Strategy Tinkering Can Stop Your Growing Business in its Tracks

by Robert Sher

Click here to order the February 2015 issue in which this article appeared or click here to download it to your mobile device.


Building a business through the direct selling channel can be a powerful strategy for rapid growth. Creating innovative products and services, along with leading-edge approaches to connecting with the field and motivating performance are similarly efficacious strategies. However, even great strategies aren’t enough to sustain success.

In-depth research has shown that there are seven silent growth killers that are particularly harmful for midsized companies (generally regarded as those with $10 million to $1 billion in revenue) that can offset the success coming from a great strategy. While each of the killers is deadly in its own right, this article will focus on the danger of “strategy tinkering at
the top.”

First, let’s start with an overview of the seven growth killers:

1. Letting Time Slip-Slide Away

Time—or rather, lack of appreciation for it—is the first silent growth killer. Midsized companies have big, complex projects they never experienced when small. As a result, projects seem to take too long, or get stuck altogether.

2. Strategy Tinkering at the Top

For midsized firms, tinkering with the business’ core strategy can be deadly, particularly when changes are made without proper research, planning and testing. Founders and entrepreneurial leaders are at risk of over-innovation, distracting the core business from scaling.

3. Reckless Attempts at Growth

In the effort to scale, organizations face increased risk and expense. If the attempt at growth costs too much and the revenue doesn’t match the expense, growth won’t materialize, but a cash crunch will.

4. Fumbled Strategic Acquisitions

Acquisitions can be vital to a growth strategy, but they can also derail an organization. Successful less than half of the time, acquisitions are less about the deal and the closing and more about selection and what happens afterward: the integration process and execution of the acquisition plan.

5. Operational Meltdown

A rapidly growing bottom line and a rigorously lean operation can be a death sentence under the cover of success. Leaders must be able to recognize early signs that an operational meltdown is looming. The magical time when the field hits the tipping point can be tarnished or destroyed when operations fails to deliver.

6. The Liquidity Crash

Running out of cash can happen to any organization—particularly those making reckless attempts at growth and those suffering financial erosion or a shock to the system.

7. Tolerating Dysfunctional Leaders

Having a strong, high-performing leadership team in place is critical to growth and to overcoming the other silent killers—or better yet, avoiding them in the first place.

These growth killers often grow out of sight and out of mind for midsized firms, and can drive even successful firms into extinction. Firms looking to survive the killers must proactively guard against them.


For midsized firms, tinkering with the business’ core strategy can be deadly, particularly when changes are made without proper research, planning and testing.


Let’s dig into the second growth killer: Strategy Tinkering at the Top. In theory, an entrepreneurial CEO is a dream-come-true. What executive wouldn’t want a boss who gets excited about good, new ideas and is willing to back them? But in reality, an entrepreneurial CEO can be a nightmare—especially for midsized companies, which simply can’t afford to experiment with too many new ideas and strategies at once.

Consider an online publisher whose CEO was highly innovative and in tune with his market. Every month, he would dream up two or more “fantastic” ideas and would order the team to give these new ideas top priority. When his staff would ask him about his previous month’s priorities, he gave them no guidance. His focus was squarely on the new idea of the moment.

This forced his team to steer from guardrail to guardrail as they tried to refocus on their new task. Of course, they couldn’t implement any of the new ideas; as soon as any headway was made, the ideas were discarded in favor of bigger, better ideas the CEO had cooked up. This is a classic case of strategy tinkering. As is typically the case with strategy tinkering, the team was demoralized, and the CEO’s most talented executives fled. The firm stagnated.

Some of his “fantastic” ideas were in fact fantastic, but due to the constant change of direction, they never got executed. While no one—not the board, the management team, or investors—should ever try to stop the CEO from generating ideas, there must be a process to select the best ideas from the CEO and test them without diverting the business’ operating team from their core mission.

Strategy tinkering becomes disastrous when the company and its leadership are driving hard toward a specific goal or mission. Complete focus on execution is required to reach the goal, and hard decisions must be made on allocating resources to this primary goal. Then comes talk of a different objective. Of a new competitive threat. Or a new opportunity. Some of the teams scatter to reconnoiter the new strategy. Another team thinks the core goal has already been replaced, so it begins work on the new one. Resentment builds when employees’ hard work feels wasted. Progress toward the core objective is slowed or stopped, and significant effort will be required to get everyone reoriented in the proper direction.

Such CEO strategy tinkering can be a bad habit, perhaps the product of an overactive urge to chase squirrels or pick up shiny objects. In addition, it may be a reaction to seemingly intractable problems like inconsistent revenue generation or low profitability.

An important indicator of CEO strategic tinkering is resistance from the executive team. Hard-headed, passionate CEOs often struggle to listen to the counsel of those around them—usually to their detriment.

Most CEOs won’t admit it, but oversight makes us better executives. The worst cases of strategic tinkering come from CEOs with complete freedom. Boards should act to require the CEO to stay within the firm’s approved vision and mission. CEOs who understand how a strong, involved board can help them will make sure their boards are stocked with experience and talent.

Of all the C-Suite executives, CFOs have the greatest chance to reign in a tinkering CEO. They are acutely aware of the effects of distraction and bad decisions on the financial statements. And it’s the CFO’s fiduciary responsibility to sound the alarm when targets are missed. Yet most CFOs won’t sacrifice their relationship with the CEO (or their jobs) in the face of a CEO who won’t listen. In fact, almost no one (other than a strong board) can deal with a CEO who refuses to listen.


There must be a process to select the best ideas from the CEO and test them without diverting the business’ operating team from their core mission.


CFOs need to understand that they’ll never be able to completely dissuade their CEO from tinkering, but even winning a 20 percent tinkering-reduction is a big win. CFOs should be persistent, and CEOs must remember to seek the CFO’s advice and listen carefully. This will encourage the CFO to keep presenting his or her opinions, even if the CEO doesn’t accept them all.

But CEOs can help curb their own tinkering impulse in a very simple way: by putting their vision for their company down on paper. Writing it down makes it real.

I’ve sat down with over 100 CEOs and asked them what their company’s most important priorities are. Generally, they quickly can outline the crucial key performance indicators (KPIs), the critical projects that must be executed and the three to five differentiators that make their business thrive. Unfortunately, most have never shared their insights with their team in a concise written document.

These simple plans, often just one page, can create clarity and agreement. They promote focus, and make it easy for everyone to assess the company’s performance and progress each month. As targets are missed and the team focuses on achieving them, the group becomes increasingly intolerant of the tinkering that gets in the way of execution. And when the tinkering starts, the CEO will face a team that will be able to ask how the tinkering fits into the CEO’s own written plan. And, if the new ideas are truly superior to those that preceded them, they can ask what parts of the original plan should be reprioritized.

This will stop many CEOs in their tracks as they remember the conviction with which they created and wrote down their plan in the first place. Again, even if this only stops 20 percent of the tinkering, it is still a major win.

Even at startups with relatively small leadership teams, being clear about the organization’s priorities and what work should be done first is essential. Operating plans, progress tracking and prioritization do not have to be bureaucratic or cumbersome. If the CEO is to be free to innovate, he or she must know that the rest of their team is getting the right things done each day. Yet planning and organization don’t come naturally to many founder-CEOs, and that job falls to their senior leaders.

One of my clients was a self-acknowledged tinkerer. She loved spotting new opportunities and chasing them, and found running the core business to be boring. But she understood that building value in her own company required that she slow down her tinkering. In fact, she became so excited at the prospect of formal planning as a tool to limit her own tinkering that she made a large poster showing the company’s one-page plan and posted it prominently on an office wall. She reasoned that if she started to tinker, it would be clear to everyone that she was violating her own plan.

So how can CEOs and their teams find the proper balance between strategic intransigence and the alluring temptations of tinkering? No CEO and no top team should ever stop thinking strategically. But they should keep such thoughts and discussions from the execution team. Top executives should be able to discuss strategy—and changes to it—without confusing it with or negatively affecting current execution priorities. For those leaders striving to have a more transparent organization, produce a brief and very high level summary after strategic off sites, just enough to stop misunderstandings and supposition.

If the reconnaissance work to explore a new strategy requires more than discussion, a separate team should be assembled to do just that. And keep it low-key. Most strategic ideas that at first appear to be brilliant are discarded upon review and testing. It’s best that this happens in the background until one new strategy rises to the level of a roll-out.

Disciplined processes such as business planning and monthly reviews of the plans, combined with broad visibility throughout the firm, will also play a strong role in keeping tinkering at bay, and keeping midsized businesses the healthier for it.


Robert Sher is Founder of CEO to CEO and the author of Mighty Midsized Companies: How Leaders Overcome 7 Silent Growth Killers(Bibliomotion; hardcover; September 2014). A regular columnist on Forbes.com, Sher has worked with executive teams at more than 85 companies to improve the leadership infrastructure of midsized organizations.

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Are We Winning?

by John Fleming

Click here to order the February 2015 issue in which this article appeared or click here to download it to your mobile device.


It’s hard to keep a scorecard on the direct selling industry! Those who tend to look for a way to criticize can always find something. Those of us who see within the industry and have the opportunity to interact with industry decision makers gain much insight and perspective. And this is a time of year to reflect. The corporate scorecard will be the year-end financial statements that will recap the business of the previous year. Businesses will win or lose depending upon the bottom-line numbers of profit or loss and the top-line number of revenue generated in comparison to the prior measurement period. But the question for those of us affiliated with the direct selling industry might be: What is the industry scorecard? Are we winning or are we losing?

Some scorekeepers like Bill Ackman, the hedge fund manager who has specifically targeted Herbalife with venomous attacks on the company’s method of conducting business (direct sales), completes his scorecard based on a set of very personal criteria that leads to an accusation and attack on, in this case, Herbalife in particular. However, this type of scorecard has implications for the entire industry. Direct selling, as a channel of distribution, is executed in many different ways, from what we often refer to as party plan to network marketing, social entrepreneurship, social selling, and social commerce, or even simply person to person. Today, the actual definition of direct selling is so very broad that direct sellers utilize online methods for delivering messages and transacting business as effectively as any channel of distribution.

In response to a scorekeeper like Bill Ackman and his staff, we remind such scorekeepers of the fact that the industry has a formal code of ethics as well as an informal code of ethics. The industry code and the more stringent company codes of ethics serve to govern the manner in which those who utilize the direct selling channel engage both employees of the company and the independent brand partners representing the company’s products, services and business opportunity. Independent contractors are also consumers as it simply makes sense to be your own best customer.


Today, the actual definition of direct selling is so very broad that direct sellers utilize online methods for delivering messages and transacting business as effectively as any channel of distribution.


