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Ramblings Of A Tired Lawyer, or Where Have All The Products Gone?

Feb 8, 2008
Tired of the wrong idea for starting a company - and I do not mean "To make money." That will always be at the core of a new company launch. But how will the company make money? By selling something. Great. That is also proper planning. Something people want and are willing to pay for. We are still on the right track. But now the train is about to get derailed.

What do people want the most? A way to make lots of money with little effort. So we will sell them a way to do that! WRONG - TILT - STOP! Start over. Income opportunities CANNOT be sold. A company that is in business to provide income opportunities CANNOT survive. Distributors who believe their mission is to provide income opportunities to everyone they come in contact with, and who will sign the always ready application, CANNOT, long term, survive. Products or services that no one will buy, unless an income opportunity is attached, DO NOT a company make. Let me explain.

The great song of the sixties has a line, "Where have all the flowers gone?" Well, I ask, "Where have all the products gone?" (and services). The first and paramount mission of every direct selling company and its independent contractor sales force MUST BE to place as many of its "better mousetraps" in the hands of as many end user consumers as possible. An end user consumer is a customer who is buying the "better mousetrap" for its intrinsic value or worth, and NOT to participate in an income opportunity. The argument that purchases are for intrinsic value is seriously weakened if the purchases are:
  • Required to be made to be allowed to sign up as a distributor.
  • Required to be made by a distributor to "open a product center."
  • Required to be made by a distributor to qualify for a compensation plan payment.
  • Required to be made by a distributor to advance in the compensation plan.
  • Required to be made by a distributor to "re-enter" the same or a different "phase" or "cycle" of the compensation plan.
  • Required to be made by a distributor to "buy in" to a higher compensation plan title or pay level.
The above list includes an assumption that the products stay with the distributor and are not consumed or do not move on to an end user consumer. Of course, distributors can "certify" that they consumed themselves or sold to customers X percent, and/or they have on file or have sent to the company the names of Y numbers of their retail customers. (My personal view is that personal consumption in reasonable quantities and not for qualification is a retail sale and fully commissionable. Al Sheldon, California Deputy Attorney General, said as much at the last MLMIA conference, and referenced the AuQuest Settlement with specific language on personal consumption. Not all state Attorney General Offices agree.) Note that this list DOES NOT exclude ALL purchases by distributors. In some programs the company itself has proof of "purchases for intrinsic value" by the nature of the ordering system and compensation plan. For example, all companies who direct ship to customers who are linked up to the company by their representatives can easily verify that they are shipping products to a non-representative name and address. A strong presumption is raised that these are purchases for intrinsic value.

Another example would be the second and subsequent purchases by representatives who have not sponsored anyone. I concede the first purchase by a distributor is most often made with the intent of "making money" or "working the program." But if they make a second purchase, and have not sponsored anyone, they cannot be making the purchase to qualify for any portion of the multi-level aspects of the pay plan, since, by not sponsoring, they have chosen to not participate in the multi-level aspects of the program.

Yet another example would be a company with a pay plan where say $45 of personal volume is all that is ever required to be classified as "active" and eligible to receive commissions on downline volume. If the average order size is $81, a strong presumption is raised that all purchases, or at least the amounts over $45, are purchases for intrinsic value.

But I am rambling. Back to my point. I want to leave for another day and another article the issue of WHAT PERCENT of the company's sales or an individual distributor's sales should be "for intrinsic value." What I am really tired about is when the percent is ZERO. First, the most obvious: the "bad design" programs. Another name I give to such programs is "Representative only" programs. The company is really trying to enter the income opportunity business. The products or services are an afterthought, and purchased by the representatives to "play the game." There are NO true customers. Regulatory actions in numerous states in the last year have sent the strongest message possible: "Such programs will not be tolerated."

The less obvious, but also "in jeopardy," programs are those that have a "good design," but bad implementation. Company executives and their marketing and legal advisors can only go so far in setting up the program. It then comes down to what the field forces, especially the leaders, do with the program. If they take a properly designed program and implement it as a "Representative only" money game, it is doomed. I have had regulators from seven key states say to me personally or to an audience I was in, the equivalent of, "We look past the paper to what is really going on in our state."

In closing, "How much retailing?" and "What is a retail sale?" is a serious issue for all legitimate MLM companies, and is probably the number one legal issue for MLM direct sellers. I am not addressing that issue here. BUT - The existence of ZERO retailing MLM companies just gives the regulators sitting ducks, AND the opportunity to paint all companies with the same brush. The plea from this tired lawyer to company entrepreneurs is, "Do not start yet another such venture." The plea from this tired lawyer to distributors is, "Do not work such a program expecting it to be long term, as it cannot survive, and do not distort the properly designed program you are working into a 'Representative only' program."
About the Author
Gerald P. Nehra is an MLM-specialist, private practice attorney. He is one of only a few attorneys nationwide whose practice is devoted exclusively to direct selling and multilevel marketing issues. His 33 years of legal experience includes nine years at Amway Corporation, where he was Director of the Legal Division. He can be reached at 1710 Beach Street, Muskegon, Michigan 49441-1008, 231-755-3800, 231-755-4700 fax. His e-mail address is GNehra@mlmatty.com.
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