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by on February 15, 2011 12 Comments

5 Reasons Why More Disclosure Is A Bad Idea

To misquote Billy Shakespeare: “To disclose or not to disclose, that is the question.” Troy recently received an email from someone expressing concern about the practice of companies “buying leaders.” I’ve written in the past about the practice of companies offering special sweeteners for top performers. In the video below, Troy says the lack of transparency creates “an integrity issue” and cites a book on Integrity by Henry Cloud. Troy says when there’s a lack of information, the “integrity of the whole” is questioned, which threatens to undermine the reputation of the industry we all fight hard to protect.

Under the video, I list 5 reasons why Troy is wrong and why more disclosure IS A TERRIBLE IDEA!

(be prepared for sarcasm)

5 reasons why more disclosure IS A TERRIBLE IDEA!

1. It gives prospects an extra factor to consider when making a decision

When you need people to buy into the character of the leader before joining, opening the door for questions on motive is a non-starter.

2. Prospects will reach crazy conclusions

If there’s a “special deal” that’s available only to certain people on stage, prospects might say, “He’s not here for the product, he’s here for the money!” Prospects should never engage in this line of thought.

3. It casts a cloud

When the leader is talking about the amazing properties of product X, prospects might naturally be distracted with the fact of the “special deal” they’re never going to get.

4. It’s nobody’s business!

Leaders drive the numbers, build the communities and should be allowed to enjoy the fruits of their labor. So for all the whiners that want more transparency, go build a bigger business and negotiate your own deal!

5. It’s the law

And laws are boring.

SOLUTION

Take the “special” out of “special deal.” Instead, publish a unique reward whereby ANYONE can qualify if they hit certain metrics within a certain timeframe. As an example, create a bonus whereby someone that climbs the charts fast i.e. Diamond in two months, give them a continuing reward i.e. pay them an extra 2% on the gross revenue they generate. Make these rewards public. And since they’re available for everyone, and they’re fully disclosed, they’re no longer “special.” Once the company is seeded with enough talent, they can shut off the reward and honor the terms with their top leaders.

The word “Transparency” should be more than a buzzword designed to foster trust. Instead, it should be part of a broad commitment to excellence and integrity. When there’s trust in the marketplace, it creates synergy that benefits everyone. When there’s a flavor of distrust, the “integrity of the whole” is compromised, which affects everyone. Until we realize that we’re all playing in the same sandbox, we’ll never be in a position to improve the state of the industry.

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by on February 10, 2011 3 Comments

Published in Obtainer Magazine!

I had the pleasure of meeting Michael Sander at the Direct Selling Congress in Amsterdam. Michael is the Chairman for “Obtainer Media” and he’s one of the coolest guys I’ve ever met. Living in Dubai, he has some amazing stories. The Obtainer is a great publication that focuses on the direct sales space.

Michael was kind enough to invite me to write a guest post in the magazine. I wrote an article titled “Grace vs. Law: the challenges faced by companies when correcting behavior.” I’m excited to be sharing it with you, so please check it out and tell me what you think.

The article is on p. 110 (click the link below). It’s easy to locate by typing “Thompson” in the search bar and it’ll zip you right to it. Enjoy!

Click here for article

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by on February 9, 2011 19 Comments

USA Today Reports on MLM: point for point response

Photo by @w3inc via Flickr

Over the past year, USA Today has taken a special interest with the MLM model. They’ve published a number of articles skeptical of the MLM model and usually reference examples from Fortune Hi Tech Marketing. Recently, they published an article titled “Many in multilevel marketing sales find it hard to earn much.” The article focuses on some legitimate concerns with the MLM model and I address them point for point below. However, it’s not entirely fair to focus on the challenges facing the model without mentioning the positives. When done right, direct sales offers people with an unmatched opportunity to change their finances. There’s a low-cost of entry, people can represent exciting brands and unique items, they can sell those products for profit and they can build large sales teams and earn override commissions on downline performance. If the product is marketable and the compensation plan fair, it gives the average person a chance to change their life. Is it tough to make it in the MLM space? Absolutely. It’s damn hard to make it in sales and it’s damn hard to achieve anything significant in life. Are there companies out there exploiting the model and harming people? Yep. It’s why I sued a company last year. But the fact of a few bad apples should not impugn the entire MLM space. In reality, it’s challenging to win in any endeavor, including business. In the MLM space, it takes strong sales skills (which can be developed) and a lot of work.

Comments about the article

The picture

In the image of the victims in the article, there’s a VHS tape. Who in the world still sells VHS tapes!? This initially made me wonder how recent the couple was involved with Amway. And then I continued to read and discovered that they quit the business in 2000! Seriously!? If the author was trying to make a point about Amway by talking about “victims,” it would have been a lot better to get some quotes from a more recent example.