The formal Code of Ethics is provided by the U.S. Direct Selling Association, and this code is public information. Members of the U.S. DSA pledge to abide by the U.S. DSA Code of Ethics. Many non-members of the U.S. DSA (direct selling companies) have created their own company codes and often use the DSA Code of Ethics as their benchmark. In either case, the direct selling industry overall has done a good job of policing itself and has grown as a channel of distribution to over $30 billion in U.S. revenue and $150 billion in worldwide revenue, generated by approximately 16 million U.S. independent contractors and 90 million worldwide independent contractors.

Every organization and every business has some type of scorecard for reflection on previous-year results and the planning of the new year. It is part of our nature to desire a scorecard to determine if we are winning or losing. Each winter, the NFL hosts the ultimate scorecard in professional football, the Super Bowl, where thousands will witness the final score that determines the best football team of the year. The same process holds true for all professional sports teams and leagues wherever they are located in the world. Hundreds of millions watch these events on television.

Direct Selling News created a scorecard for the direct selling industry when we first published the Direct Selling News Global 100 listing in 2009. Each year, this enormous research project serves to identify the top 100 direct selling companies in the world who certify their revenue performance by submitting the DSN Revenue Certification Form and complete a profile of their company. This process results in the publishing of perhaps the most important scorecard on the industry issued by anyone.

However, there is more to score on a company-by-company basis, and we offer on this page a potential scorecard profile that we believe tells even more of the story about an industry that shows such diversity in its representation of people from all walks of life. Direct selling as a method of distribution provides people with hope and with training to learn the basic knowledge and skills to be able to build a business. This could be a small part-time effort or a more serious effort that not only develops customers but also provides the opportunity to recruit and train others to do this, resulting in a much larger business opportunity. Because a scorecard is so important, we encourage each direct selling company to submit your Global 100 information and profile, as in so doing you participate in a valid process for scoring an incredible industry.

In going through the scoring process, we remain optimistic that we will have experienced another year of overall growth with respect to the first two categories on the scorecard pictured. Within the growth, there will always be those companies that did not grow, and the reasons for that are many, some of which are mentioned below and are also being researched by Direct Selling News.

Continue to Direct Selling News to see the scorecard and find out if we are winning or not.

 

 

Entrepreneurs Are Not Normal

by Darren Hardy

Click here to order the November 2014 issue in which this article appeared or click here to download it to your mobile device.


An excerpt from Darren Hardy’s upcoming book, The Entrepreneur Roller Coaster

NOTE: Darren Hardy’s new book, The Entrepreneur Roller Coaster,explores the passion and determination behind the entrepreneurial experience. Direct selling companies are often started by lone entrepreneurs who build their ideas into large companies which attract even more entrepreneurs as direct sellers of their products and services. We think you’ll enjoy this excerpt.


You’re a freak.

That’s right. A freak. And so am I. Don’t be offended—it’s a compliment. Let’s define freak.

freak |freek| noun: a person who is obsessed with or unusually enthusiastic about a specified interest.

If that’s not a definition for an entrepreneur, I don’t know what is. No doubt you have to be “unusually enthusiastic” and pretty freaky to get on this roller coaster. Most don’t have the courage to even step into the car of this thrill ride. But you do, and that is exactly why they will call you a freak.

Not only are you rare in your courage, but it turns out you’re unusual for even wanting to ride in the first place—only about 10% of people are entrepreneurs. That means the other 90% are “normal.”

Let’s define normal.

normal |nawr-muhl| adjective: conforming to the standard or the common type; usual.

Yuck! The “usual,” “common type,” or “standard” societal normal (that big, herd-like 90 percent) don’t like it when a “freak” steps out of line. That kind of nonconformity threatens them. It challenges their choices and identity. Rather than step out themselves, it’s safer for them to scorn your choices and attack you, in hopes of dragging you back into the herd so they can feel better about themselves.

So, yes. They will call you freak. They will call you crazy.

And that is good.

“Here’s to the crazy ones. The misfits. The rebels. The troublemakers. The round pegs in the square holes. The ones who see things differently. They’re not fond of rules. And they have no respect for the status quo. You can quote them, disagree with them, glorify or vilify them. About the only thing you can’t do is ignore them. Because they change things. They push the human race forward. While some see them as the crazy ones, we see genius. Because the people who are crazy enough to think they can change the world, are the ones who do.” —Apple Inc. ad, 1997 after Steve Jobs returned to Apple.

So hello, crazy one! Welcome to the freak show! The good news is you don’t have to catch cannonballs, swallow swords, or breathe fire in order to join this freak show. (Unless, of course, your business actually is running a circus.)

The bad news is that being a freak can be painful at first.

Beware the Crabs

I was once told about a type of crab that cannot be caught—it is agile and clever enough to get out of any crab trap. Yet these crabs are caught by the thousands every day, thanks to a particular human trait they possess.

The trap itself is simple: a wire cage with a hole at the top. Bait is placed in the cage, and lowered into the water. A crab comes along, enters the cage, and begins munching on the bait. A second crab sees the first crab and joins him. Then a third. For a time, it’s crab Thanksgiving. Eventually, though, all the bait is gone.

At this point the crabs could easily climb up the side of the cage and leave through the hole. But they don’t. They stay in the cage. And long after the bait is gone, even more crabs continue to climb inside the trap. Not one leaves.

Why? Because if one crab realizes there’s nothing keeping him in the trap and tries to leave, the other crabs will do anything they can to stop him. They will repeatedly pull him from the side of the cage. If he is persistent, the others will tear off his claws to keep him from climbing. If he persists still, they will kill him.

The crabs—by the power of the herd—stay together in the cage. All the fisherman needs is a tiny bit of bait. The rest is easy. Then the cage is hauled up, and it’s dinnertime on the pier.

When you chose to become an entrepreneur—to be different—and walk out on that 90 percent, something strange happens. Instead of encouraging and supporting you, your friends, family, and colleagues become crabby and start trying to drag you back down into the “trap.”

But why do they do it? Many of these people love you. Why would they want to hurt you (emotionally) and kill your hopes, dreams, and desire for something more?

There are two key reasons … Read the rest of the article at Direct Selling News

 

 


Author NameDarren Hardy is a successful entrepreneur, publisher of SUCCESS magazine, and New York Times bestselling author of The Compound Effect and Living Your Best Year Ever: A Proven Formula for Achieving Big Goals. His latest book isThe Entrepreneur Roller Coaster. Find out more at: www.rollercoasterbook.com.

‘All In’ for the Third Time: ViSalus Co-Founder Blake Mallen Talks

by DSN Staff

Click here to order the October 2014 issue in which this article appeared or click here to download it to your mobile device.


On Sept. 2, Greenwich, Connecticut-based Blyth Inc. announced that the company had reached an agreement to sell the majority of its ViSalus subsidiary to the founders and certain other preferred stockholders of ViSalus. They completed the transaction, which involved exchanging shares of redeemable convertible preferred stock of ViSalus for shares of ViSalus common stock, on Sept. 4. Blyth now owns approximately 10 percent of ViSalus. DSN sat down with Co-Founder and Chief Marketing Officer of ViSalus Blake A. Mallen to discuss the deal. Here’s what he had to say.


DSN: Start at the beginning for us. This is quite a transaction. How did it all come about?

BAM: Yes, it’s obviously a big move. We think the ViSalus story is made up of three big “All In” moments. In the beginning, it was definitely kind of an “All In” spirit that gave rise to the company back in 2005. Nick (Sarnicola), Ryan (Blair) and I took all the money we had back then and acquired the assets of a failing company and birthed the idea of ViSalus and our mission. We had very humble beginnings—about 18 months or so without a single paycheck.

We had developed a great relationship with the Goergen family and Blyth when Nick, Ryan and I were still young executives in our mid-20s. By 2008, we felt that joining Blyth was the best move for ViSalus in order to provide a lot of the infrastructure and the operational expertise to help us accomplish what we wanted for the long term. So we created a partnership and a great relationship.

Shortly after we announced the deal with Blyth in 2008, the economy collapsed and Nick, Ryan and myself again took our last money that we had at the time to self-fund the company, and reinvent in 2009—our second “All In” moment. The irony is that this moment gave birth to the Body by Vi 90 Day Challenge, which is the brand that made us who we are today with the meteoric rise over the last few years.

Now we’re in a rebuilding and expansion mode, and we wanted to go all in again, so we approached Blyth a couple of months ago with the idea to buy back all the remaining shares that Blyth owned, minus 10 percent. They saw our passion, and they know we’re founders and ViSalus is our baby, and running it is something we want to do for life.

This last transaction is our third “All In” moment. Most of the transaction included money owed to us in the original agreement with Blyth. Basically, we walked away from it and rolled it back into the company. We took back, between us and our field, 90 percent of ViSalus. We’re all excited to have full ownership back and a new beginning and a new birth.

DSN: So when you look at that new beginning and new birth, how does this ownership change better position ViSalus?

BAM: Focus is probably the best word to use, and regaining the ability to put our resources 100 percent into … CLICK HERE FOR THE REST OF THE INTERVIEW

The BurnLounge Court Decision Clears the Air on Many Issues

by Kevin Thompson

Editor’s Note: On the publication of the Ninth Circuit Court of Appeals’ opinion on the BurnLounge case, attorney Kevin Thompson published an article on Seeking Alpha detailing the decision and what each aspect of the Court’s opinion meant for the direct selling industry as a whole, and Herbalife in particular. This article contains excerpts of Thompson’s longer article, which you can access on SeekingAlpha.com or Thompson’s website.


On June 2, 2014, the Ninth Circuit published its long awaited BurnLounge Opinion. Within hours, both sides of the Herbalife (HLF—NYSE) battlefield issued statements claiming victory about the decision. One thing is clear: The gray space in MLM law separating legitimate direct selling companies from pyramid schemes has been minimized considerably.

BurnLounge was held by the court to be a pyramid scheme. In its opinion, the Ninth Circuit clarified a lot of contentious issues surrounding the industry. The factors assessed in reaching that determination are informative for long and short investors going forward. And of course, the factors are informative for the industry as a whole. While the people betting against Herbalife have argued that the entire industry has been propped up with bubble gum and duct tape over the years with clever interpretations of case law, this opinion clears the air considerably.

Thoughtful Analysis Regarding the Definition of “Ultimate User”

The Court dedicated an entire section to the definition of “ultimate user.” Before diving into the law, it’s important to understand the basics: The practice of paying commissions on purchases made by distributors for self-consumption and/or resale is known as “internal consumption.” The opposite is when distributors buy primarily to qualify for bonuses, i.e. buy things they would never buy at prices they would never pay without the financial opportunity. In BurnLounge, the Court held that participants in the plan can be counted as “ultimate users” provided that the participants bought the products for legitimate “internal consumption,” i.e. personal use.

