MKT 440. Multi-Level Marketing (MLM)

Transcription

1 MKT 440 Multi-Level Marketing (MLM)

2 What Is Multi-Level Marketing (MLM)? 2 / 1

3 What Is Multi-Level Marketing (MLM)? MLM is a retail distribution channel form including a manufacturer and a set of registered independent distributors who together distribute the manufacturers products directly to the market. 1 MLM is therefore a type of direct selling; it is distinguished from other direct selling methods by its compensation system, which awards income to distributors both for their personal sales (sales they themselves generate to end-users) and the personal sales of distributors downline from them (that is, distributors who are recruited and mentored by the upline distributor). Almost all the member firms of the U.S. Direct Selling Association use the MLM form of compensation. 1 Anne T. Coughlan, FAQs on MLM Companies 3 / 1

4 What Is Multi-Level Marketing (MLM)? MLM is a retail distribution channel form including a manufacturer and a set of registered independent distributors who together distribute the manufacturers products directly to the market. MLM is therefore a type of direct selling; it is distinguished from other direct selling methods by its compensation system, which awards income to distributors both for their personal sales (sales they themselves generate to end-users) and the personal sales of distributors downline from them (that is, distributors who are recruited and mentored by the upline distributor). 2 Almost all the member firms of the U.S. Direct Selling Association use the MLM form of compensation. 2 Anne T. Coughlan, FAQs on MLM Companies 4 / 1

5 What Is Multi-Level Marketing (MLM)? MLM is a retail distribution channel form including a manufacturer and a set of registered independent distributors who together distribute the manufacturers products directly to the market. MLM is therefore a type of direct selling; it is distinguished from other direct selling methods by its compensation system, which awards income to distributors both for their personal sales (sales they themselves generate to end-users) and the personal sales of distributors downline from them (that is, distributors who are recruited and mentored by the upline distributor). Almost all the member firms of the U.S. Direct Selling Association use the MLM form of compensation. 3 3 Anne T. Coughlan, FAQs on MLM Companies 5 / 1

6 What Value Do MLM Firms Add? 6 / 1

7 What Value Do MLM Firms Add? The MLM and its distributors form a symbiotic system, with the contributions and efforts of each being crucial to the success of the MLM business for both. 4 The MLM firm provides distributors with a ready-made product line to sell; with a product infrastructure that reliably delivers products to them to sell, takes returns, and handles customer service inquiries; and with a comprehensive IT infrastructure that manages logistics as well as payments. An entrepreneurial individual can engage in an MLM business opportunity without incurring all the overhead costs mentioned above, so MLM is an attractive option for entrepreneurs who do not have the financial wherewithal to build their own business from scratch, or to pay sometimes substantial franchising fees to start a franchise retailing business. 4 Anne T. Coughlan, FAQs on MLM Companies 7 / 1

8 What Value Do MLM Firms Add? The MLM and its distributors form a symbiotic system, with the contributions and efforts of each being crucial to the success of the MLM business for both. The MLM firm provides distributors with a ready-made product line to sell; with a product infrastructure that reliably delivers products to them to sell, takes returns, and handles customer service inquiries; and with a comprehensive IT infrastructure that manages logistics as well as payments. 5 An entrepreneurial individual can engage in an MLM business opportunity without incurring all the overhead costs mentioned above, so MLM is an attractive option for entrepreneurs who do not have the financial wherewithal to build their own business from scratch, or to pay sometimes substantial franchising fees to start a franchise retailing business. 5 Anne T. Coughlan, FAQs on MLM Companies 8 / 1

9 What Value Do MLM Firms Add? The MLM and its distributors form a symbiotic system, with the contributions and efforts of each being crucial to the success of the MLM business for both. The MLM firm provides distributors with a ready-made product line to sell; with a product infrastructure that reliably delivers products to them to sell, takes returns, and handles customer service inquiries; and with a comprehensive IT infrastructure that manages logistics as well as payments. An entrepreneurial individual can engage in an MLM business opportunity without incurring all the overhead costs mentioned above, so MLM is an attractive option for entrepreneurs who do not have the financial wherewithal to build their own business from scratch, or to pay sometimes substantial franchising fees to start a franchise retailing business. 6 6 Anne T. Coughlan, FAQs on MLM Companies 9 / 1

