Because of the abuses of the "rotten apples" of the industry, multilevel marketing has become a closely scrutinized and regulated industry.

Investigating A Network Marketing Opportunity

By Jeffrey A. Babener

February, 1996

 

 

What are the chances that you will be offered a network marketing opportunity at some time in the near future by a friend, relative, neighbor or co-worker? Well they're pretty good given the fact that, according to the Direct Selling Association, more than 5 million Americans are involved in a direct selling opportunity and that one in every ten households has a direct seller. As one leading direct selling company puts it, "We are your neighbors."

So, if you are seriously thinking about taking up your neighbor on that network marketing opportunity, keep some of the following things in mind.

Doris Wood, Executive Consultant for one of the country's leading management consulting firms for the network marketing industry, The Wood International Group (TWIG), points out: "There's no substitute for some hard-nosed investigation. Remember, you are going to be living and breathing your networking experience for years," says Irvine, California-based Ms. Wood, who brings for than 30 years of industry experience to the table and is also President of one of the industry's national trade associations, the Multi-Level Marketing International Association (MLMIA). "Due diligence pays off. It can bring you added financial security and many new friendships." On the other hand, she notes, "You are going to be asking your friends and neighbors to join this network marketing opportunity, and your credibility and reputation is on the line -- so take the time to be sure that you are doing the right thing."

Although not without its challenges today, as a general matter, legitimate network marketing companies are well received throughout the U.S. With increasing frequency, federal and state governments offer assistance and guidance to the network marketing industry. The IRS releases special publications, videos and has adopted specific regulations recognizing a very legitimate profession. As in the franchising industry, several states have also adopted specific legislation for multilevel distribution companies which set forth objective standards for those companies to follow. Differentiating a legitimate network marketing opportunity from a pyramid scheme should not be a difficult task for the entrepreneur when some basic and objective indicators are observed.

Any industry that offers such dramatic rewards and carries with it a lower dollar cost of entry obviously will tend to attract some of the best and some of the worst entrepreneurs. The industry has not always thrived. Over the years, it has come perilously close to extinction as a result of prosecution by regulators who claimed the industry promoted pyramid schemes under the guise of legitimate marketing. And, in many cases, the prosecutors were correctly chasing and eradicating such scam and scheme pyramids.

Other programs which were in fact legitimate have survived, however. In a classic legal decision in 1979, the Amway Corporation prevailed in such a prosecution and in fact effectively received a stamp of approval of its marketing program by the Federal Trade Commission. This particular decision opened the door to many other legitimate multilevel marketing companies.

Because of the abuses of the "rotten apples" of the industry, multilevel marketing has become a closely scrutinized and regulated industry. Regulations regarding multilevel marketing companies in the United States are a constantly changing patchwork of overlapping laws, which lack uniformity and vary from state to state.

The basic thrust of these statutes is that marketing plans are prohibited which require an investment or purchase by sales representatives for the right to recruit others for economic gain. Under these statutes, multilevel marketing companies must be bona fide retail organizations which market bona fide products to the ultimate consumer. Inventory loading and "headhunting," or remuneration for the mere act of recruiting others, are prohibited. Sales kits should be sold at actual company cost to sales representatives.

In the leading legal decisions, a variety of abuses have been targeted as potential elements of illegal marketing plans:

  1. Products which have "no real world" marketplace, i.e. the marketing program is a facade for a scam.

  2. Products which are sold at inflated prices.

  3. Plans which result in inventory loading or "buy-in" qualification by distributors.

  4. Substantial cash investment requirements.

  5. Mandatory purchases of peripheral or accessory products or services.

  6. Plans in which distributors are left with substantial unsold inventory upon cancellation of participation.

  7. Plans in which fees are paid to distributors for headhunting and emphasis is on recruitment rather than sale of product.

  8. Earnings misrepresentations or inflated earnings representations.

In determining whether or not a program is a legitimate multilevel marketing opportunity, the would-be participant or the entrepreneur, who is considering a multilevel marketing program, should consider several important points:

  1. Product or Service. The company should offer a high quality product or service in which consumer satisfaction is guaranteed. It must have a "real" demand in the marketplace. If the product is consumed by distributors themselves, it must be one that distributors would want to buy on its own merits, irrespective of participation in the marketing plan.

