Wednesday, October 24, 2012

MLM Basics: Inventory Loading, and front-loading

Seal of the United States Federal Trade Commis...
Seal of the United States
Federal Trade Commission.
(Photo credit: Wikipedia)
"The MLM Attorney" Kevin Thompson wrote a very good piece on the problem of "front-loading" and "inventory loading" in MLM. (IMHO, he should write more often, but he seems to do it only once a month, must be all that lawyer stuff that kept him busy)

Mr. Thompson and I actually do think a lot alike, as I have covered this very topic in two other blog posts here

What is Inventory Loading (and why you should care)


Danger of a Large Starter Kit

A large starter kit is front-loading, i.e. entice / force / encourage the new affiliate to buy more inventory (probably more than what s/he can sell in the near future), merely to stay qualified for either bonuses, or to a rank which entitles them for higher payout levels.

And FTC frowns upon this sort of practice, because it's a sign that the business is really a pyramid scheme.

FTC don't care about paper compliance. They want to see how the comp plan is being seen and interpreted by the affiliates.

It's ALL about the MOTIVATION. 

If the affiliates see the comp plan is played in a way where they have to buy enough products to stay qualified for a certain level payout (and if they don't, their bonus pay drops significantly), then FTC may see evidence of inventory loading (or front-end loading, if this was done with starter kits). Why? Because the affiliates are NOT buying products from the company for resale, but to merely qualify for higher commission level.

Company can make it optional, can obfuscate it with multiple levels, limited time offer, startup bonus, etc. Whatever it is called, it all comes down to affiliate POV, as shaped by the comp plan.

Gerald Nehra, another "prominent" MLM attorney, explained this as a part of his explanation about "intrinsic value", i.e. people buy the product because of the product's intrinsic value, not because of the comp plan attached to it. And any sort of inventory loading diminishes the intrinsic value, and puts the company in danger of being sanctioned / shut down by FTC.

Furthermore, Mr. Thompson addressed a psychological issue I didn't cover: "loss aversion" / "sunken cost". If the comp plan is written to entice the affiliates to "go all in" and buy the largest starter kit in order to qualify (fast track, etc.) for a bonus, then later affiliate would felt obligated to continue a losing situation due to sunken cost / loss aversion, i.e. I can't quit now, not when I have all this stuff in my garage!

Read his article here:

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  1. I followed your blog from on the topic of Motor Club of America. I'm on the fence about them. I've been searching around the net as much as I can about them and it is difficult to come across any credible information, but here is a link from the Better Business Bureau:

    It seems that they aren't absolutely sure either since they don't have enough information.

    What do you think about MCA/TVC Matrix?

    1. The MCA discussion here is over at:

      A few passionate defenders, but not very logical ones.

  2. Thanks for the link. I also just came across your relatively recent discussion about MCA on this link:

    What I gather from this discussion is that the legality of becoming a member by using the services VS joining the company for the income opportunity seems to be ambiguous. Although it raises red flags, there is no absolute certainty of whether it is legal/illegal. At least thats what I understood from that discussion. Do you know whether FTC is aware of this company? I'd like to come in contact with them soon.

    1. Essentially correct. MLM always have a bit of this ambiguity, but this company is more ambiguous than average. Thus, it is a red flag.

      FTC do not comment or review companies. When they act, it'd be a court order to cease and desist, and by then it's too late for the company and their affiliates.

      Please take the MCA discussion to MCA topic. :)