According to the law and their implied purpose, a network marketing company's purpose is to retail stuff through their affiliates (IBOs, distributors, counselors, salespeople... whatever). However, few if any of modern MLM's verify that the products they sold to their affiliates are actually retailed. Almost all network marketing companies merely require a signed "promise" from the affiliates that they promise to honor the Amway Safeguard Rule #1 "Retail Customer Rule". And without retail, the common affiliates's only income would be to recruit additional affiliates (who also do not retail, since retail is hard). If you extrapolate this out, you have a bunch of salesepeople who sold stuff to themselves, while recruiting yet more people like that. That would make it a pyramid scheme.
The Omnitrition Case and Lack of True Retail
In the Webster vs. Omnitrition case, Webster, an affiliate of Omnitrition, sued Omnitrition of being a pyramid scheme. The company responded by asking the court for a summary judgment, i.e. "Court, please tell me (and whoever sued me) I am NOT a pyramid scheme! I use Amway Safeguard Rules! I can't be!" After looking at the evidence, the court ruled that if the company (Omnitrition) does not audit actual retail, then the company cannot use this "signed promise" to prove they are not a pyramid scheme. Omnitrition then immediately settled the lawsuit with Webster, as they apparently find paying off Webster, et al. to be easier than actually auditing their retail.
Yet dozen years after Omnitrition case, no major network marketing company that I know of, audits retail.
The implication is mindblowing: virtually all major network marketing companies in the US are in danger of being declared a pyramid scheme, despite their claimed adoption of Amway Safeguard Rules that supposedly separated network marketing from pyramid schemes, because they do NOT audit retail.
When Herbalife was first accused by Bill Ackman to be a pyramid scheme at the end of 2012, Herbalife cannot cite how many retail customers it has. Even now in 2014, Herbalife is STILL citing the retail number it EXTRAPOLATED from surveys it conducted in 2013. Herbalife cited a lot of ancillary numbers, like "amount of products directly shipped to non distributors" (31% IIRC), but it has NO RETAIL NUMBERS.
Herbalife classified their ranks by amount of downlines they have (no downline, single level downline, multi-level downlines), and claimed those with no downline are "customers", and those with single level downline are retailers.
THIS MAKES NO SENSE. By definition, EVERY distributor, no matter if they have downline or not, ARE RETAILERS, if the company was following the Amway Safeguard Rules!
Herbalife also produced survey results in 2013 that claimed 44% of its distributors have NO INTENTION OF RETAIL PROFIT, and 73% PRIMARILY JOINED FOR 25% DISCOUNT.
Why would a company NOT encourage retail, which is at the heart of network marketing?
Because lack of retail enrich those at the very top of the company and the company itself, with minimal effort and expenses needed all the way around (company or affiliate).
No Retail, No Profit (for you)
When you retail a product you bought "wholesale" from the company, both you and the company profits. You earned the markup over the wholesale price, and company earned whatever they marked up over their true costs. And your upline benefits.
If you self-consume the products, and not sell them (like eating all the food you're supposed to be selling), you spent money on the products, but you haven't generated any profit for you. The company, on the other hand, don't care, since they earned money. Your upline benefits too.
So what incentive is there for them to teach you to retail? None. They don't care what you do with the product. As long as you keep buying the stuff, they don't care. It generates sales for them. Why should they "waste" energy in teaching you? In fact, Omnitrition was infamous for telling its affiliates buy 1000 bucks of their stuff and GIVE THEM AWAY to participate in their comp plan. They don't care about YOUR retail profit... Once you paid them, they don't give a **** about what you do with the product. Pour it down the drain, drink it, give them away, they ALREADY got YOUR money.
(They can *sell* you lessons... that may or may not work, but that'd be a part of the "tool scam".)
But there's a more fundamental problem... Lack of retail violates the basic premise of multi-level marketing... that the upline is supposed to benefit from the SALES EFFORTS of their downlines. And sales efforts IMPLIES RETAIL. No retail, no sales effort, yet company and upline still profits.