Pokorny echo

The article reiterates some of the same points discussed in the past about the Pokorny class action lawsuit. Amway has already taken a beating on these very issues and most of the issues referenced in the article have already been addressed by Amway. The article references tool companies, which was the main point of contention in the Pokorny class action case. Gerald Nehra, another MLM attorney and one I hold in high esteem, was quoted in the article. The article states:

The sale of training materials has to be a “very small” part of distributors’ businesses, or “people will focus more on that aspect of the business than on the aspect of selling products to customers,” says Gerry Nehra, a Michigan attorney representing multilevel marketing companies and former director of the legal division of Amway from 1982-91. Nehra, who would not comment on Amway specifically, says that when selling training materials becomes the focus, the business becomes “overly dependent” on recruiting more representatives, which raises questions about whether a company is a pyramid scheme.

It was a good summary by Nehra. When the vast majority of funds are made via tool sales, the economic pressure forces people to focus almost exclusively on recruitment (who need more training), which lead to sustainability issues and cultural problems within the organization. It’s a large issue being dealt with by multiple companies in the space right now. But this is old news.

Likelihood of Success

The article states:

Even proponents of multilevel marketing say the cases and probes underscore one of the growing problems in the industry: It can be very difficult, if not impossible, for most individuals to make a lot of money through the direct sale of products to consumers. And big money is what recruiters often allude to in their pitches.

“Ease of earning an income” is never a factor when determining if a company is a pyramid scheme or not. One of the greatest things about the industry: ease of entry. One of the worst things about the industry: ease of entry. Because it’s so cheap and easy to join a MLM, the vast majority of participants do nothing and never earn an income. It’s not because the model is unfair, it’s largely because the vast majority of participants DO NOTHING, which skews the income averages down. The issue referenced in the article centers on one thing: managing the expectations of prospects before they join. This highlights the importance of using a good income disclosure to make sure the prospect is fully informed of the data before making a decision.

Price competitiveness

The article states:

With the growth of discounters including Walmart and retail websites, few people need to buy toiletries, detergent or vitamins from a friend or neighbor, especially with the higher prices charged so all the commissions can be paid. Making money by recruiting more people, selling them training materials and persuading them to buy products can become the only way to make much money at some of the companies.

I’ve written about this in the past. The above paragraph is absolutely true. And it’s why most MLMs avoid selling cheap, commodity products. I think it’s safe to say that the vitamins at Wal Mart are not the best in the market. They’re targeting a different demographic and offering a different value proposition. The MLM space is designed to introduce unique products and services into the marketplace. The keyword is VALUE. If there’s legitimate demand for the product being sold at the price requested, and the margin is sufficient for the company to support a MLM compensation plan, the above quote about big box stores is irrelevant. However, if the product is UNmarketable and UNcompetitive with alternative products in the marketplace, then the company is relying on “opportunity driven demand” (i.e. the compensation plan) and the distributors are forced to focus almost exclusively on recruitment and internal consumption. It happens. But just because it happens does not mean it’s representative of the entire space. The above quote paints the entire MLM space with a broad brush. Smart companies are NOT trying to compete with Wal Mart. When it comes to cheap goods, Wal Mart has that space covered. But when it comes to premium products with incredible health benefits, great MLMs shine. I’ve written about this concept a year ago about the importance for MLM companies to constantly innovate. In order to avoid the market catching up and offering comparable items at cheaper prices, the MLM executive team needs to stay one step ahead of the curve to keep their distributors armed with marketable items.

Distribution system / Amway’s revenue increase

The article states:

Roland Whitsell, a former business professor who spent 40 years researching and teaching the pitfalls of multilevel marketing, says it’s little surprise Amway’s big growth is now outside of the U.S. He says the “direct selling” in multilevel marketing is needed in countries with “primitive distribution systems and limited choices in retail stores,” but its potential is “seriously limited” here.

Lieberman notes the company is “extremely successful in formerly communist countries and in developing countries.” Sales were also up last year in the U.S. by about 5%, he says.

Regarding Rolan Whitsell’s quote, he’s certainly entitled to his opinion. However, network marketing is not just about the physical distribution of product. Are there more efficient means of delivering goods in the market? Sure. It’s easy to place an order on Amazon.com and have it on your doorstep within a day. However, Rolan Whitsell is willfully ignoring one of the most valuable functions of a good MLM: engaged sales force telling the product story! Some products are so new, so far ahead of the curve, there needs to be a person-to-person interaction before a consumer will make a decision. I have a client that recently sold its product through Kohl’s, a popular retail outlet. They soon discovered that the product only sold well when it was demonstrated and sampled; hence, their entry into the direct sales space. Did they have a shipping problem before they started their MLM? No. They had a marketing problem, which is one of the benefits of leveraging the MLM model when selling unique products and services. Rolan’s quote completely ignores this important function. Wal Mart is not in the business of selling premium cookware, yet Pampered Chef is worth over $1,000,000,000. Selling is more important than shipping.

