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Your comp plan in a post-Herbalife settlement world

Article by: Kenny Rawlins
October 24, 2016

“What does my company need to do in order to stay off the FTC’s radar?” This is the question on everyone’s mind in light of the recent Herbalife settlement and Vemma action. I’m not an attorney, but as InfoTrax’s Vice President of Commissions Operations, I’ve read the court documents for both cases—and there are a few things I would strongly recommend that you consider. The five compensation plan areas I would encourage you to look into are:

• Your autoship program

• The way you differentiate distributors and customers

• The way you incentivize customers

• Your personal volume requirements

• Your incentives for customer acquisition

Get rid of autoship requirements

The first thing that’s clear to me from both cases is that it’s no longer safe to require distributors to participate in autoship. Instead, you should focus your commission qualifications on volume—not the type of order used to purchase that volume.

I would recommend moving away from autoship as much as you can. Vemma got rid of their autoship requirements before the FTC came after them, but it was still touted so heavily that it drew the FTC’s attention. If you’re going to keep autoship, market it as a convenience—similar to Amazon’s Subscribe & Save program—but don’t require it and don’t even encourage it.

And it may be possible to reward your distributors for using autoship while keeping it safely separate from your compensation plan. There are some autoship rewards programs in the industry that don’t directly contradict this piece of my advice—Nu Skin and doTERRA both have points programs which function separately from their commissions.

These rewards programs functions very much like a buy ten subs, get one free promotion. Those participating in autoship for consecutive months earn a percentage of the value of that autoship in rewards points—which are separate and distinct from the commission points system. Earn enough rewards points and you can redeem them for product. Many companies in many industries have programs like that. I picked the credit card I use based on its points program. You probably did too.

In addition to talking to your attorney about an autoship rewards program, I also think it’s a good idea to consider a simple loyalty rewards program—buy in consecutive months (whether with autoship or regular orders) and get the reward. While companies like having an autoship on file—it feels more secure than crossing your fingers and hoping that people will keep buying—the current climate makes it safer to keep autoship out of the discussion when you talk about both compensation and rewards.

Differentiate customers and distributors

As I look at the Herbalife settlement and the Vemma action, what strikes me the most is a sense that we need to get back to what this industry is really meant to be. Direct selling, at its core, does two things: It provides quality products, and it provides a business opportunity. These two things should be separate from each other. In too many companies, the two have been blended together.

In today’s world, many direct sales customers are signing up as distributors simply so they can get the wholesale price. Most companies that I’ve worked with recognize that many in their distributor force are functionally customers. But what we’re seeing is that regulatory bodies dislike that as a legal argument. We have way too many distributors out there saying, “Oh, you like the product? Just sign up for $39.95 and you’ll get the wholesale price.” New customers don’t even realize they’ve become distributors. And then when the FTC does an audit, it says, “95% of the people in your system are distributors, and that’s where all your sales are going.” And the company ends up responding, “Well, yeah, but most of them aren’t really distributors.” This is no longer a safe practice. We need to start doing a better job of differentiating between these two groups. We need to be able to point to customers.

Direct sales companies are not simply wholesale buyer’s clubs because they’re also business opportunities. If someone signs up as a distributor, it needs to be because that person wants to resell the product. They need to know they’re starting a business venture, and they need to know there are risks associated with that. The Herbalife settlement requires that distributors receive a lot of specific business training before they can sign up.

Encourage and incentivize customers

When we talk about having customers who are not distributors, we need to look at how other industries incentivize their customers. Inside your organization, there are customers and social enrollers. In today’s climate, although they sign up as distributors, they’re not actually distributors. While they might refer others to the product, they don’t have the intention of replacing their income with commissions from your company. They need to appear in your records as customers, but I don’t see any reason why you couldn’t design reward programs for them—programs that aren’t compensation, aren’t commissions, and aren’t earnings.

It is possible to incentivize desirable customer behaviors without bringing those customers into the business opportunity. For instance, DirecTV gives you $10 off your bill for a year any time you refer a friend. DoorDash—a food delivery app—gives you $7 when a friend you referred places their first order. If I take advantage of that offer, I’m not a distributor for DoorDash—I’m a customer getting a referral reward. I’m not “earning.” I’m not providing DoorDash with my tax information. I’m simply referring friends to a service I like. We don’t see anyone raising an objection to this kind of program because it doesn’t come with extravagant income claims. No one expects to make millions of dollars referring people to DoorDash.

So, not only do you need to distinguish someone who likes the product but who’s not trying to build a business, but you should consider offering them a loyalty program or a referral program without tangling them up with your sales force.

Include customer volume as personal volume

The fourth thing I recommend is to rework your personal volume requirements. Your distributors should not need to personally place an order to qualify for commissions. Any time a customer makes a purchase, that volume should be included in their distributor’s personal volume.

For example, if I’m a distributor trying to qualify for commissions and you—my customer—place a 100 PV order, I’ve generated $100 in sales. But under the rules of some compensation plans, I’d be better off buying the product myself and then turning around and selling it to you without the system knowing. That’s the behavior we want to get away from.

As an aside, if you’re going to do a loyalty rewards program like I mentioned earlier, only personal orders should count toward that. If you want to give loyalty rewards points to both customers and distributors, letting the distributor count the customer’s points puts you in a position where you’re counting points twice. So when I recommend counting customer volume as personal volume, I’m talking about doing that from a commission plan standpoint.

Use customer volume as a metric

Customer volume is a metric that you should calculate, display, and encourage. As a distributor, I should know what percentage of my downline volume came from customers. If a high percentage of my volume comes from customers, the company should reward me for that. In both the Vemma action and the Herbalife settlement, a percentage of volume coming from customers is actually a requirement to receive commissions. I’m not saying you need to go that far, but I would encourage distributors to have customer volume, I would reward it, and I would start prominently displaying it.

How you reward that behavior is up to you. You could create some kind of bonus for it, or set up something like a quarterly contest where distributors can win a free iPad or a free trip if they’re in the top 10% of customer volume generators.

Final thoughts

My objective with this article hasn’t been to tell you what to do. I can’t give you some specific action that you can take in order to protect yourself from the FTC. I will say, however, that it would be foolish to assume that the FTC is going to stop going after direct sales companies or to assume that they’ll change direction abruptly. But these five areas within your compensation plan merit your attention. Weigh your options and decide what you and your company can do to insulate yourself against the FTC.

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All Articles, Herbalife Settlement, Understanding Compensation Plans for MLM

Kenny Rawlins

Kenny Rawlins has been fortunate enough to have been around the network marketing industry his entire life and has experienced its power...

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Comments (2)

  • Larry Horat - Reply

    Oct 29, 2016

    Good job Kenny! Much like Mohammed Ali….This is going to shake up the Direct Sales world!

  • James Roguski - Reply

    Oct 30, 2016

    The best plan I have seen is

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