The Inside Track On Network Marketing

By Jeffrey A. Babener

February, 1998



Network Marketing is big business and growing fast - worldwide sales exceed $80 billion and more than 20 million people are involved. Like any other industry, it has its own jargon. For those that want the inside track fast, here's the "lingo" you should know:

Important Network Marketing Terms:

Multilevel--A direct selling program in which distributors make money on their personal sales, and, in addition, are entitled to recruit distributors and receive bonuses based on the sales of their recruits and the recruits of their recruits through multiple levels.

Multilevel Junkie--An MLM distributor who goes from one MLM program to another in search of a business opportunity. Junkies seldom make a commitment to the product and are seldom successful.

Front-end Loading--A frowned upon practice in which distributors cause other distributors to buy unreasonable amounts of inventory in order to generate more commissions and overrides.

Heavy Hitter--A distributor who is very successful at producing large volume sales and who has a large following among other distributors.

Matrix--A compensation plan that looks grid like in which a distributor is limited as to the number of recruits at each level, for instance in a three by five matrix, each level down to five levels will only have three distributors.

Unilevel--A compensation plan in which distributors are paid out over a finite number of levels, for instance five levels, and do not advance to a qualification above distributor regardless of performance.

Stairstep Breakaway--The oldest and most predominant compensation plan. After meeting certain performance criteria, a distributor advances in rank, and breaks away from his or her original sponsorship line. The original sponsor receives a percentage override on the sales of the entire breakaway organization.

Sponsoring--The recruitment of a new distributor to sell products or services for an MLM company.

Co-op Ads--MLM distributors frequently pool ad media money and share the leads generated by ads in magazines, infomercials, etc.

Sales Kit--The only requirement to become a distributor of a legitimate MLM is the purchase of a moderately priced, $20-$100, sales kit that includes order forms, sales receipts, training manual, brochures, etc.

Retail Sale--A sale to a nonparticipant customer or to a distributor who is purchasing for personal or family use in reasonable amounts and not solely for qualification or advancement in the marketing program.

Stacking--An abuse by a distributor who seeks to manipulate remuneration in the marketing plan by placing underneath the distributor's position various family members or nonproducing distributors.

High Ticket--Items sold by MLM companies that sell for hundreds of dollars such as water filtration systems or electronic products as opposed to low ticket items such as vitamins or cosmetics.

Active Distributor--A distributor whose monthly sales activity qualifies them for bonuses or override commissions.

Level--The position of a distributor in your downline. Personally sponsored distributors are your first level. Their personally sponsored distributors are your second level.

Generation--In a stairstep plan, a person who qualifies to breakaway from his upline, and becomes a first generation breakaway.

Upline--All sponsors above a distributor.

Downline--All distributors sponsored directly by a distributor, as well as distributors sponsored below by other distributors.

Leg--An organizational line of sequentially sponsored distributors starting from one initial sponsoring distributor.

Organization--All distributors in all legs sponsored by a particular distributor.

Personal Volume--The personal production or sales of a single distributor.

Group Volume--Personal sales volume of a distributor in combination with the sales of distributors in all or part of his or her downline, as defined by a company's compensation plan.

Seventy Percent Rule--A common activity requirement that distributors must sell at least 70% of their last wholesale purchase order before reordering. This requirement is applauded by regulatory agencies as an inhibitor of inventory loading.

Buy-Back Policy--Most legitimate companies adopt a policy of repurchasing unsold inventory for a reasonable period of time from distributors who choose to terminate participation. Typical repurchase is 90% of net cost for a period of 30 days to a year.

Important Legislation:

Pyramid--Virtually every state has a pyramid statute and has applied it to legal multilevel marketing or direct sales activity. A pyramid is generally defined as the requirement that a distributor make an investment for the right to recruit others for economic gain. As a general matter, at cost sales kits are exempt from the definition of investment. Statutes prohibiting chain letters or endless chain schemes are generally found associated with pyramid legislation.

Multilevel Distribution Statutes--Several states have adopted legislation specifically directed at regulating multilevel marketing companies. These statutes require registration and a variety of disclosures. In addition, the statutes protect terminated distributors and require specific language in distributor agreements on such issues as cancellation and buy-back policies.

Sales Referral--Many states have adopted sales referral legislation prohibiting rebates or bonuses to customers based upon the referral of other customers who purchase product. If marketing programs are not administered properly, companies can easily run afoul of these statutes.

Business Opportunity Legislation--The classic business opportunity statute is California's Seller Assisted Marketing Plan Act (SAMP Act). Companies which offer business opportunities for fees in excess of threshold amounts must comply with this legislation. The majority of states have adopted these statutes. At cost sales kits are generally exempt under this legislation, but initial inventory purchases are not. Companies should be very careful not to trigger this legislation as it carries civil and criminal penalties.

FTC--The Federal Trade Commission has long regulated this industry. Look for application of the FTC's franchising and business opportunity guidelines. The FTC is most concerned about deceptive advertising and lately has been most active in the field of earnings misrepresentations. The FTC's ruling on door-to-door sales, or "cooling off period" sets the standard for direct sales involving more than $25.

U.S. Postal Laws--The Postal Service regulates the industry through application of its lottery and mail fraud statutes. Some administrative judges have interpreted the lottery statutes quite broadly in this field suggesting that any multiple-level program may create the chance element of a lottery. The mail fraud statutes are generally more oriented to mail order operations and are most concerned with marketing plan misrepresentations.

Consumer Protection Statutes--Virtually every state has adopted unfair trade practices statutes. These statutes are generally oriented to deceptive advertising and deceptive representations. Companies which run afoul of other legislation will probably also run afoul of these state statutes.

Green River/Licensing--This legislation is generally local in origin. The legislation places restrictions on door-to-door soliciting or may require specific licensing of direct selling distributors. Companies must pay close attention to see that their independent distributors are not "licensed" out of business.

The above glossary only scratches the surface, but does give a good indication of the important terms involved in network marketing.


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

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