The Court held, “BurnLounge is correct that when participants bought packages in part for internal consumption, the participants were the ‘ultimate users’ of the merchandise and that this internal sale alone does not make BurnLounge a pyramid scheme.”(BurnLounge Decision, p. 19). The Court went on to say, “Whether the rewards are related to the sale of products depends on how BurnLounge’s bonus structure operated in practice.” Bottom line: Factors need to be weighed when assessing whether commissions are driven by “ultimate users.”

What Is an “Ultimate User”?

In this regard, the Court looked to the FTC’s 2004 Staff Advisory Opinion for guidance. The section quoted by the court reads, “In fact, the amount of internal consumption in any multi-level compensation business does not determine whether or not the FTC will consider the plan a pyramid scheme. The critical question for the FTC is whether the revenues (that support the commissions) are generated from purchases of goods and services that are not simply incidental to the purchase of the right to participate in the money-making venture,” (emphasis mine).

BurnLounge was held to be a pyramid scheme because “the rewards BurnLounge paid were primarily for recruitment, and (distributors) were clearly motivated by the opportunity to earn cash rewards from recruitment.” (BurnLounge Decision, p. 3-4). The Court weighed several factors in reaching its conclusion that the majority of the rewards were tied to recruitment, not legitimate product sales to “ultimate users.”

Retail vs. Non-Retail

It’s now a moot point. Up until this case, critics argued that the majority of a company’s revenue must come from retail sales, i.e. sales to customers outside of the network. Their rationale: Rewards via internal consumption were “recruitment rewards,” thus, the majority of revenue must come from customers instead of participants. While external sales remain a strong indicator of product value, it’s not a bright-line, determining factor. More importantly, it’s not a requirement.

In its opinion, the Court made itself clear that purchases made by the participants can be counted as legitimate sales PROVIDED… and this is key… there’s legitimate consumer demand for the products. In other words, the Ninth Circuit affirms the idea that there are essentially two categories of purchases: (1) those by ultimate users inside or outside the network, and (2) those derived via opportunity driven demand, i.e. people inside the network buying to qualify for commissions, otherwise known as “channel stuffing,” “garage qualifying,” “inventory loading,” etc.

Factors the Court Used in Finding that BurnLounge Lacked Sufficient “Ultimate Users”

It’s now reality beyond debate: Revenue from participants inside the network must be carefully considered when assessing a company’s legitimacy. The resulting commissions from internal consumption cannot be blindly treated as “recruitment rewards” as critics would prefer.

What are the factors that the Ninth Circuit used?

  • Purchasing patterns
  • Lack of value
  • Requirements to buy to qualify
  • Lack of consumer safeguards
  • Emphasis of the marketing

While these factors were not centrally located, they were referenced in various locations throughout the opinion. They’re discussed more fully below.

Purchasing patterns: The Court was disturbed by the fact that 95 percent of distributors bought the premium products while only 35 percent of non-distributors (customers) bought the same. (BL Decision, p. 14). The Court said, “If package purchases were driven by the value of the merchandise included in the packages rather than by the opportunity to earn cash rewards, one would expect to see comparable numbers of (distributors) and (non-distributors) buying the same packages.”

Lack of value: The Court held that the BurnLounge products had limited value, thus, the primary motivation leading to the purchases was NOT for legitimate product consumption. (BL Decision, pages 10, 19). Instead, the BurnLounge distributor was motivated to enhance earning potential. The Court held, “In practice, the rewards BurnLounge paid for package sales were not tied to consumer demand for the merchandise in the packages; they were paid to (distributors) for recruiting new participants. BurnLounge, through its recruitment efforts, created its own synthetic market.”

Requirements to buy to qualify: In BurnLounge, participants were REQUIRED to buy the premium packages to qualify for deeper commissions. Since the motivation driving distributor consumption is crucial in pyramid scheme analysis, BurnLounge was immediately dead in the water when it required distributors to buy. The Court held, “The district court found that because purchasing a package was required for participation as a Retailer or Mogul, and because Moguls earned cash for selling packages, (distributors) by default received compensation for recruiting others into the program.” (BurnLounge Decision, p. 10). Plus, distributors had to recruit several additional participants to qualify for the basic bonuses (“concentric retail bonuses”). Without question, the plan forced people to focus on recruitment and buy items they never would have bought at prices they never would have paid but for the income opportunity.

Lack of consumer safeguards: This is a point that’s more nuanced. While the Court did not reference the “Amway Safeguards” specifically, they did note that Amway was found to be legitimate due to its policies. As a recap, the FTC held Amway to be a legitimate enterprise largely because of its consumer safeguards. Specifically, Amway had a 70 percent rule (where 70 percent of all purchases needed to move to other people), the 10 customer rule (where distributors had to certify that products went to at least 10 customers each month) and the buyback rule (where distributors had 12 months to return sellable inventory). These safeguards were not specifically referenced in the opinion. However, in response to BurnLounge’s argument that it was just like Amway, the Court said, “Though Amway created incentives for recruitment by requiring participants to purchase inventory… it had rules it effectively enforced that discouraged recruiters from ‘pushing unrealistically large amounts of inventory onto’ recruits.”

In my opinion, the 70 percent rule and the 10 customer rule are no longer relevant. Those rules are vestiges from an era that pre-dates direct fulfillment. In those days, the “directs” had to purchase inventory on behalf of their entire organizations and fulfill the orders; thus, warranting rules that ensured the inventory was moving to “ultimate users.” Today, unique orders can be shipped to individual homes. The risk of inventory loading is greatly reduced provided that there’s a robust, easy-to-understand and clearly communicated buyback policy.

The Court held that BurnLounge had zero policies to prevent bonus buying. Once bought, the products were non-refundable.

Emphasis of the marketing: The Court held that BurnLounge participants focused primarily on recruitment over product value. The Court wrote, “The district court also found that BurnLounge’s marketing focus was on recruiting new participants through the sale of packages.” (BurnLounge Decision, p. 10). In BurnLounge, the pay plan literally required participants to recruit several people to achieve the basic levels in the plan. Plus, the products had minimal value, leaving distributors with little choice but to focus on the financial opportunity.

What Does This Mean Going Forward?

Network marketing companies will get more intelligent in delineating between “ultimate users” and everyone else. The market is already moving toward preferred customer programs where people can receive product discounts as preferred customers WITHOUT joining the business. Since we know these are metrics the courts want, it’s important to show clean data. Absent clear delineation, we have the factors provided in the BurnLounge case to help. Currently, when people join to save money on product (as my friend recently did with an essential oils company), short sellers treat them as “victims” or “failures” for purposes of beefing up the failure rate and finding a pyramid scheme. As the BurnLounge opinion makes clear, it’s not proper to make such distinctions without carefully considering the motivation driving the sales.


KevinKevin Thompson is an MLM attorney specializing in working with direct selling companies, large and small. He is a founding member of Thompson Burton PLLC and a Supplier Member of the Direct Selling Association.

Ackman’s Folly: 7 False Assumptions on Herbalife

by Kevin Thompson

Click here to order the February 2014 issue in which this article appeared or click here to download it to your mobile device.

Editor’s Note: Direct Selling News contacted Kevin Thompson directly and requested a condensed version of a longer article he recently wrote. We reprint his point of view because we feel it is a perspective that should be shared with our DSN audience.

The full article is also available on Thompson’s website at www.thompsonburton.com.


It’s been almost a year since Bill Ackman announced his short position on Herbalife (HLF—NYSE). With much media fanfare, he gave a 300+ slide presentation explaining the validity of his thesis. On Bloomberg, he confidently declared, “This is the highest conviction I’ve ever had about any investment I’ve ever made.” To the casual onlooker, it appeared that all hope was lost for Herbalife. But those of us who benefited from a little more context knew better. We’ve seen this movie before with convicted criminal, Barry Minkow. Admittedly, Bill Ackman is different than his felon predecessor. While Minkow concealed the fact he was paid for his attack (fraud), Ackman made his position clear from the start. And really, that was the only difference. They both relied on the same worn-out anti-MLM arguments. They both stitched together various quotes and articles, most of them out of context, in an effort to stretch the truth and create an appearance of filth.

They both ultimately failed. As I’ve watched the debate unfold over the past year, I’ve been greatly puzzled by the amount of effort Ackman has expended to kick down this “unsustainable pyramid.” While I don’t think he’s a bad person, I think he’s obviously crossed a line and gone from an objective fund manager to a mean-spirited fund manager. It can happen to anybody. I tell all of my children, “Thompsons control their emotions.” I started reciting this maxim when I noticed my 4-year-old daughter making poor decisions during one of her fits. Under the influence of strong emotions, we all make mistakes. Ackman is clearly under intense emotions when he says things like,


While I don’t think Bill Ackman’s a bad person, I think he’s obviously crossed a line and gone from an objective fund manager to a mean- spirited fund manager.


“This is not a trade for me, we are going to take this… to the end of the earth.” He’s ignoring basic fundamentals and investing purely on ego. At some point, he got off track. I’m calling the game. It’s over for Ackman’s bet, no matter how hard he postures. Herbalife is not going to be shut down as a pyramid scheme. I can count seven assumptions made by Ackman that have all turned out to be faulty. It was his reliance on these assumptions that led to his reckless confidence.

False Assumptions

1. He Assumed Bigger Means Better

Central to Ackman’s thesis is a legal report prepared by someone at Sullivan & Cromwell. To this date, Ackman has not provided this report, though he still falls back on it when pressed about his thesis. Sullivan & Cromwell is an enormous law firm based out of New York. With over 800 lawyers and $1 billion in revenue, it’s safe to place them in the “big firm” category. But bigger is not always better. While Sullivan touts a number of reputable brands as clients, they’ve likely advised zero clients regarding their sales in a network marketing format. I represent network marketing companies, and I know the competitive landscape of lawyers in my space. Candidly, Sullivan & Cromwell is completely off the map. With MLM law, being a generalist is a plan for failure. If someone at Sullivan & Cromwell told Ackman that Herbalife was a pyramid scheme, he or she lacked meaningful experience to know better.


Bill Ackman assumed the market would follow his “well-researched” logic. He thought wrong.


2. He Assumed He Could Hypnotize the Market

Ackman assumed that with the awesomeness of his initial PowerPoint presentation, the market would panic resulting in a massive selloff. And truthfully, the market did panic for a couple of weeks before growing immune. Bob Chapman and I published the first article that challenged Ackman’s position. (Chapman is the Founder of Chapman Capital LLC, a Los Angeles-based investment company, and was an activist versus Herbalife following the death of Herbalife Founder Mark Hughes in 2000.) Two weeks after Ackman’s initial presentation, when the wound was still fresh and the stock was trading in the low $30s (it’s now at $75 per share), we pointed out that the emperor had no clothes. Ackman did not anticipate large fund managers betting against him. As other funds began doing some due diligence, they all started piling on the long side based on the realization that Ackman’s only shot was government intervention. As the market sobered up, Ackman’s presentation was placed under a microscope and found to be grossly inadequate for purposes of finding illegality.