10 How Does An MLM Distributor Earn Income? 10 / 1

11 How Does An MLM Distributor Earn Income? The distributor earns the difference between the retail price s/he charges and the wholesale price s/he paid to acquire product. 7 A business-builder can earn commissions on the sales of distributors downline from him/her. The distributor financially benefits from personal consumption at wholesale prices, because s/he otherwise would pay some retail markup to acquire these products for personal use. In a legitimate MLM, a distributor does not earn any income from merely recruiting a downline distributor; income is earned based on sales generated, not the number of people downline from a distributor. 7 Anne T. Coughlan, FAQs on MLM Companies 11 / 1

12 How Does An MLM Distributor Earn Income? The distributor earns the difference between the retail price s/he charges and the wholesale price s/he paid to acquire product. A business-builder can earn commissions on the sales of distributors downline from him/her. 8 The distributor financially benefits from personal consumption at wholesale prices, because s/he otherwise would pay some retail markup to acquire these products for personal use. In a legitimate MLM, a distributor does not earn any income from merely recruiting a downline distributor; income is earned based on sales generated, not the number of people downline from a distributor. 8 Anne T. Coughlan, FAQs on MLM Companies 12 / 1

13 How Does An MLM Distributor Earn Income? The distributor earns the difference between the retail price s/he charges and the wholesale price s/he paid to acquire product. A business-builder can earn commissions on the sales of distributors downline from him/her. The distributor financially benefits from personal consumption at wholesale prices, because s/he otherwise would pay some retail markup to acquire these products for personal use. 9 In a legitimate MLM, a distributor does not earn any income from merely recruiting a downline distributor; income is earned based on sales generated, not the number of people downline from a distributor. 9 Anne T. Coughlan, FAQs on MLM Companies 13 / 1

14 How Does An MLM Distributor Earn Income? The distributor earns the difference between the retail price s/he charges and the wholesale price s/he paid to acquire product. A business-builder can earn commissions on the sales of distributors downline from him/her. The distributor financially benefits from personal consumption at wholesale prices, because s/he otherwise would pay some retail markup to acquire these products for personal use. In a legitimate MLM, a distributor does not earn any income from merely recruiting a downline distributor; income is earned based on sales generated, not the number of people downline from a distributor Anne T. Coughlan, FAQs on MLM Companies 14 / 1

15 Pyramid Schemes Vs. Legitimate Marketing 15 / 1

16 Pyramid Schemes Vs. Legitimate Marketing Pyramid schemes promise consumers or investors large profits based primarily on recruiting others to join their program, not based on profits from any real investment or real sale of goods to the public. 11 Some schemes may purport to sell a product, but they often simply use the product to hide their pyramid structure. There are two telltale signs that a product is simply being used to disguise a pyramid scheme: inventory loading and a lack of retail sales. 11 Debra A. Valentine, International Monetary Funds Seminar Banks, Washington, D.C., May 13, / 1

17 Pyramid Schemes Vs. Legitimate Marketing Pyramid schemes promise consumers or investors large profits based primarily on recruiting others to join their program, not based on profits from any real investment or real sale of goods to the public. Some schemes may purport to sell a product, but they often simply use the product to hide their pyramid structure. 12 There are two telltale signs that a product is simply being used to disguise a pyramid scheme: inventory loading and a lack of retail sales. 12 Debra A. Valentine, International Monetary Funds Seminar Banks, Washington, D.C., May 13, / 1

18 Pyramid Schemes Vs. Legitimate Marketing Pyramid schemes promise consumers or investors large profits based primarily on recruiting others to join their program, not based on profits from any real investment or real sale of goods to the public. Some schemes may purport to sell a product, but they often simply use the product to hide their pyramid structure. There are two telltale signs that a product is simply being used to disguise a pyramid scheme: inventory loading and a lack of retail sales Debra A. Valentine, International Monetary Funds Seminar Banks, Washington, D.C., May 13, / 1

19 Inventory Loading And Lack Of Retail Sales 19 / 1

20 Inventory Loading And Lack Of Retail Sales Inventory loading occurs when a company s incentive program forces recruits to buy more products than they could ever sell, often at inflated prices. 14 If this occurs throughout the company s distribution system, the people at the top of the pyramid reap substantial profits, even though little or no product moves to market. Many pyramid schemes will claim that their product is selling like hot cakes, however, on closer examination, the sales occur only between people inside the pyramid structure or to new recruits joining the structure, not to consumers out in the general public. 14 Debra A. Valentine, International Monetary Funds Seminar Banks, Washington, D.C., May 13, / 1

21 Inventory Loading And Lack Of Retail Sales Inventory loading occurs when a company s incentive program forces recruits to buy more products than they could ever sell, often at inflated prices. If this occurs throughout the company s distribution system, the people at the top of the pyramid reap substantial profits, even though little or no product moves to market. 15 Many pyramid schemes will claim that their product is selling like hot cakes, however, on closer examination, the sales occur only between people inside the pyramid structure or to new recruits joining the structure, not to consumers out in the general public. 15 Debra A. Valentine, International Monetary Funds Seminar Banks, Washington, D.C., May 13, / 1