One of the "defenses" offered for this behavior is "but the lowest level affiliates got the products, even at a discount. So they did not 'lose' anything. AND they can return the stuff for 90% refund within stipulated period. So what's the problem?"
The answer is also within the Omnitrition case, as the court had examined the entire Amway Safeguard rules and how did Omnitrition implemented it. It had *also* ruled that if nobody was properly informed of the refund rules, little if any proof it was actually simple to use, etc. it ALSO cannot be used as defense against being allegedly a pyramid scheme.
Furthermore, consider this point. Amway's "ten retail customer rule" means you sell to ten different customers every month. If you sell to yourself (self-consume), you only made ONE sale. So if you still certified that you sold to many retail (5, 10, whatever) you lied. And the company *knows* you lied because you can't POSSIBLY have consumed all that by yourself, as it knows exactly how much it shipped to you.
They don't care. "Sale" is "sale" to them. They don't care whether their product reaches "real" customers. The company has NO INCENTIVE to enforce the retail rule. In fact, it's an EXPENSE to them. They want to AVOID IT at all costs.
The difference is whose money end up going to them... A customer's money.. or YOUR money.
Or in other words, if you're told that you can make money selling this, then you're told 70% of you don't expect to make a profit (and 90+% of you won't any way) which is the lie? (Answer: "you can make money selling this")
Potential Solutions
There are several solutions, but all are heavily resisted by companies and the DSA.
1) Require affiliates to submit online reports (which are automatically compiled if all orders are done online, so this is only regarding LOCAL sales), and add random audits. Companies claim this is way too much paperwork for them and for their affiliates, even in modern age of computers and data mining and smartphones tablets and barcodes and such.
2) Outlaw self-consumption, forcing all sales to be retail, PERIOD. This is especially resisted by the DSA, which went around various states and convinced some MLM friendly states, such as Utah, to adopt legislation that specifically legalized self-consumption. This also seem to have a logical problem in that some self-consumption ought to be legal, but only "reasonable amounts". What's reasonable would be dependent on the product.
3) Require affiliates who joined only for the 'wholesale discount' (which according to Herbalife includes 73% of its distributors) to be kicked out of distributor / affiliate program, and dump them into a "preferred customer" program, where they still count as customers and thus get a discount, but CANNOT RECRUIT ANY ONE (they are customers, not upline wannabes).
The final solution was partially adopted by many network marketing companies already, even Herbalife. However, it is a workaround, not a true solution, as it does not address the real issue: how does a network marketing company prove it is actually retailing the products to the public, when it only tracks product movement up to the distributors? Pushing the self-consumers out of the distributor count would give the company more "accurate" sales numbers, but if those numbers are not collected the answer is still not available.
It is as if the various network marketing companies are deliberately attempting to AVOID knowing how much retail they really do, as "willful blindness". Which is quite curious because the whole idea of network marketing is to get the products to market without going through traditional retail channels.
And it is this inherently conflicting behavior, "cognitive dissonance", that may be the root cause for all the bad connotation that dogged network marketing for the past several decades.
Will you do a Dictionary article about the Omnitrition case in depth?
ReplyDeleteSoon, man, soon. :)
DeleteI found this link to be pathetic
ReplyDeletehttp://mlmdreamsaver.com/2009/05/from-product-to-people-mlm-paradigm-shift/
She's clearly the "recruiter-type"... As she never talked about selling the product or service, but went straight on the "sell the opportunity".
DeleteThe way MLM is supposed to be, is you do retail, and if you find a customer who's so excited, and actually HELPED YOU make a sale, you then perhaps invite him or her into your sales team/downline.
Yet so many self-proclaimed MLMers have completely lost the will to retail. They only know how to recruit, and everything is about recruiting. Thus my blogpost. :)
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