Bottom line: He assumed the market would follow his “well-researched” logic. He thought wrong. The most notable of long investors are Carl Icahn, George Soros and Bill Stiritz. Notable investors in Ackman’s camp: zero.

3. He Assumed the Salesforce Would Collapse

When I first saw Ackman’s presentation last year, I thought to myself, “There’s no way Herbalife distributors can build with this kind of negative publicity.” They surprised me, and they surprised Bill Ackman. Ackman’s presentation was almost a self-fulfilling prophecy. If the salesforce were rendered inert, the stock would tank, thus proving his theory that Herbalife is a volatile pyramid destined to collapse. While the collapse would have been directly tied to Ackman, he would have attributed it to the volatile nature of pyramid schemes. As stated earlier, the stock bounced back. As for the salesforce, they trudged forward, producing significant results under tremendous pressure quarter after quarter. It’s hard enough to build a network without impediments. If there’s negative press, it only compounds the difficulty. Somehow, the Herbalife distributor found a way.

4. He Assumed He Could Confuse the Public about Market Saturation

This is somewhat related to Assumption No. 2 where Bill Ackman expected to mesmerize the market with his logic. Ackman assumed that his argument regarding market saturation would actually fly. In theory, it seems to make sense. At some point, assuming everyone is successful at recruiting Herbalife distributors, the market would be exhausted. In Ger-Ro-Mar, the FTC tried to make this “geometric progression” argument and failed. In that case, the company was in the business of selling women’s lingerie. The court cleverly wrote, “We find no flaw in the mathematics or the extrapolation [presented by the FTC] and agree that the prospect of a quarter of a billion brassiere and girdle hawkers is not only impossible but frightening to contemplate, particularly since it is in excess of the present population of the Nation, only about half of whom hopefully are prospective lingerie consumers. However, we live in a real world and not fantasyland.”

In an article online, MLM consultant Len Clements said it best when he wrote, “I wonder, how many more years does a 32-year-old company like Herbalife have to exist, and continue to grow, before this notion of the MLM company succumbing to ‘inevitable market saturation’ becomes folly.” In his first presentation, Ackman asserted that Herbalife was running out of markets; thus, doomed to experience “market saturation.” Keep in mind, Amway is 22 years older than Herbalife, operates in 20+ more countries and has over three times the sales revenue of Herbalife—and they have yet to “saturate the market.” But I digress.

5. He Assumed He Could Confuse the Issue of Internal Consumption

Bill Ackman assumed he could stitch together an argument that criminalized heavy internal consumption. As a recap, “internal consumption” is a term used to describe the act of paying commissions on downline consumption/sales. If distributors buy the product for personal use (distributor = “internal”), commissions are triggered. The criticism of internal consumption: It can lead people to buy things they never would buy while they’re under the influence of a pay plan, i.e. “opportunity driven demand.” This issue is the main source of criticism of network marketing, and Ackman seized on it. First, the conclusion: It’s legal to pay commissions on internal consumption. The debate has always revolved around the appropriate amount.

Given the low cost of entry into network marketing companies (oftentimes less than $100), this sort of black-and-white standard is intellectually disingenuous. Since it’s so easy for distributors to join a program to “give it a shot” or save money on product, it blurs the line between retail sales and distributor volume. In an oft-quoted FTC advisory memo in 2004, the FTC said, “In fact, the amount of internal consumption in any multi-level compensation business does not determine whether or not the FTC will consider the plan a pyramid scheme.” The key is motivation: What’s driving the consumption? If it’s opportunity driven demand, the motivation is misplaced. In its rebuttal presentation on Investor Day (Jan. 10, 2013), Herbalife released some data that put this issue to rest. Based on its objective data, 31 percent of all orders are drop-shipped to non-participants (found on page 50 of the presentation). This at least indicates that the products have legitimate value and are not merely token items. As for the issue of distributor motivation, 73 percent of all distributor orders are made by participants that are not qualified to receive commissions (page 59). As if that’s not enough, Herbalife commissioned Nielsen to conduct a study on the penetration of Herbalife distributors and end users in the United States. The results: Herbalife has over 7 million customers in the U.S. alone, which dwarfs its distributor numbers by 6.5 million. The verdict: The products have value.

Bottom line: Ackman is clamoring for the wrong piece of data. He’s asking that Herbalife reveal their retail sales data. The key factor is “motivation,” and motivation is not easily quantified. And given the low cost of entry for all network marketing companies ($60 for Herbalife), this piece of data is not the determining factor with respect to pyramid allegations. Does Herbalife have this data? Yes. Are they obligated to provide it? No. They’ve already shown some compelling statistics, and they’re tightening the screws with respect to distributor compliance. Going forward, I suspect Herbalife will do a better job of distinguishing its customers from business-builders.


Ackman’s failure has led to a more unified direct sales industry and bolstered support for outreach efforts. And quite candidly, it’s made the space better.


6. He Assumed He Could Launch a Surgical Strike on Herbalife

Ackman likely assumed that he could keep the pressure solely on Herbalife without agitating the rest of the direct sales industry. Keep in mind, the direct sales channel represents approximately $167 billion in global revenue, according to the World Federation of Direct Selling Associations. When he relied on common arguments used against all network marketing companies, he brought the entire industry into the melee. Initially, he was careful. On Bloomberg after his initial presentation, he said, “I’m not saying that companies like Amway are pyramid schemes.” Now, his arguments are growing broader with each presentation. With this in mind, every company in the industry benefits from his failure. It’s led to a more unified direct sales industry and bolstered support for outreach efforts. And quite candidly, it’s made the space better.

7. He Assumed He Could Refute the Value of the Buyback Policy

The value of Herbalife’s 12-month buyback policy cannot be understated. When I see former distributors crying foul about the money they’ve lost, I care, but I wonder if they knew about the return policy. Herbalife offers a 12-month refund on all unused/unsellable inventory (without a restocking fee). When people are upset about money lost, it’s clear that the issue is regret. They regret using the product. But they still used it and derived value from it. The 12-month buyback policy, which is adopted by Herbalife and strongly encouraged across the entire industry, is the ultimate consumer safeguard. It’s designed to help distributors get their money back on unsellable and unwanted inventory when they decide to exit.

When you factor this element with the 31 percent drop-shipping statistic + the 73 percent statistic of orders from non-qualified distributors + the 12-month buyback policy + the 0.2 percent return rate + the minimal amount of consumer complaints, it paints a clear picture: The products have legitimate value, and the consumer safeguards are sufficient.

Conclusion

Ackman’s gamble is over. This is not false bravado. I’m calling it now like I called it with Bob Chapman weeks after Ackman’s first presentation. Ackman can waste his investors’ money as long as they’ll allow. It does not change the fact that Ackman’s argument was premised on several assumptions, all of them faulty. It took little skill to craft an argument and seem convincing to those unfamiliar with the issues. The MLM space is murky, to say the least. But Herbalife has never taken ranks with the companies on the bottom rung. Ackman knew this, relied on an undisclosed legal report from a firm with zero experience in the category, relied on several other assumptions, took a gamble, and failed. Recent statements from Ackman seem to be coming from a man with a bruised ego, leading with his emotions and not his head. Herbalife is not a pyramid scheme, and with each passing day they evolve into a better company.


Kevin Thompson+Kevin Thompson is an MLM attorney with extensive experience in helping entrepreneurs to launch their businesses on secure legal footing. He is a founding member of Thompson Burton PLLC and a Supplier Member of the Direct Selling Association.

The Evolution of Direct Selling

by Teresa Day

Click here to order the January 2014 issue in which this article appeared or click here to download it to your mobile device.

Issue Addressed

The current of misconception and mistrust in the general public around the terms “network marketing,” “MLM” and “direct selling” may run too deep for the industry to reshape its image by using the same terminology going forward. Additionally, this current terminology may not sufficiently describe who and what we are and what our business model accomplishes.

Where might we begin in order to explore a naming change? This article presents one approach.

Summary

Though we might have called it different names throughout history, we’ve always sold things to each other, and we’ve always been social in our interactions, including those involving commerce. Indeed, it could be stated that the history of commerce is the history of humanity. The purpose of this article is to take a closer look at the history of selling and social interaction and apply that history to the consideration of a possible change in naming conventions within the direct selling industry.


Part I

Historical records of commerce in merchant colonies reach as far back as the 19th century B.C., but this only means that’s as far as recorded history goes. The true beginning of the exchange of goods and services began when the first group of people needed something that someone else could produce. Simply put, people have always “sold” things to one another—long before any legal or formal infrastructure existed, goods and services changed hands in barter and in one-on-one transactions.

Author David Schmidtz speculates in his 2010 book A Brief History of Liberty that the chief reason Neanderthals died out and Homo sapiens flourished is that Neanderthals never moved beyond the small groups in which they developed. There isn’t much evidence of cooperation or of their purposefully overcoming their isolated living conditions. Homo sapiens (that would be us), on the other hand, almost immediately developed what Schmidtz calls “the propensity to truck and barter.”¹


Simply put, people have always “sold” things to one another.


According to Schmidtz, Neanderthals disappeared because they “were not entrepreneurs.”² In contrast, Homo sapiens seem to have very early on embraced the ideas of division of labor, long-distance trade, and creating and managing a surplus of goods. In other words, commerce. Of course, there is no written record to support these ideas; however, archeological finds—tools made in one area found hundreds of miles away, segmented living and working quarters, and other evidence—give it validity.

What this means is that trade—the making available of goods and services and the purchasing of said goods and services—coincides with the emergence of modern man. To put it in a nutshell, the history of commerce is the history of humanity.

The archeological record also indicates basic crafts began developing about 10,000 years ago—such things as spinning thread from flax, wool and silk to make clothing and rugs; baking clay in kilns to make pottery for cooking and storing food; and weaving grasses together to form mats and baskets, among other things. Needles have been found in Europe from this time that are small and thin enough to indicate horsehair as the preferred thread, which means people could now sew articles with more complexity and even visual interest. Felted and woven rugs graced the floors, though “home” might have been a cave.

And, as truly as they do today, individuals would have emerged with special skill or flair in the making of these items, causing others who might have admired the work to ask, “How can I get one like that?” And so a transaction would take place, and a happy “customer” would go home with a new basket.

It is the relationship between the buyer and the seller that begins, completes and supports the transaction—what we today call “network marketing” or “direct selling.”


