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Multi-level Marketing and Internal Consumption

Article by: Nancy Tobler
October 20, 2015

The Vemma case put the spotlight on internal consumption (or personal volume) as potentially problematic for multi-level marketing companies that require a minimum amount of personal consumption as a part of their commissions qualifications. A recent article by Crittenden and Albaum (2015) provides a nice summary of internal consumption in the industry. First Crittenden and Albaum point out that people join direct selling/MLM companies for a variety of reasons. Second, they point out the distinction between internal consumption and inventory loading (which is illegal). Third, they go on to explain that internal consumption is not unique in direct selling/MLM companies. They end the article with five studies of on internal consumption.

People join MLM companies for a variety of reasons and purchasing the product at a discount is one reason. Mark Rawlins, founder of InfoTrax Systems, has studied compensation pay outs for over 30 years. In his book From Commission Plan to Compensation Strategy, Rawlins suggests that there are five types of distributors, (a) consumers, (b) social enrollers, (c) sales people, (d) sales leaders, and (e) dream builders (Rawlins, M., 2008). The bulk of those that join any MLM or direct selling company do so for the discount on the product. These distributors never sign up distributors and receive small (if any) compensation rewards. This number is often as high as 70% of those who sign a distributor form. The second most common type of distributor is the social enroller. These people love the product and the company and love to share, however, they are not interested in building a business. The number who sign up to make a steady income is a small percent. This does not mean that there is a problem with the company or the compensation plan.

In addition, 80% of direct sellers are women. Many of the products sold by direct sales or MLM companies are targeted at women. Now, I am the last person to be caught saying that women are not cut out for business. The point I am making here is that women have chosen direct selling for a variety of reasons and internal consumption is obviously one of those reasons. We have great articles on MLM.com that refer to the way women shop and sell (check out What do women want? and What women want. What are the Facts?)

The second area that Crittenden and Albaum cover is inventory loading. Here at MLM.com we have discussed inventory loading in other articles Vemma and the Burn Lounge Case. The big question in internal consumption is: Is there an end consumer that actually uses a product? Prior case law seems to indicate if there is a person who actually uses a product (in the Vemma case, the energy drink Verve) and it is not being purchased just to qualify to be part of the compensation, then that purchase is not inventory loading.

The third point they make is that internal consumption or discounts are a part of many businesses. Personal sales occurs in a range of business models. Personal consumption of company products is not unique to MLM. If you work for a restaurant, often you receive a discount on the restaurant’s food. If you work for a car dealer, you often receive a discounted price for your car. If you work for an airline, you get reduced fares. The list goes on and on. I like to joke that everyone needs a “guy” (or gal in this case) that can get you a deal.

The final point of Crittenden and Albaum’s article is five studies of internal consumption. They start off with a sample of 40 national retailers in two southwestern United States cities. In City A, 37 offered employee discounts and in City B 28 offered discounts.

The second study called 401 households to see if having an employee discount influences whether or not a person works with a particular company. 100 of the respondents did say that they had employee discounts at their company. Only 15% of those stated that the employee discount was a factor in accepting the position with the company. This study again shows the prevalence of employee discounts.

The next study sought to find out if a connection exists between job satisfaction and internal consumption. In this study, the asked 223 adult women if they had employee discounts, and if the discounts were connected to job satisfaction. 83 stated that they received employee discounts. Half of the 83 women had purchased in the last 12 months through the discount program. All of the women were asked if an employee discount would have an effect on job satisfaction. 57% said that the discount would have “no effect”. Again, the finding shows the existence of employee discounts.

The next study looked at whether or not personal consumption influenced the sale of a product to consumers. Several iterations of this study occurred, one of which was with a direct selling/ MLM company as the prompt. Both studies found that personal consumption did not influence sales of the product to a potential consumer.

In conclusion, the research by Crittenden and Albaum shows that employee discounts are pervasive in many retail sales markets. The interesting finding was that many did not see the employee discount as a motive for joining. Those who join direct selling seem to do so for the discount. This finding suggests that the discount is not a primary motivator in other industries. This finding deserves further investigation. Is the internal consumption that occurs in direct selling/ MLM different from other industries? Whatever the answer to that question, the point is that internal consumption is not unique to direct selling/MLM. An entire industry should not be punished or derided based on legitimate personal consumption of a product.

Crittenden, V. L., & Albaum, G. (2015). The misplaced controversy about internal consumption: Not just a direct selling phenomenon. Business Horizons.
Rawlins, M. L. (2008). Understanding Multi-Level Commissions and Their Role in a Successful Company.
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MLM Legal, FTC versus Vemma, All Articles

Nancy Tobler

Nancy Tobler has a PhD in communication from the University of Utah. She specializes in research on how organizations change,...

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