Regulatory Oversight: Three Ways to Keep Your Direct Selling Business Above Scrutiny
In recent weeks, one of the largest firms in the direct selling business made some sweeping changes to their business model allegedly driven by FTC regulatory oversight.
Based on the FTC’s recent investigation, the firm announced its transition from MLM to a single-level distributor model.
We’re not going to take a stand on the particulars of the case, the firm, or on the FTC’s policies. What we find far more productive is to use this event as a chance for the whole direct selling industry to do a reality check.
Here are three ways direct selling companies can avoid raising red flags.
1. Don’t sell anything that lacks tangible value.
There’s a line between a legitimate direct selling business and a pyramid scheme that should never be crossed. In a pyramid scheme, there’s no actual transfer of value between a current sales rep and the person they’re trying to recruit.
Want “in” on the scheme, er, business opportunity? Then you’ll pay for the privilege—but you won’t get an actual product to show for it. You will, however, eventually make money if enough other people also invest. (That’s what the pyramid folks tell you, anyway.)
A legitimate direct selling business charges a nominal fee to start a business and ensures that their start up kit provides strong product value for the expense incurred. Look for ways to decrease obligations on the distributor and increase product driven commission opportunities.
2. Never pay a recruitment based sales rep commission just for signing people up.
All commissions should be associated directly with products. We believe that the market will continue to experience compensation plan compression as firms strive to simplify their environment and become more efficient in their sales practice. This effectiveness focus should be driven by product sales velocity rather than recruitment expansion.
One thing you can do to minimize scrutiny is to ensure that commission plans, incentive contests, and bonus models are primarily product driven with recruitment as a sweetening element rather than a principle focus.
Want to accelerate recruitment during a given time period? Consider offering your sales reps extra commissions (or similar bonus structures) on the sales their new recruits make over the next 90 days. You’ll keep the focus on selling products but also reward good recruiters.
Some MLM firms have tried to get around this principle by requiring new distributors to purchase boxes and boxes of inventory—far more than most sales reps might ever expect to sell. This practice is sure to raise red flags for regulators, too. Be sure that any “starter kit” you require your distributors to purchase is relatively low-cost and contains only as much product as they would need to offer as samples to potential customers. Never pay a commission on a starter kit.
3. Make sure you have more sales reps making sales than sitting idle.
There’s no hard-and-fast rule about what percentage of your distributors should actually be making sales in any given year. But if you have 30,000 sales reps and only 2,000 of them actually made a sale this last year, that obviously indicates something is wrong. The logical next question is, “Well, if your people aren’t making money from sales, what are they making money from?”
Longtime MLM sales reps enjoy being able to earn commissions on people deep in their downlines. You can’t blame them—they put in the hard work to build their businesses, and now they’re sitting pretty. Regulatory oversight increases when groups of distributors are collecting paychecks without making any actual sales.
To reduce regulatory oversight, consider reducing how many levels in a downline can generate commissions for a sales rep. Implement a reasonable monthly sales quota that is required for any distributor to earn commissions from their downlines. As stated by compensation plan expert Dan Jensen, “Compensation plans should always be based upon a ‘do this, get that’ structure.” This mindset ensures a product driven focus which an expanded network helps support rather than a network driven focus that holds product sales as secondary.
Even with Regulatory Oversight, We’ve Got Your Back
Direct Selling has always been a vibrant and constantly changing place of sales and marketing innovation. Heightened regulatory oversight doesn’t have to mean that direct selling as we know it is at risk, but it does mean we should take a closer look at what we’re doing and consider how we can tighten up some of our policies.
Whether you decide to make changes in your recruiting practices and compensation plans or keep things much as they are right now, just remember that Thatcher’s Prowess platform can change as required to meet your needs. In fact, you can run deep-level commission, single-level commission, and ecommerce business structures within a single instance of our software. You won’t find a more flexible, scalable or feature rich system anywhere. Learn more about Prowess.