As for Amway’s report about a 5% increase in revenue, if they actually grew in 2010, they’ll be dramatically ahead of the curve. This is the first report I’ve seen about a company’s performance in 2010. I’ll report findings from the other companies as they’re published.

Cost of doing business

The article states:

Wittlich says he worked day and night on his Amway business and never made a profit. “Active” Amway distributors earn an average of just $115 a month, according to Amway’s latest disclosure statement. Just a quarter of 1% (0.26%) make more than $40,000 a year, which Amway attributes to the fact many work part time.

See my original comments about Wittlich. He quit the business 10 years ago! What insight could he possibly provide about Amway’s business model today? Also, see my comments about the greatest thing and the worst thing about direct selling companies: the ease of entry. The majority of people do nothing, which skews the numbers down.

More about tools

The article quotes Lou Abbott, author of MLM: the whole truth. The article states:

Abbott says nearly all multilevel marketing companies prohibit distributors from selling “tools.” When they are allowed, the products are supposed to be sold at cost. He notes $8 DVDs are a “profit center” when they cost “25 cents” to produce.

This is not entirely accurate, although I can see how Lou would reach this conclusion. It’s perfectly fine for tool companies to profit handsomely from the sale of tools. If there’s a market for the material, the creator can sell the items at whatever price the market will bear. The rub comes into play when there’s a financial opportunity associated with the selling of tools, which turns into a MLM on top of another MLM. And with the competing interests, the model with the stronger pay plan gets the most focus, which is usually tools.

Indicators for the future

The article states:

Stuart Singer, a partner at Boies Schiller & Flexner, one of the law firms that represent the class-action plaintiffs, hopes the Amway settlement, if approved by a judge, will have a beneficial effect on the industry.

“If Amway recognizes the need to transform their business, then I think the other companies that are involved in multilevel marketing will have to follow suit,” he says. “It’s just a matter of time.”

We can hope. The space will never “go mainstream” until the space gets serious about quality control. As an industry advocate once said, people are burying their faces in piles of money and they’re doing nothing to address the obvious problems. Until the bad companies are routinely weeded out, they’ll continue to burn through people at an alarming rate and create another generation of skeptical MLM participants. The solution lies in incentivizing on customer sales.

Conclusion

In order to genuinely improve the space, it’s important to honestly acknowledge some of the challenges. The negative truth always stings more than the negative lies. While the USA Today article was clearly biased, she raises some valid concerns that can be easily addressed. What do you think about USA Today’s article? Do you disagree with any of my points above?

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by on December 6, 2010 1 Comment

Ultimate Web Cash Flowchart – MLM

Fast Company, a magazine for entrepreneurs, published the below infographic about the multiple revenue streams available on the internet. MLM had a large presence in the “Other” category. It got me thinking…

Based on what I’m seeing in the business, talking to prospective clients everyday, the network marketing model of distributing goods and services is on a tremendous growth curve. As the barriers to start a MLM are going down due to the ease of private labeling, low cost entry for software vendors and online marketing tools, countless people are saying “This is it. It’s my time.” The marketplace is starving for unique product…products with a story, products that say something about ourselves, products that add value. The demand for unique products has always been there; however, due to the high-cost nature of introducing products into the market, we sort of got generic, mass produced stuff. Times are changing. With next year’s infographic, I imagine the MLM circle will get a tad bigger.

Do you have any ideas you’d like to share about the “next big thing” in the direct sales space?

MLM revenue infographic

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by on June 10, 2010 1 Comment

Revised FTC Endorsement Guidelines: Part 1 (Master Distributors)

As I was reviewing the revised FTC endorsement guidelines, I ran across several provisions that would impact the direct sales industry. When people read the word “impact,” I think they naturally assume it’s a negative thing. Undoubtedly, the revised FTC guidelines calls for more disclosures from network marketing companies. In a multi part series, I’m going to hash out the provisions that network marketing companies need to pay special attention to.

