity—the focus on customers—is daunting. The FTC wants most of your sales to be made to customers, and by customers they mean people who registered as customers; you cannot claim that someone who registered as a distributor is actually a “customer” seeking a better price. If they signed up as a distributor the FTC is going to count them as a distributor, period.
The problem for the industry is that this will force a radical shift away from the industry standard “build strategy.” In most network marketing companies, distributors are trained to sign everyone up as a distributor and then each individual decides whether they will be a customer or build a business. So if your recruit sells product and operates as a distributor, great. If your recruit never sells and remains functionally a customer, that’s fine too. It is clear the FTC will not allow you to count this second group as customers. For almost all network marketing companies, changing this recruiting mindset will not be easy for your sales force.
So that raises the million dollar question for company owners: Do you change to comply with these guidelines before you get into the FTC’s sights? Do you make changes that could really affect your growth and momentum, or do you wait and hope you don’t get in their sights?
No one should underestimate the difficulty of changing how you do business. Distributors, especially those who’ve been in the industry for a long time, don’t have much in common with ordinary individuals in the corporate world. They do things their own way, and often they’re in the industry for that very reason. They aren’t the type of people who like following marching orders. And distributors like the single sales pitch. They like signing everyone up as a distributor and letting each individual self-select, it is the easiest build strategy to implement in a downline. But it’s clear from both the Vemma case and the Herbalife settlement that the FTC wants individuals to sign up as customers and to only advance to be distributors when they take meaningful, purposeful action.
The one-step process is how distributors have operated for 30 years. All of these distributors out there with long histories in the industry will have a difficult time adapting their methodologies to cope with the new expectations. Some high-level distributors out there talk to a hundred people a day. What do you tell them to do when you implement a two-step process? What sales pitch do they now use? Do they send their downline out to encourage customers to make the switch to distributor? How are they supposed to identify the 10-30% of customers who have interest in selling the product? You can say, “We’ll wait until they refer a few people,” but we’re not even sure if you’re safe allowing people to refer new customers until they become distributors.
But, again, this is not a law. So how quickly should you comply? After all, the FTC won’t come after every company all at once. So, do you need to solve this problem today? The clients I deal with are asking this question. Whether they’ll do it or not, I don’t know. But they’re internally debating whether or not they should. There’s no clear cut answer to this question. In part the lack of an answer centers on the fact that the action to take—if you do take action—is not entirely clear.
The rules about commissionable volume that we see Vemma and Herbalife complying with are the same in spirit, but different in the specifics. An Arizona court gave Vemma a 51% customer volume rule. The consent decree Herbalife signed includes a 2/3rds customer volume rule. So the percentage may not be settled, but it’s clear the FTC want’s the industry to focus on customers.
It’s worth mentioning that Herbalife agreed to charge distributors and preferred customers the same sign up price. For Herbalife, this isn’t a crippling rule because they already have variable prices depending on a distributor’s rank. New distributors get a 25% discount. When you advance to become a supervisor you get a 50% discount. So giving preferred customers the 25% discount leaves some money on the table for salesperson commissions. But most network marketing companies do not have this type of a price structure, so if they give customers the same price as distributors, companies will have to make sure their compensation plan has money for salesperson commissions built into them.
Looking at the Vemma and Herbalife cases, there are a lot of differences but there are some things that are clear. If you want to claim that someone is a customer, they have to be signed up as a customer. That rule is nearly identical in each case.
One group of companies who are in pretty good shape are party plan companies, since they have always focused on building customer bases. Over the last several years party plans have experience a resurgence across the industry. I think it’s likely that their market share will continue to grow. But for the rest of the direct sales companies out there—companies already doing business, already supporting massive trees full of distributors (and customer-like distributors)—it’s clear what they need to do in order to comply with the guidelines the FTC is setting, however, what is much less clear is how companies will go about doing it.