The next day, a neighbor might see the customer using her new basket and inquire about it. “Where did you get that basket? It’s beautiful.” “Oh, Geta made it, and I traded some bread for it.” “Do you think she would make one for me?” “Sure, what have you got to trade that she wants? By the way, she also makes beautiful woven rugs.” A relationship between buyer and seller is established, and by virtue of word-of-mouth exchanges the seller’s customer base grows. What was true 10,000 years ago is still true today.

There is another way in which selling has remained unchanged throughout the centuries. Some anthropologists have argued that this close exchange of goods and services without the use of “money” actually strengthened the bonds between people in the community. That is to say, the act of “buying” and “selling” goods without the use of money cannot really be separated from the value of the goods themselves, nor from the value of the relationship between the people making the exchange. Anthropologist Stanley Diamond calls this idea the “primitive exchange.”³

It is our opinion that the bond created in this transaction was not merely due to the absence of “money” to complete it, but rather the exchange itself that occurs between two (or more) people who live, play and work in close proximity. It is the nearness of the relationships—the “warm circle,” to use modern terms—that connects the buying and selling of the item with the value of the relationship between the people making the exchange. In other words, it is the relationship between the buyer and the seller that begins, completes and supports the transaction—what we today call “network marketing” or “direct selling.”

Frankly, the exchange of goods and services for something other than hard currency lasted well into the 20th century when, for example, doctors would take chickens for payment from patients who simply had no cash. Texas Tech University in Lubbock, Texas, has memorialized the original barn structure on its campus where students during the 1920s could bring their own dairy cows, which were milked there during the day to “pay” for the students’ tuition.

In truth, it is really only in the past 60 years with the rise of the monolithic corporation that our age-old selling and buying practices—closely aligned with our social relationships—have dramatically changed. In our current day, the commerce we experience and engage in on a daily basis is occurring on such a large scale that it is difficult to compare it to when cottage industries dominated the commercial landscape. And, in fact, as new generations are born and raised, fewer living individuals would have grown up in a time when they could even experience smaller-scale commerce.

We believe that it is actually today’s practices that represent the anomaly in commerce. Modern practices have removed all semblance of the “relationship” that used to exist between buyers and sellers. This is precisely why so many marketing firms today are selling services that revolve around “relationship marketing.” People are becoming aware that big business has lost something valuable along the way to corporate domination. Direct sellers, however, have always known this.


People are becoming aware that big business has lost something valuable along the way to corporate domination. Direct sellers, however, have always known this.


Just as people have always bought and sold goods and services, people have always been social. We build communities. We build cities. We find reasons to join clubs and to be with other people, and usually our affiliations center on those things we have in common. In social interchanges, we share those things that appeal to us, those things that have helped us, and even those things we want to share with others just because we like them.

Indeed, sharing things we love with our friends and family is such a natural part of our daily lives that we might not even notice how often we engage in this behavior. So pay attention next time to the co-workers who can’t stop talking about the movie or the restaurant they went to over the weekend and how you should go, too. Or the neighbor who recommends his brand of lawnmower or the friend you can ask about a doctor or dentist. We are constantly utilizing our networks to share the things we love and to help us make decisions about purchasing goods and services.

It is clear to us that the direct selling industry, as we know it today, is a marketing and distribution system that has codified the two natural human behaviors of buying and selling products and living and operating in tight-knit social networks.

In fact, these human tendencies are so strong that they have become codified as a marketing strategy called “word-of-mouth” marketing. Today, even with the amazing gains in technology, it’s still considered the best form of marketing. People do not trust corporations, but they do trust their friends and peers—their social network.



Certain human tendencies are so strong that they have become codified as a marketing strategy called “word-of-mouth” marketing.


Part II

While we have made a strong case that all aspects defining the channel of distribution known today as “network marketing” or “direct selling” have been in existence for centuries, the more formal understanding of the channel as opposed to other methods of retail selling began to emerge in the 1880s. This was when David McConnell first recruited Mrs. P.F.E. Albee to sell his perfume in her town and the Southwestern Company refined its door-to-door approach of selling books. Developing over the last 150 years into a more systematic type of approach—and having been refined by legal input, consumer responses and technological advances—many other remarkable companies have followed in their footsteps to continue the thriving channel we now call the direct selling industry.

Shifts in technology, ideas about business models, and other things that have impacted the industry and the times are all simply circumstances that surround the fundamental human activities of social sharing and economic transactions. We may feel that we’ve come a long way from living in a cave with a felted rug on the ground and a new basket in our hands. But honestly, how different is that from someone sitting in their two-story red-brick house in the suburbs, visiting with a friend who is showing them a new necklace she bought from a neighbor, prompting the other person to go online and order the same one from that consultant? Not different at all. Social sharing still leads to social commerce.

Schmidtz introduces the first chapter of his book with this quote: “The greatest threat to and the best hope for a better life, in the long run, comes from other human beings. Historically, trade has been a great liberator.” 4

Our business model has liberating properties, because it is based fundamentally on human nature: We are social.


This quote resonates in our time, but even more so in the direct selling model, for we continually see evidence of this truth. Our business model is not only thriving and creating real opportunity in emerging markets, but also here in the U.S. with the economy shrinking and little chance of the return of eliminated jobs. Our business model has liberating properties because it is based fundamentally on human nature: We are social. We seek out those goods and services we want and need. We trust our friends and their friends. This is direct selling, regardless of time or circumstance.

New economies are being created in the wake of large business and government failure to sustain growth. Smaller, more personal economies with greater chances of survival are replacing large, monolithic economies that simply no longer fit the pattern of the new world. Entrepreneurialism is the current buzzword appearing in countless magazine articles and flowing from the lips of politicians.

But traditional routes to entrepreneurial endeavors generally include high barriers: the need for capital, the need to pay people salaries, the need to develop marketing materials and spend advertising dollars, the need for computer infrastructures in both hardware and software, and so on.

Direct selling remains the best path to entrepreneurialism available to any one individual, without regard to a large bank account or access to one, without regard to educational background or training, and without regard to experience. Wisely choosing a product and a company to become associated with, the direct seller has access to everything necessary to build a successful and sustainable business. In fact, with the advancements of technology available to everyone, for the first time an individual has the capacity to compete at a much higher level with far more established enterprises.

Indeed, tech advancement has in no way hampered the experience of the direct seller; it has only and in every way improved it, thus ensuring the business model will survive and continue to grow in the future. This thought brings us to the underlying question raised by this article: Is the current lexicon used in our industry (“network marketing” and “direct selling”) serving us well, and will it continue to serve us well in the future? Is it time to consider redefining ourselves with new terminology?

Certainly, a few companies in the industry have already started to do so. A very successful jewelry company defines itself only as a “social seller,” not using any of the traditional language in their materials or training. Utilizing technology to leverage the consultants’ social networks, this company focuses on teaching its consultants to “sell” socially. They are not alone—other companies have focused on consultants creating online “boutiques” and using their social media contacts as their customer base, avoiding the terms “network marketing” and “direct selling” altogether.

The rationale behind such decisions is really twofold. First, companies that make the decision to avoid the terminology of direct selling and yet still engage in the business model are clearly distancing themselves from the negative press, bad actors and general public misunderstandings about the manner in which the model operates, not the model itself. Second, the companies are linking their sales and marketing language to the language of the present—the use of social media dominates every other manner of communication among humans.

The two constants are what we’ve delineated in this article: We share stuff with our friends and family, and in that interchange we also sell stuff. Social sharing leads to social commerce.

The end goal appears to be to further the validity of the model and to increase the sales for the consultant. It seems that the companies already changing their terminology believe these things must be connected in today’s world.


As an industry, it’s time to consider whether a new approach, one already utilized by many companies, may bring value. The end goal appears to be to further the validity of the model and to increase sales for the consultant. It seems that the companies already changing their terminology believe these things must be connected in today’s world. In other words, they believe sales will increase and more people will be interested in engaging in the opportunity if and when the opportunity does not seem to be connected to the old versions of “network marketing” or “direct selling.”

Considering the case we’ve made in this paper that commerce and social activity are inextricably linked and have forever been, and the fact that the general public calls the newest technology that allows us to stay connected “social media,” it makes sense that adopting these terms in sales and marketing uses could attract a wider audience. It also makes sense to use the general public’s current acceptance of social media as a way to engage in a wider conversation about our opportunities.

Conclusion

In the wake of so many misconceptions and basic misunderstandings of the direct selling business model that continue to surface, we believe it is definitely time for the industry itself to become more proactive in the public conversation. As Neil Offen asked in his recent article in DSN, “Do we let our critics define us or do we take steps to make sure we better control our own reputation?”5


Teresa Day is the Editorial Director of Direct Selling News.


  1. David Schmidtz and Jason Brennan, A Brief History of Liberty (West Sussex, UK: Wiley-Blackwell, John Wiley & Sons Ltd, 2010), 31.
  2. Schmidtz and Brennan, 33.
  3. Stanley Diamond, In Search of the Primitive, (New Brunswick, NJ: Transaction Publishers, 1974-2009), 134.
  4. Schmidtz and Brennan, 30.
  5. Neil Offen, “The Great Equalizer and Opportunity,” Direct Selling News, October 2013, 58.

DSA’s Direct Selling Summit Connects Direct Sellers, Members of Congress

by Alyssa Wolice

Photo above: Summit attendees gather with DSA staff for a formal presentation of the Direct Selling Proclamation and Compact on the Capitol steps.

Click here to order the December 2013 issue in which this article appeared or click here to download it to your mobile device.


On Wednesday, Oct. 23, more than 100 independent direct selling consultants and industry executives from across the country came together on Capitol Hill for the Direct Selling Association’s (DSA) first-ever Direct Selling Summit.

Independent consultants from more than two dozen companies shared their personal success stories with Members of Congress and their staffs. For many direct sellers, the event marked their first-ever visit to the nation’s capital and their first experience connecting with their Members of Congress. All told, direct sellers took part in more than 70 individual meetings.

Additionally, Summit attendees renewed their commitment to the highest standards of ethical business practices, innovation and customer service by signing the Direct Selling Proclamation and Compact. The proclamation was displayed throughout the day to remind participants, as well as bystanders and others on Capitol Hill, of the role direct selling plays in the economy and in the lives of millions of men and women across the country.

“Do not underestimate the importance of what you are doing,” Congressman Mario Diaz-Balart (R-Fla.) said to this year’s Summit attendees. “Do not underestimate the importance of folks like me seeing the real-life implications of what… the Federal Trade Commission or anyone else is doing. Because when you’re up here [as a Member of Congress], you see the end results, and it’s all numbers and statistics. The reality is that’s not what this is about. It’s you. … You might say, ‘I don’t see how what I did [during meetings with Members of Congress] is that important.’ Just your presence—for people to see, to visualize what we’re dealing with—is so important.