  2. Price. The price of the product or service must be fair and competitive in the marketplace. Distributors should be able to purchase the company product at wholesale or at a substantial discount from prices found in retail stores.

  3. Investment Requirement. There should be no investment requirement at all, except a sales kit or demonstration material sold at company cost.

  4. Purchase and Inventory Requirement. A legitimate marketing program should have no minimum purchase requirement, nor any inventory requirement, for one to become a distributor or sales representative. Once in the business, however, ongoing activity or qualification requirements are typical of leading network marketing companies.

  5. Use of Product. Products should be used by consumers and not end up in a garage or basement.

  6. Sales Commissions. Sales commissions should not be paid for the mere act of sponsoring other distributors.

  7. Buy-back Policy. A legitimate multilevel marketing company will agree for some reasonable period of time to buy back inventory and sales kit materials in resalable condition from distributors who cancel participation in the program.

  8. Retail Sales. The focus of the marketing program should be to promote retail sales to nonparticipants. Many states and programs recognize that purchases for personal or family use in reasonable amounts by distributors are also retail sales.

  9. Distributor Activity. Many of the new statutes regarding multilevel distribution companies require that distributors perform a bona fide, supervisory, distributive selling or soliciting function in moving the product to the consumer, i.e. that they have meaningful contact and communication with their downline sales organization.

  10. Earnings Representations. The basic rule is that a legitimate marketing program should not make any earnings representations unless those representations are based on a track record. Testimonials by individuals of their own experiences are not uncommon, however.

  11. Training. A good network marketing program should offer solid training in sales and recruitment to its distributors.

DOING YOUR OWN AD-HOC INVESTIGATION.

How far should you go in your investigation? Well keep in mind that the typical network marketing opportunity only involves a $50 to $100 investment to get started. So, keep your eyes and ears open, but also keep in mind that you are not mortgaging your house to do this business. Remember, for most people, it is a part-time job.

  1. Is the company a member of industry associations? Give a call to the Direct Selling Association and the Multi-Level Marketing International Association. These organizations have all kinds of information on network marketing and have adopted some ethics standards for their members.

  2. Most states regulate network marketing companies through their consumer protection division or attorney general's office. Call the offices in your state or the state where the company is headquartered and ask if there is any problem.

  3. Check out the company with your own Better Business Bureau. Ask the company if it belongs to its own local Better Business Bureau.

  4. If you have access to a credit reporting service, such as Dun & Bradstreet, you may be able to get financial information about the company. If it is a publicly traded company, you probably can pick up information and corporate reports from online services.

  5. Ask the person who is seeking to sponsor you for the names and telephone numbers of other distributors, or former distributors in your area. It is very important that you get a balanced portrait of the opportunity. Make sure to talk to distributors who have had success and, if possible, talk to distributors who have dropped out of the program or become inactive, and seek their reasons, including opinions on the quality and price of the product and the fairness of the compensation plan. Keep in mind that the attrition rate in most network marketing companies is very high because this part-time activity is competing with the tug and pull of many other responsibilities and opportunities in people's lives. And, if possible, get some references to retail customers of those distributors.

  6. Attend an actual business opportunity meeting, as well as a company training session so that you can see firsthand the quality of company support and marketing materials.

  7. Business magazines and industry trade publications are great sources of information. Check out business magazines like Entrepreneur, Business Start-Ups, and industry trade publications, such as Money Maker's Monthly. These publications are chalked full of tips about doing a network marketing opportunity.

  8. In many instances, companies' specific products are regulated by government agencies or trade associations. For instance, you may wish to check out food supplements and vitamins with your local FDA office or water filters with the water quality association.

  9. Obviously, you should get as much material from the company itself. What you want to find out is information about the number of years they have been in business, number of countries they operate in, the number of distributors, gross sales, etc. Frequently, this sort of information is proprietary because most direct selling companies are private. You are going to have to do a little digging to get this sort of information, but it will be worth it.

CONCLUSION

So when your neighbor knocks at the door, put on your "Columbo hat" and spend a couple weeks investigating. The investment in time and effort will be well worth it.

 

Jeffrey A. Babener
Babener & Associates
121 SW Morrison, Suite 1020
Portland, OR 97204
Jeffrey A. Babener, the principal attorney in the Portland, Oregon law firm of Babener & Associates, represents many of the leading direct selling companies in the United States and abroad.

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