22 Inventory Loading And Lack Of Retail Sales Inventory loading occurs when a company s incentive program forces recruits to buy more products than they could ever sell, often at inflated prices. If this occurs throughout the company s distribution system, the people at the top of the pyramid reap substantial profits, even though little or no product moves to market. Many pyramid schemes will claim that their product is selling like hot cakes, however, on closer examination, the sales occur only between people inside the pyramid structure or to new recruits joining the structure, not to consumers out in the general public Debra A. Valentine, International Monetary Funds Seminar Banks, Washington, D.C., May 13, / 1

23 FTC V. Koscot (1975) 23 / 1

24 FTC V. Koscot (1975) The Commission found that pyramid schemes force participants to pay money in return for two things. 17 First is the right to sell a product, second is the right to receive, in return for recruiting other participants into the program, rewards which are unrelated to sale of the product to ultimate users. The Commission explained that paying bonuses for recruiting will encourage both a company and its distributors to pursue that side of the business, to the neglect or exclusion of retail selling. The shortterm result may be high recruiting profits for the company and select distributors, but the ultimate outcome will be neglect of market development, earnings misrepresentations, and insufficient sales for the insupportably large number of distributors whose recruitment the system encourages. 17 Debra A. Valentine, International Monetary Funds Seminar Banks, Washington, D.C., May 13, / 1

25 FTC V. Koscot (1975) The Commission found that pyramid schemes force participants to pay money in return for two things. First is the right to sell a product, second is the right to receive, in return for recruiting other participants into the program, rewards which are unrelated to sale of the product to ultimate users. 18 The Commission explained that paying bonuses for recruiting will encourage both a company and its distributors to pursue that side of the business, to the neglect or exclusion of retail selling. The shortterm result may be high recruiting profits for the company and select distributors, but the ultimate outcome will be neglect of market development, earnings misrepresentations, and insufficient sales for the insupportably large number of distributors whose recruitment the system encourages. 18 Debra A. Valentine, International Monetary Funds Seminar Banks, Washington, D.C., May 13, / 1

26 FTC V. Koscot (1975) The Commission found that pyramid schemes force participants to pay money in return for two things. First is the right to sell a product, second is the right to receive, in return for recruiting other participants into the program, rewards which are unrelated to sale of the product to ultimate users. The Commission explained that paying bonuses for recruiting will encourage both a company and its distributors to pursue that side of the business, to the neglect or exclusion of retail selling. The shortterm result may be high recruiting profits for the company and select distributors, but the ultimate outcome will be neglect of market development, earnings misrepresentations, and insufficient sales for the insupportably large number of distributors whose recruitment the system encourages Debra A. Valentine, International Monetary Funds Seminar Banks, Washington, D.C., May 13, / 1

27 FTC V. Amway ( ) 27 / 1

28 FTC V. Amway ( ) Amway had three different policies to encourage distributors to actually sell the company s soaps, cleaners, and household products to real end users. 20 First, Amway required distributors to buy back any unused and marketable products from their recruits upon request. Second, Amway required each distributor to sell at wholesale or retail at least 70 percent of its purchased inventory each month a policy known as the 70% rule. Third, Amway required each sponsoring distributor to make at least one retail sale to each of 10 different customers each month, known as the 10 customer rule. 20 Debra A. Valentine, International Monetary Funds Seminar Banks, Washington, D.C., May 13, / 1

29 FTC V. Amway ( ) Amway had three different policies to encourage distributors to actually sell the company s soaps, cleaners, and household products to real end users. First, Amway required distributors to buy back any unused and marketable products from their recruits upon request. 21 Second, Amway required each distributor to sell at wholesale or retail at least 70 percent of its purchased inventory each month a policy known as the 70% rule. Third, Amway required each sponsoring distributor to make at least one retail sale to each of 10 different customers each month, known as the 10 customer rule. 21 Debra A. Valentine, International Monetary Funds Seminar Banks, Washington, D.C., May 13, / 1

30 FTC V. Amway ( ) Amway had three different policies to encourage distributors to actually sell the company s soaps, cleaners, and household products to real end users. First, Amway required distributors to buy back any unused and marketable products from their recruits upon request. Second, Amway required each distributor to sell at wholesale or retail at least 70 percent of its purchased inventory each month a policy known as the 70% rule. 22 Third, Amway required each sponsoring distributor to make at least one retail sale to each of 10 different customers each month, known as the 10 customer rule. 22 Debra A. Valentine, International Monetary Funds Seminar Banks, Washington, D.C., May 13, / 1