“Democracy does not work by osmosis,” he continued. “It requires involvement. You’re involved in your industry and your businesses. You’re also standing up for wealth creation, for what has made this the most prosperous and, therefore, the most generous country in history.”


“You’re standing up for wealth creation, for what has made this the most prosperous and, therefore, the most generous country in history.”
—Congressman Mario Diaz-Balart (R-Fla.)


Prior to meeting with Members of Congress and their staffs, attendees were provided with an overview of the direct selling industry, DSA and the purpose of the day’s events. From there, attendees were briefed on how to prepare for meetings with Members of Congress and their staffs, as well as media interviews. DSA President Joseph N. Mariano said, “We thought it important that we, at least indirectly, answer some of the misinformation and myths that are out there to make sure that they don’t grow or, more importantly, end up a part of legislation here in Washington, D.C., or the states that could affect direct selling businesses negatively.”

“That is why it is more important than ever that we bring our folks to Washington so that Members of Congress and their staffs, as well as regulatory agencies such as the Federal Trade Commission, can gain a better understanding of who we are,” he said. “In fact, we represent a diverse population of people from all around the country with diverse motivations, different demographic backgrounds, races and religions.

“Some of the most impressive people I have ever met are independent direct selling consultants,” he continued. “So many people have pulled themselves up from nothing and built businesses to help their families and increase their skills. Many are newly immigrated to our country or have no significant education or prior business experience, and yet they now find themselves with much more affluence and a renewed sense of confidence in their business and leadership capabilities.”

After the morning briefing, direct sellers, executives and DSA staff came together for a formal presentation of the proclamation and a picture on the Capitol steps. Attendees were also invited to take individual portraits with Mariano, and many took advantage of the opportunity to capture snapshots of the Capitol building and the Washington Monument.

“Direct selling is my life,” said Theresa P., an independent consultant with Traci Lynn Fashion Jewelry. “I’m in this full time and, for that, it is so important to me that Congress knows about this industry. My favorite thing about direct selling is the transformation—seeing someone come in shy, intimidated or down on themselves and watching them gain confidence as they achieve their goals.”


“In almost every other industry, legislation has been required to ensure there is truly equal opportunity for everyone. In direct selling, that’s not the case. Anyone can pursue a career in direct selling…”
—Mark Petersen, Vice President of Field Development, 4Life Research


Mark Petersen, Vice President of Field Development for 4Life Research, accompanied one of 4Life’s independent consultants on the trek to Capitol Hill. He said, “One of the many things most important to me about direct selling is the fact that, in almost every other industry, legislation has been required to ensure there is truly equal opportunity for everyone.

“In direct selling, that’s not the case,” he continued. “Anyone can pursue a career in direct selling regardless of their education or background. Direct selling truly provides an equal opportunity for everyone, and it really becomes apparent when we hear some of the success stories direct sellers have shared. In direct selling, success is directly tied to effort and perseverance, rather than who you are, where you come from, where you were educated or what you believe.”

Throughout the day, attendees donned T-shirts that read “Create a Better Life as a Direct Seller” across the front. On the back of the shirts was a word cloud, which featured adjectives such as empowering, innovative, entrepreneurial, genuine and enriching—just a few of the words direct sellers used throughout the day as they shared their stories with Members of Congress, DSA executives and one another.

“There is no doubt that the biggest reward I have found through direct selling is being able to help other people reach their goals,” said Cynthia D., an independent consultant with LifeVantage Corp. “You start out in this industry seeing the big picture of the possibilities that could impact your own family’s future, but helping other people, that’s the true essence of being a part of direct selling.”


Congressman Mario Diaz-Balart (R-Fla.)Congressman Mario Diaz-Balart (R-Fla.) Summit attendees sign the Direct Selling Proclamation and Compact.Summit attendees sign the Direct Selling Proclamation and Compact. Congressman Jason Chaffetz (R-Utah)Congressman Jason Chaffetz (R-Utah)

Addressing Summit attendees, Congressman Jason Chaffetz (R-Utah) said, “We appreciate you being here. This is a critical, critical part of the process. As a Member of Congress, we represent about 800,000 people. That’s a very difficult task—to try to be in touch and in tune. There’s nothing more important to us than meeting with people from our own districts and from across the country—those who are feeding real families, who are trying to take care of themselves and trying to improve their lives or the quality of life for others.”

Congressman Chaffetz shared his story of how he first experienced direct selling when he worked for Nu Skin more than 10 years ago.

“You can’t be successful unless you help other people,” he said. “That’s the beauty and the magic of direct selling and the companies you’re with. You’re only successful if you help others to reach their goals and aspirations. If somehow, some way, you can capture that message and share it with Members of Congress, that will be very helpful.”

Congressman Chaffetz briefly addressed challenges that have impacted—and could impact—the direct sales channel, such as product agreements and labeling issues, as well as tax laws and threats to the independent contractor status.

“Please, keep invested in this,” he said. “I talk to my district office every single day, and you should be communicating with those people as well. You’ve got great leadership here in the DSA. I believe in [direct selling] in my heart. I know this helps people; it gives us opportunity and creates real success for people’s lives. That’s what it’s all about.”


“I believe in [direct selling] in my heart. I know this helps people; it gives us opportunity and creates real success for people’s lives. That’s what it’s all about.”
—Congressman Jason Chaffetz (R-Utah)


To cap off the day’s excitement, Summit attendees gathered in the Rayburn House Office Building for an ice cream social open to all Members of Congress and their staffs. Direct sellers shared their stories with executives, DSA staff and Congressional staffers while posing for pictures and celebrating the day.

“I went to a Viridian Energy meeting three years ago, and I had, at that time, just reached a point in my life that I knew would come—I had three kids in college at the same time,” said James K., an independent consultant with Viridian. “I had been in the printing industry for years, but when I saw the opportunity that Viridian could offer, I said to myself, ‘This is real. This is something I can put my time into.’ Now that I’ve been with Viridian for three years, the thing I find most rewarding about my direct selling career is the ability to help others become successful and watch direct selling change their lives. It’s an amazing experience, and you get such good feelings when you see others achieving success as well.”

Sherri G., an independent consultant for Scentsy, also reflected on the event with DSA staff. “I am so thankful DSA gave us this opportunity to have our voices heard,” she said. “This is a critical part of what makes direct selling so successful, what can help make our businesses successful; and it’s important that Congress hears from us. DSA has given us our voice, and we appreciate that.”

DSA is continuing its efforts to see all direct sellers have their voices be heard by launching an online Proclamation page (www.dsa.org/proclamation), where individuals can affirm their promise to uphold the highest standards of business ethics and reinforce the positive impact direct selling has on people from all walks of life.

“Each of the names affixed to the Direct Selling Proclamation represents a life impacted by the direct selling industry,” said Mariano. “These men and women represent not only a sample of today’s direct sellers, but also family, friends, customers and supporters who recognize what direct selling means to the U.S. economy, to the livelihoods of nearly 16 million people and their families, and to beneficiaries of direct selling’s countless charitable undertakings.”

While the Proclamation resonated with this year’s Direct Selling Summit participants, as well as Members of Congress, their staffs and passersby, those in attendance represented a very small percentage of the entire sales channel.

“This Proclamation is about reaffirming who we are: a sales channel that helps those involved create better lives for themselves, their fellow sellers and their communities,” observed DSA Chief Marketing Officer Amy Robinson. “We know there were companies who were not able to send their sellers to Washington, D.C., to talk to Congress, but they too are represented by this Proclamation, and they should have the opportunity to sign it.”

DSA encourages all of its member companies to make their salesforce members aware of the online Proclamation and ask them to lend their support for all that is good about the channel. Doing so will provide independent direct selling consultants with an opportunity to show solid commitment and support for direct selling as the new year approaches. It will also demonstrate the breadth and reach of the direct sales channel to Congress, as well as to the general public.

“Once we’ve gathered the signatures, we’ll send this Proclamation to relevant federal and state agencies and legislative bodies to showcase the strength of the sales channel,” Robinson said. “The more DSA member companies make their field members aware of the Proclamation and encourage them to sign it, the greater the impact we’ll have.

Mariano added, “There are countless stories out there of lives changed by the direct selling opportunity, and this Proclamation serves to recognize as many of them as possible. Direct sellers sent more than 17,000 letters to the FTC when they were considering changes to the Business Opportunity Rule. If even a fraction of direct sellers sign this proclamation, we will eclipse that incredible success 10 times over.”


Alyssa WoliceAlyssa Wolice is Communications Specialist at the U.S. Direct Selling Association.

Special Tribute: Ross Creber Retires—Direct Selling Passion Is All in the Family

by Kassandra Hayes

Ross Creber, direct selling warrior and servant leader for over 30 years, recently announced his plans to retire as the President and Secretary of the Direct Sellers Association of Canada. Prior to working in support of direct selling and becoming an industry advocate, Creber’s experience included that of both entrepreneur and corporate executive, having worked with prominent Canadian firms in diverse sales and marketing roles. While at the helm of the DSA in Canada, his skills, talents and experience enabled many key initiatives. In the late 1990s, Creber, as Executive Director of the World Federation of Direct Selling Associations, managed the first Socio-Economic Impact Study ever conducted on the impact of direct selling on global economies.

In tribute to his many accomplishments and his many years of outstanding leadership, DSN brings you a personal interview with Ross Creber.

KH: What attracted you to the direct selling industry to begin with?

Ross Creber

Ross Creber

RC: I got attracted to direct selling because of my wife, Bobbie. At the time, we had two young children, and she was a registered nurse running an orthopedic center. Bobbie didn’t want to go back to that after having the kids, yet she was looking for something outside of the home that offered more flexibility. She went to a Tupperware party and connected with the gal doing the show, and one thing led to another. Bobbie ended up selling Tupperware and in a period of three years became one of the top managers in Canada. We were given an opportunity to start a new Tupperware distributorship in Calgary. After eight years of being one of the top Tupperware distributors, I went on staff as Vice President Marketing for Tupperware in Canada.

Our careers in direct selling include my work as a business consultant for other direct selling companies and Bobbie having been President of the Canadian DSA for five years. Following this, she was hired to open PartyLite Gifts in Canada. I joined the DSA as President, and five years later we moved to London, England, so that Bobbie could open new markets in Europe for PartyLite. I took a position with the WFDSA as an Executive Director working closely with FEDSA (now SELDIA).

We told our kids we would come back to Canada when we had grandchildren. We were thrilled to return to Canada years ago and to be closer to our children and grandchildren. I was recruited to continue my work as the President of the DSA, and Bobbie continued her work in the industry, which ultimately led to her launching another direct selling company in Canada, lia sophia, where she is currently Managing Director. So direct selling has truly been a family affair.