I recently wrote an article about “Master Distributors” and explained the pros and cons of cutting special deals with top networkers. In the end, I see nothing wrong with businesses cutting favorable deals with top performers. HOWEVER, I think it’s important for companies that cut these deals to disclose the relationship to the public. There’s a provision in the guidelines that’s directly on point:

§ 255.5 Disclosure of material connections

When there exists a connection between the endorser and the seller of the advertised product that might materially affect the weight or credibility of the endorsement (i.e., the connection is not reasonably expected by the audience), such connection must be fully disclosed. . . . Additional guidance, including guidance concerning endorsements made through other media, is provided by the examples below.
. . .
Example 4: An ad for an anti-snoring product features a physician who says that he has seen dozens of products come on the market over the years and, in his opinion, this is the best ever. Consumers would expect the physician to be reasonably compensated for his appearance in the ad. Consumers are unlikely, however, to expect that the physician receives a percentage of gross product sales or that he owns part of the company, and either of these facts would likely materially affect the credibility that consumers attach to the endorsement. Accordingly, the advertisement should clearly and conspicuously disclose such a connection between the company and the physician.
End Quote

Analysis

With master distributors, assuming a special deal has been cut, there’s certainly a material connection that would not be expected by the audience. In this case, as stated by the guidelines, the connection would need to be disclosed because absent a disclosure, regulators will perceive the endorsement as deceptive or misleading. In example 4 above, the endorsing physician was earning a cut of gross sales of the product. In that context, the guidelines clearly state that his relationship with the company should have been disclosed.

Let’s play around with the characters in the example 4 hypothetical. Instead of an anti-snoring product, let’s say it’s a water filtration system sold via network marketing. And instead of a physician, let’s say she’ a distributor. We’ll call her Susan. Additionally, as with the physician in the above example, let’s say Susan is receiving a percentage on the gross revenue of her downline volume. Since Susan is getting a special deal that’s not available to the public (again, there’s nothing wrong with this), let’s call her a master distributor.

Now that the scene is set, let’s play around with some facts. Susan is at a convention talking about the incredible benefits of the walter filters and about how they zap salmonella and chlorine. She also talks about the incredible financial opportunity referencing the unique binary/two-up/matrix/unilevel hybridization, patent pending, copyrighted pay plan. Since Susan is the recipient of a lucrative deal (percentage on gross revenue), it could be perceived as a fact that would “materially affect the credibility that consumers attach to the endorsement.” If consumers knew about Susan’s deal, they would be in a better position to weigh in on the veracity of the endorsement being made. Consumers might think to themselves “Of course this is the opportunity of a lifetime…for her!” Or, if Susan and the company handle it well, Susan can build trust with her organization from a position of full disclosure whereby her endorsement would still merit attention.

When companies and distributors do not disclose these deals, it’s my opinion that’s it’s an abuse of goodwill accrued by the distributor. Clearly, their opinion means something or else they’d be unable to draw over the hundreds and thousands of new participants. People trust their leaders and that measure of trust has value for companies looking to beef up their sales. If new participants were aware of a special deal, they would at least be operating with all of the facts. And in most cases, the participants would still follow their leader.

What do you think about this FTC provision? Do you think companies should disclose their deals with master distributors?

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by on May 10, 2010 7 Comments

Recruiting vs. Sponsoring

There’s a difference. One is about slinging warm bodies in a downline. Participants are required to buy the products and immediately asked to turn over their contacts and recruit more participants to engage in the cycle of consuming, recruiting, etc. Recruiting is primarily self-serving. When there’s a small chance for making sales to customers due to pricing issues, the participants focus on the only thing that brings them income: recruiting. And when the primary means for earning income is via recruitment, there needs to be a recruitment engine that makes it easier for participants to jump into the stream of activity and repeat the cycle. This leads to an ill-informed group of participants that are oversold on the merits of the business and uninformed about the expenses and sustainability of the behavior. Companies with heavy recruitment cultures flame out within a few years (or several if they’re lucky), or worse, get shut down.

Sponsoring is about taking personal responsibility for the new participants in the business, ensuring they have a good understanding of the responsibilities associated with owning their own business, educating them about the product and mentoring them along the way as they make sales and sponsor other participants. Sponsoring is about caring and education. It creates a win/win relationship between the sponsor and the enrollee.

The ultimate safeguard a company can put in place to ensure a healthy balance between recruiting and selling is a retail sales rule. In Amway, a distributor is purportedly required to make a certain amount of retail sales before they can earn override commissions on their downline volume (their recruit’s volume). Before the participants can benefit from their recruitment efforts, they need to demonstrate a proficiency in selling.

Businesses that require constant recruitment is a deck of cards. It’s cool in the beginning but it has a violent end. It’s nirvana when things are going well, but when recruitment slows just a tad, the whole thing comes crashing down. Customer sales is the best way to fortify a business. And to accrue customer sales, there needs to be a marketable product. What do you think?

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