I’m going to start this article with the conclusion: MLM 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 MLM 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.