KH: What drew you to the role as the DSA President in Canada?


I have such a passion for direct selling and the ability to work with government officials, to be able to make legislative changes and impact people’s lives in such a positive way.


RC: I have truly enjoyed my entire career in direct selling. I have such a passion for direct selling and the ability to work with government officials, to be able to make legislative changes and impact people’s lives in such a positive way. I have so enjoyed the friendships over the years with people in business and government working to make sure we do all we can to maintain an open marketplace for direct sellers and companies. In fact, this is still what drives me today.

KH: Over your career as President of the Canadian DSA and also as Executive Director of the World Federation of Direct Selling Associations, what is it about direct selling that has made the deepest impression upon you?

RC: My deepest impression goes back to the impact you make on people’s lives. This industry is open to all people of all races and educational backgrounds. This is the thread that ties us all together. The method of how we do business based upon cultural or regulatory differences is secondary. In the end, it’s all about building relationships and meeting people where they are by providing quality services and quality products.

I also love the entrepreneurial nature of this business. We equip people with products, business savvy and tremendous earning power. We truly transform their being and their confidence. This industry is open to anyone with no barriers. People just need to have a willingness to engage and work hard. Another huge impression on me is the way the direct selling industry comes together to resolve issues, because at the end of the day we all want our direct sellers to be successful.

Ross Creber with Canadian Prime Minister Stephen Harper.

Ross Creber with Canadian Prime Minister Stephen Harper.


In the end, it’s all about building relationships and meeting people where they are by providing quality services and quality products.


KH: What have you seen change the most?

RC: Probably what I have seen change the most over the years is the method and the speed of communication, with Twitter, personal websites and the expectations of consumers. All of these have impacted the dynamics of the business.

We are also seeing more ethnic diversity, which works well for people coming into our country, because they can start to work within their ethnic communities until they are more comfortable with the language and culture in other communities. Of course, we want them to eventually move outside their comfort zone and expand their horizons.

KH: What still needs to change? Or be improved?

RC: We need to change the perceptions of people outside the industry and show that we indeed provide a legitimate and powerful business opportunity. The direct selling channel is so unique that it is difficult for people outside of the business to understand how you continue to motivate an independent salesforce as opposed to a salesforce of employees.

We are seeing increased interest from the younger generation entering the channel, with some of this being driven by exposure to university programs on entrepreneurship. These are the people who get into direct selling because they are not sure what they want to do. And in the process they discover a lifelong career.

The strongest asset that we have as associations and as an industry is our Code of Ethics and Business Practices. Unlike many other industry associations, you don’t just write a check and gain membership in the more than 60 DSAs around the world. The rigorous review that is undertaken prior to granting membership, including the commitment to and compliance with the Codes by our respective member companies, provides assurance to direct sellers and consumers that they can purchase products and invest in the business opportunity of our members with confidence, knowing that they are backed by organizations that require a strong adherence to ethical conduct in the marketplace.

I believe that we are doing a good job of communicating this message to regulators, but we need to do a better job of communicating the message to consumers, and the WFDSA and local DSA Communications Initiative will go a long way to creating a greater awareness among direct sellers and consumers. This is a great marketing tool for direct sellers to use during presentations to customers or prospective recruits.

KH: What have you witnessed in your tenure about the growth of the direct selling channel of distribution among people?

RC: We continue to see an increase in the 55+ age group. These are people looking for second careers and supplemental income. And of course, one of our biggest drivers remains young moms looking for an outlet, a flexible new career that allows them to combine home and work environments.

KH: Please share your thoughts on the future of our industry, in Canada and across the world.

RC: Direct selling transforms lives. Back in the early days when I was a distributor for Tupperware, I witnessed people’s lives and confidence change. It’s not always about money. Money is certainly a factor, but it’s the improved skills and the increased self-confidence that evolves over time. People treat direct selling as a business and lifelong career—not a hobby. This trend will continue to grow nationwide and globally.

KH: As you prepare to step down as Canadian DSA President, what are you most proud of?

RC: We have developed a very strong relationship over the years with government agencies and the Canadian DSA. We had a lot of legislative wins during my time and Bobbie’s time at DSA. We have been able as an association to work with the federal government and develop amendments to the Competition Act, which deals with multi-level marketing and pyramid schemes of selling. This legislation really is a model for the industry.

Back in 1991 we identified that the Goods and Services Tax (GST) would create a real challenge for direct sellers, so the association with support of legal counsel worked with the Department of Finance and Canadian Revenue Agency to put in an alternative collection mechanism for direct sellers. The precollection mechanism allowed direct selling companies to collect tax at the time of sale and remit to the government on a regular basis. This was a win-win for the industry, direct sellers and government. It’s a classic example of how government and industry work together. In fact, we are the only industry that was given a special arrangement when GST first came in. Through legislative work we have been able to harmonize direct selling processes across provinces and simplify the process for companies and the direct seller who sells across borders. The greatest acknowledgement came when the Prime Minister’s office identified the DSA as a significant contributor to the economy.

I have been blessed over the years to receive the following honors:

  • Recipient of the DSA’s Ivan P. Phelan Award (1997)
  • Recipient of the DSEF Circle of Distinction Award (2010)
  • Recipient of The Queen Elizabeth II Diamond Jubilee Medal (in celebration of Her Majesty the Queen’s Diamond Jubilee of her ascension to the Throne) (2012)

I want to acknowledge a number of mentors throughout my career, including Bobbie,  Jud Whiteside, Jack Miller, Ray Patrick, Joe Mariano and Neil Offen, just to name a few.

I am looking forward to spending more time with my wife; our family, including our five grandchildren; golf and some travel.

The Great Equalizer and Opportunity

by Neil Offen

It has been slightly over two years since I retired after 40 years with the Direct Selling Association (DSA), first as a staff attorney and lobbyist and eventually as President and CEO. In addition, I was there at the creation of the Direct Selling Education Foundation (DSEF) and the World Federation of Direct Selling Associations (WFDSA), serving as Vice Chairman and Secretary General, respectively, of those two organizations. I have spent some 42 years in our industry—the reality is that it’s a method of distribution more than an industry per se—representing it, protecting it, promoting it and policing it. To say the least, I have seen much change, much adaptation, and much growth and innovation during that period. At the same time, I have seen the industry’s core values remain focused on empowering people one individual at a time, seen it being led by women and men of integrity and high moral character, and seen a continuing commitment to and passion for our distributors by corporate management.

I have also witnessed a spirit of service by our industry and its companies, their personnel and their representatives in the field in the various communities in which they operate. Given all of the good that our industry represents, it is disappointing to see the negative attacks on it. At this juncture in the road, the direct selling industry faces the question: Do we let our critics define us or do we take steps to make sure we better control our own reputation?

To explain what I mean, I will be focusing on four areas. One disclaimer that I need to make at the outset is that I am speaking for myself and only myself. I am not representing the DSA, the WFDSA or any other entity.

The four areas I will discuss are the industry’s attributes, the negative myths and canards leveled against it, the actions that can harm the reputation of the industry, and finally, what I see as possible solutions and courses of action that will continue to protect, promote and enhance the reputation of the direct selling industry. I use the terms sales persons,consultantsdistributors and representatives interchangeably throughout the article.


Do we let our critics define us or do we take steps to make sure we better control our own reputation?


Direct Selling Attributes: What Are They?

Neil Offen—A Biography

Neil H. Offen served as President and CEO of the 100-year-old Direct Selling Association from 1978 to 2011. He also served as Secretary General of the 63-nation World Federation of Direct Selling Associations and as Vice Chairman of the Direct Selling Education Foundation. In 1994, Offen was appointed by President Bill Clinton and confirmed by the United States Senate as Vice Chairman of the board of directors of the Inter-American Foundation (IAF), a U.S. government foreign-aid agency working in Latin America and the Caribbean, through which he held senior U.S. government diplomatic status. IAF has distributed approximately $1 billion to non-governmental organizations exclusively for micro-entrepreneurial endeavors.

Offen has also served on the boards of numerous organizations and councils. In addition to being inducted into the Direct Selling Hall of Fame and the DSEF’s Circle of Honor, he is also the recipient of the WFDSA’s Lifetime Achievement Award.

Offen received his Juris Doctor degree from George Washington University and his Bachelor of Arts degree from Queens College where he was a New York State Regents Scholar. He resides with his wife, Carolyn Jennings, in Chevy Chase, Md. He has a daughter, Meredith, and a son, Michael; a daughter-in-law, Dana; and two poodles, Jasmin and Phineas Biscuit, better known as PB and J.

All of us working in direct selling believe in its positive attributes. I’ve listed here those truths about the direct selling opportunity that I believe are most powerful:

    1. It empowers people. Its diversity is without bounds. It offers opportunities for people to set their own objectives, great or small, through full- or part-time efforts, for career opportunities or merely for supplemental income. It is an industry that directly ties reward to effort. It does not discriminate based on race, gender, national origin, religion, age, physical condition, educational background, political beliefs or financial resources;
    2. It provides unlimited flexibility for the individual to achieve her or his own goals and control the time spent in the business as well as how that time is spent;
    3. It drives micro-enterprise development wherever it operates—in a world seeking and needing such enterprises—and is a robust, grassroots source of business skills education, guidance and training;
    4. It motivates people through providing recognition, quality products and services, technical resources and an overall nurturing environment with ongoing symbiotic support;
    5. It provides opportunities with minimal capital investment or risk of loss;
    6. It provides consumers with outstanding product warranties and guarantees in each marketplace in which it operates;
    7. Its rules and standards, through company policies and through the independently administered direct selling associations’ codes of ethics, protect both salespeople and their consumers from abuse;
    8. It is a simple business, though not necessarily an easy one, and due to the independent contractor status of each salesperson, it allows great ease of entry and egress;
    9. It is global in nature and borderless in promotion of common core values and ethical standards;
    10. It is innovative, adaptive and technologically friendly;
    11. It has a strong public service and corporate social responsibility orientation at both the corporate management and the individual distributor levels;
    12. It offers social contacts in a world where more and more people are becoming isolated from one another;
    13. It is cause-oriented where its distributors believe in the product or service or opportunity and that they are helping to fill a valuable need of friends, family, neighbors and the public at large; and
    14. It is a source of social and economic stability and opportunity within all its markets.

Direct selling motivates people through providing recognition, quality products and services, technical resources and an overall nurturing environment with ongoing symbiotic support.


Myths and Canards

Several untrue assertions regarding our industry permeate the Internet and mainstream news media. The following are some of the misstatements or outright lies often attributed to our business model.

Myth No. 1: All—or almost all—people who participate in direct selling lose money.


DSA research shows that over 80 percent of business-oriented recruits have very modest goals when joining a company and the vast majority … have their expectations met or exceeded.