31 FTC V. Amway ( ) Amway had three different policies to encourage distributors to actually sell the company s soaps, cleaners, and household products to real end users. First, Amway required distributors to buy back any unused and marketable products from their recruits upon request. Second, Amway required each distributor to sell at wholesale or retail at least 70 percent of its purchased inventory each month a policy known as the 70% rule. Third, Amway required each sponsoring distributor to make at least one retail sale to each of 10 different customers each month, known as the 10 customer rule Debra A. Valentine, International Monetary Funds Seminar Banks, Washington, D.C., May 13, / 1

32 Koscot Vs. Amway 32 / 1

33 Koscot Vs. Amway The Commission found that these three policies prevented distributors from buying or forcing others to buy unneeded inventory just to earn bonuses. 24 Thus, Amway did not fit the Koscot definition: Amway participants were not purchasing the right to earn profits unrelated to the sale of products to consumers by recruiting other participants, who themselves are interested in recruitment fees rather than the sale of products. 24 Debra A. Valentine, International Monetary Funds Seminar Banks, Washington, D.C., May 13, / 1

34 Koscot Vs. Amway The Commission found that these three policies prevented distributors from buying or forcing others to buy unneeded inventory just to earn bonuses. Thus, Amway did not fit the Koscot definition: Amway participants were not purchasing the right to earn profits unrelated to the sale of products to consumers by recruiting other participants, who themselves are interested in recruitment fees rather than the sale of products Debra A. Valentine, International Monetary Funds Seminar Banks, Washington, D.C., May 13, / 1

35 Webster V. Omnitrition (1996) 35 / 1

36 Webster V. Omnitrition (1996) Throughout the 1990 s, as the Commission pursued new pyramid cases, many defendants proclaimed their innocence, stating that they had adopted the same safeguards as Amway. 26 However, an appellate court decision called Webster v. Omnitrition Int l, Inc., pointed out that the Amway safeguards do not immunize every marketing program. The court noted that the 70% rule and 10 customer rule are meaningless if commissions are paid based on a distributor s wholesale sales (which are only sales to new recruits), and not based on actual retail sales. The court also noted that an inventory buyback policy is an effective safeguard only if it is actually enforced. 26 Debra A. Valentine, International Monetary Funds Seminar Banks, Washington, D.C., May 13, / 1

37 Webster V. Omnitrition (1996) Throughout the 1990 s, as the Commission pursued new pyramid cases, many defendants proclaimed their innocence, stating that they had adopted the same safeguards as Amway. However, an appellate court decision called Webster v. Omnitrition Int l, Inc., pointed out that the Amway safeguards do not immunize every marketing program. 27 The court noted that the 70% rule and 10 customer rule are meaningless if commissions are paid based on a distributor s wholesale sales (which are only sales to new recruits), and not based on actual retail sales. The court also noted that an inventory buyback policy is an effective safeguard only if it is actually enforced. 27 Debra A. Valentine, International Monetary Funds Seminar Banks, Washington, D.C., May 13, / 1

38 Webster V. Omnitrition (1996) Throughout the 1990 s, as the Commission pursued new pyramid cases, many defendants proclaimed their innocence, stating that they had adopted the same safeguards as Amway. However, an appellate court decision called Webster v. Omnitrition Int l, Inc., pointed out that the Amway safeguards do not immunize every marketing program. The court noted that the 70% rule and 10 customer rule are meaningless if commissions are paid based on a distributor s wholesale sales (which are only sales to new recruits), and not based on actual retail sales. 28 The court also noted that an inventory buyback policy is an effective safeguard only if it is actually enforced. 28 Debra A. Valentine, International Monetary Funds Seminar Banks, Washington, D.C., May 13, / 1

39 Webster V. Omnitrition (1996) Throughout the 1990 s, as the Commission pursued new pyramid cases, many defendants proclaimed their innocence, stating that they had adopted the same safeguards as Amway. However, an appellate court decision called Webster v. Omnitrition Int l, Inc., pointed out that the Amway safeguards do not immunize every marketing program. The court noted that the 70% rule and 10 customer rule are meaningless if commissions are paid based on a distributor s wholesale sales (which are only sales to new recruits), and not based on actual retail sales. The court also noted that an inventory buyback policy is an effective safeguard only if it is actually enforced Debra A. Valentine, International Monetary Funds Seminar Banks, Washington, D.C., May 13, / 1