In my experience, the reality is that an overwhelming majority of people who join a direct selling company to sell products and build a business do profit from it. DSA research shows that over 80 percent of business-oriented recruits have very modest goals when joining a company and the vast majority, whether still with the firm or no longer in the industry, have their expectations met or exceeded. The distributors earning the highest level of income are the business builders who typically spend significant time on the business selling, recruiting, motivating and training distributors and consumers in their organizations. They generally constitute between 10 percent and 20 percent of the salesforce. There is nothing wrong or unethical about this model, and this is similar to most non-direct selling retail sales organizations.

In addition, the industry has implemented safeguards against financial loss. The biggest protection against financial loss for all participating in our business is the unconditional product money-back guarantees for consumers and, for sales people, our minimum 90 percent inventory buy-back. All DSAs require their member companies to offer buy-back protection to all their distributors. Membership in a DSA is an added protection from abuse for sales people, potential sales people and consumers.

Myth No. 2: Self-consumption by sales persons is a problematic practice.

In fact, there is no binding precedent that establishes that a set amount of sales must be sold to persons outside the sales organization. The seminal FTC/Amway case in 1979 created a “70% rule,” but that rule only applied to the requirement that the distributors certify that they had sold at least 70 percent of their inventory in the prior month before they could be permitted to buy additional inventory. (Note: This case was long before the industry adopted the 90 percent inventory buy-back standard as part of the DSA Code of Ethics, which occurred in the mid-1990s.)

Our industry’s standard of the buy-back removes the possibility of inventory loading if the firm is bound by the buy-back and it is properly administered. A distributor who purchases a product to personally consume it is a “consumer,” and there is nothing inherently wrong with paying compensation on these product sales.

Myth No. 3: Multilevel direct sales firms will fail due to geometric progression and turnover rates.

This simply may seem logical mathematically, but only if you start with the assumption that everyone is purchasing products solely to qualify to earn large amounts of compensation by creating a network and earning compensation on similar downline purchases. It does not occur in the real world because the assumption is faulty. Most persons signing up as salespeople in our industry are either seeking to buy product at a discount or for supplemental income, putting in less than 11 hours per week, and not that much in every week.

The FTC tried to make the geometric progression argument to the Second Circuit Court of Appeals in the Ger-Ro-Mar Inc.  vs. FTC case back in 1975. Ger-Ro-Mar sold bras and lingerie. In the words of the Second Circuit Court of Appeals:

“We find no flaw in the mathematics or the extrapolation [presented by the FTC] and agree that the prospect of a quarter of a billion brassiere and girdle hawkers is not only impossible but frightening to contemplate, particularly since it is in excess of the present population of the Nation, only about half of whom hopefully are prospective lingerie consumers. However, we live in a real world and not fantasyland (emphasis added).”

As stated above, the reality is that a majority join a direct sales firm either after having been a customer or wishing to buy its products at a discounted price. Most sales people and most direct sales firms market low-ticket, consumable products, and my educated guess is that over 50 percent of such sales people are sales people in name only. They buy the firms’ products at a discounted price for personal consumption and do not sell products or recruit other distributors. This percentage of “discount buyers” may approach over 90 percent of the salesforce of some firms and account for over 90 percent of product sales.


The percentage of “discount buyers” may approach over 90 percent of the salesforce of some firms and account for over 90 percent of product sales.


As with any sales organization, the industry experiences a high rate of turnover in its salesforce, but people join and leave a salesforce for a variety of reasons. For example, if a woman was working only one month before Christmas to earn Christmas present money, she would contribute to the high turnover rate even though she might return year after year for decades during the Christmas season. In addition, based on data that I have seen over the years, many sales people sell for more than one direct sales firm during the year, either simultaneously or at different times. I believe that between 10 percent and 20 percent of the sales organization falls into this category, thereby overstating turnover rates.

One final point on the geometric progression canard: I believe that the turnover rate of retail store personnel and franchise employees is very high. Strange that we don’t hear more about that and the fact that some work in retail stores because they are given employee discounts as part of their compensation plan. According to recent data, retail store employee discounts are often extended to the employee’s family and even sometimes to friends.

Actions That Can Harm the Reputation of the Industry

The reputation of our industry can be negatively impacted by a number of factors including the following:

1. Misconduct by a Member of a Salesforce

As sales people in any industry, most participants in direct selling conduct business in an ethical and consumer- and recruit-friendly manner. It is unfortunate but true that the reputation of the industry is negatively impacted if a participant inappropriately markets products or the income opportunity in a misleading way. Given the millions of participants in the direct selling industry, even the acts of a small percentage of participants can create significant reputational harm. Examples of acts that can damage the industry’s reputation include:

      • Exaggerated earnings claims made to prospective recruits;
      • Exaggerated or false product claims;
      • High-pressure recruiting and sales tactics; and
      • Excessive non-corporate training/motivational expenses.

2. Business Practices


It is important that companies properly evaluate business initiatives and compensation incentives before they are implemented to make sure they do not motivate or incentivize problematic behavior.


It is also important that companies properly evaluate business initiatives and compensation incentives before they are implemented to make sure they do not motivate or incentivize problematic behavior.  For example, I believe that compensating the salesforce for sign-up fees—which is one strong indicator of a possible pyramid scheme—as well as sales kits and aids, samples, and training fees and materials can create an incentive that increases the cost of the investment to join the business and the associated potential risk of loss to a new participant.

3. Enforcement of Distributor Policies and Codes of Ethics

If a company fails to diligently monitor the activities of its salesforce and enforce its ethical standards, regulations and policies, it will ultimately contribute to inappropriate actions that damage not only the reputation of the company but also the industry. A large number of participants join our industry each month, which makes it an imperative that companies adequately train the salesforce on marketing claims, legal requirements and the industry’s code of ethics. Companies cannot be passive in this effort.

My Vision

Having touched upon some of the attributes, myths and problematic practices, let me now turn to a view of the future that maximizes our positive attributes and potentially helps quash some of the negative stereotypes and myths that presently afflict us. Here are my high-level recommendations for the industry that I believe will further strengthen the industry and its reputation.

1. Continue to Enhance Consumer Protective Measures

I believe our industry has done a remarkable job developing consumer and distributor protective policies and codes of ethics. The industry standard of a 12-month return policy plays a critical role in protecting distributors from inventory loading risks. Unconditional 100 percent consumer product money-back guarantees should continue to be encouraged.

The DSA Code of Ethics establishes a baseline of important ethical practices for companies to follow. It is important that we continue to evaluate whether there are additional measures that can be adopted to further enhance the protection of consumers and distributors. The following are areas where I think additional protections may be beneficial to consumers, distributors and the industry:


I believe the industry should adopt and implement an industry-wide standard of transparency and disclosure regarding various relevant aspects of compensation earned by its salesforce members.


Compensation Summary: I believe the industry should adopt and implement an industry-wide standard of transparency and disclosure regarding various relevant aspects of compensation earned by its salesforce members. Many of our companies already make such disclosures, which provide prospective recruits with protection from misleading claims that could be made by a participant in the salesforce. No one can criticize us if we provide full disclosure of earnings. Presenting prospective recruits with detailed distributor earnings data during the recruiting process as well as on our websites and in our literature will eliminate most of the risk of the salesforce exaggerating the opportunities we are offering.

It is important that such disclosure be complete and provide sufficient information to furnish a fair overview of the earnings potential. Creating an industry standard will assist other companies and provide a norm they can follow. Once in place, all companies taking this transparency approach would be free from any charges of financially misleading members and prospective members of the salesforce.

Minimizing Risk of Loss: A critical component of the industry’s code of ethics is its 12-month inventory return policy, which was adopted to reduce the risk of loss for new participants. Salespeople utilizing the return policies should be able to do so easily and expeditiously. The industry also needs to remain diligent in monitoring and evaluating trends and developments in business practices and activities of direct sellers to identify additional measures that should be adopted to ensure the industry always has comprehensive measures to protect consumers and distributors.

For example, I recommend that it should be made more clear that the current buy-back policy includes other purchases by new participants in the business such as sales aids, training costs and starter kits. I believe that DSAs should promulgate code provisions to codify some of the best practices in the industry, including restricting payments on certain types of compensation.

2. Educate Our Constituencies

      • Members in the DSAs should take the opportunity to participate in industry research and surveys done by outside third-party firms retained by DSAs so that the industry will have accurate and credible data for use with the press, governmental entities, academia and other constituencies.
      • Member companies can further increase their focus on educating their salesforce and customers regarding compliance policies and codes of ethics. Having a salesforce that is knowledgeable about the code of ethics—and their responsibilities under such code—is important to the long-term success of our industry. Member companies should have the necessary compliance staff and provide the training to accomplish this. I believe the head of this function should report to the CEO or general counsel. Companies should also have a whistle-blower system in place.
      • Member companies should work to further improve their customer relations departments with a philosophy of total consumer and distributor satisfaction and excellent service. This is not just good business, it’s also smart business.
      • There should be ongoing and significant public education efforts portraying the industry as it truly is, through public relations efforts based on solid data and useful information, public service activities, promotion of quality research, excellent use of social media channels and targeted projects to educate key influencers in society (e.g., legislators, regulators, the financial press, the “style” and general news media, academia, think tanks and consumer protection organizations). We have an opportunity to tell “our story,” much more effectively. This will require substantially increased financial commitments by the companies to those efforts.
      • Annually, the WFDSA global “best practices” exchanges will ensure our industry is operating in all our markets on a consistent basis, at the highest ethical levels, and with the most effective ways to protect our corporate interests through taking the high road in building and sustaining our reputation, image and brand. Strengthening DSAs across the globe strengthens our industry. All industry firms should belong to the national DSA in the countries in which they operate.

Conclusion


Now is not the time to relax in our efforts to be a consumer-friendly, consumer-protective industry.


Now is not the time to relax in our efforts to be a consumer-friendly, consumer-protective industry. This is critical to our long-term success and the success of the people who rely on this industry for income opportunities and life-enhancing products. We must constantly evaluate our business trends and practices and be willing to take additional steps to protect our industry and its participants.

Having worked in 50 countries throughout my career, I have seen that the DSAs that are most successful are those with the support of the majority of companies in the country. I believe strong DSAs are critical to success, and I can’t emphasize enough that all industry companies should be members of the association in the countries in which they do business to most effectively do the job necessary on behalf of the industry.

Our business model not only works, but it is also a good thing for free enterprise, society and individual freedom. Its success is built on maintaining existing and establishing new personal relationships based on truth and trust. We and our sales people want happy customers and satisfied recruits. We and our sales people want to be good corporate citizens and contribute to society. In other words, we and our sales people want to do well while doing good.