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Companies respond to shifting consumer priorities and challenging macroeconomic trends

By:  Stephanie Ramirez 

The global direct selling market is predicted to expand at a compound annual growth rate (CAGR) of 2.3% through 2026, according to recently released data from insights firm Research And Markets. 

However, new business models have emerged as a result of regulatory pressures and shifting customer demands, leading many direct sellers to explore other direct-to-consumer channels to survive in the market. 

Inflationary trends, ongoing pandemic effects, the war in Ukraine, and a slew of warning letters and actions doled out by the Federal Trade Commission (FTC) aimed at direct selling companies over the last few years—all are commonly noted by company executives as leading factors in their decisions to downsize or restructure. 

Two new reports provide guidance for companies using digital marketing and independent contractors

By:  David Bland

“Overall, when designing user interfaces, businesses should look not just at the effect their design choices have on sales, click-through rates, or other profit based metrics, but also on how those choices affect consumers’ understanding of the material terms of the transaction.” — FTC Staff Report

The Federal Trade Commission (FTC) has recently renewed its focus on two areas of business practice that Commissioners believe are in need of heightened regulatory attention: the use of digital “dark patterns” in the online marketplace and companies taking unfair advantage of gig workers. On Sept. 15, the FTC released two reports: the first, a staff report summarizing an April 2021 workshop on digital “dark patterns,” and the second, a policy statement on gig work enforcement.

Coming on the heels of the release of the FTC’s Strategic Plan for Fiscal Years 2022-2026 that included the strategic priorities of protecting the public from unfair or deceptive acts as well as anticompetitive practices in the marketplace, the September pronouncements provide a clear view into the Commission’s push for increased scrutiny of online sales and marketing practices as well as those companies that utilize independent contractors—putting direct sellers, among other marketers, in the crosshairs once again.

Dark Patterns Report Released 

The FTC’s September 2022 staff report, titled, Bringing Dark Patterns to Light, is based on an April 2021 virtual workshop hosted by the Commission that brought together researchers, consumer advocates, industry professionals, and legal experts tasked with identifying the different types of dark patterns found in digital marketing and providing recommendations for companies to avoid this type of deceptive practice.

According to the report, the term “dark patterns” was coined in 2010 by a user design specialist and describes “design practices that trick or manipulate users into making choices they would not otherwise have made and that may cause harm.”

The workshop summary details four types of common digital dark patterns.

1. Design Elements That Induce False Beliefs

Companies that use their online interfaces to create false impressions, whether through design elements of the website, or through deceptive language used to market the products, have been and will continue to be at risk of enforcement action. The report highlights several examples of this type of dark pattern.

In 2015, the U.S. retailer Lord & Taylor settled charges brought by the FTC that it allegedly engaged in deceptive practices by running a paid article in Nylon, an online fashion publication, without disclosing that it was an advertisement. By creating a seemingly objective fashion article without revealing that it was a paid  promotion for a new clothing collection, the retailer became the target of Commission enforcement action. Furthermore, Lord & Taylor was accused of further deception when it failed to reveal that it had financially and materially compensated 50 online fashion influencers to model a dress from this collection on Instagram.

Another important guideline highlighted in this section of the report is the importance of the overall net impression conveyed by the design elements of a website. The Commission report states that consumers who visit websites containing rankings, consumer reviews or endorsed third parties have a reasonable expectation that these listings are objective and unbiased.

When companies are able to “pay-to-play” for improved rankings or positive reviews, the recommendations become manipulative in the eyes of the Commission, causing unfair competition and harm not only to consumers but to other companies not willing to pay for this advantage.

In 2020, the Commission took action against the loan comparison website LendEDU.com for this type of “net-impression” deception. LendEDU compiled numerical rankings of financial services companies that the FTC alleged were not “objective, “honest”, “accurate” and “unbiased”, as was represented to LendEDU website viewers. In fact, the companies’ positions on this rankings list were determined by how much they paid LendEDU.

The report offers guidance to companies to avoid these types of “False Belief” dark patterns.

• Ensure that online interfaces do not create false beliefs or otherwise deceive consumers.
• Companies are responsible for the net impressions created by the design elements of their websites, even if certain words in isolation are verifiably true.
• Do not create advertisements that strongly resemble editorial content such as news articles. The net impression created by these postings will outweigh any subsequent disclaimers in the eyes of regulators.
• Companies should consider how the design choices of a website affect the consumers’ understanding of the terms of the transaction.

2. Design Elements That Hide or Delay Disclosure of Material Information

The workshop participants identified a second type of dark pattern that occurs when companies obscure important material information from consumers. This deceptive practice becomes particularly damaging when used to hide fees and additional charges. Notifications of these fees are sometimes hidden in links or buttons that the consumer would be less likely to click on or are buried on the website, requiring additional scrolling to view.

One variation of this dark pattern is known as “drip pricing,” whereby businesses advertise only a part of the total price upfront, while revealing the additional costs later in the buying process or transaction. The Commission believes that drip pricing is also anti-competitive, as it is unfair to other businesses when consumers compare pricing across different sellers.

• To avoid regulator scrutiny for deceptively hidden disclosures, the Commission recommends that companies consider the following:
• Include mandatory fees in the upfront, advertised price.
• Do not disguise non-mandatory fees as mandatory.
• When pricing credit products, do not treat customers differently based on race, national origin, or other protected categories.

3.   Design Elements That Lead to Unauthorized Charges

A third form of digital dark pattern identified by the Commission involves deceiving consumers into purchasing goods or services that they did not intend to transact. This form of dark pattern was at the center of FTC action taken against Amazon, Apple, and Google for marketing “free” children’s gaming apps that contained deceptive in-app purchase features and buried fine-print descriptions of purchase features. In 2017, Amazon paid out $70 million in refunds related to unauthorized in-app charges in children’s games.

The workshop panel also identified free trial periods as a potential dark pattern leading to unauthorized charges. Frequently, companies will hide from customers the activation of recurring subscription charges after the free trial period ends. The prevalence of this type of “negative options” feature led Congress to pass the Restore Online Shoppers’ Confidence Act (ROSCA) in 2010. This law prohibits companies from using the negative options feature to charge for goods and services unless (1) all material terms of the transaction are clearly and conspicuously disclosed; (2) the consumer’s express informed consent for the charges is obtained; and (3) simple mechanisms are provided to stop recurring charges.

The Commission advises that companies wishing to steer clear of regulatory scrutiny from unauthorized charges should consider the following:

• Consent for purchases should be obtained through affirmative, unambiguous acts by the consumer.
• Do not hide key terms of a purchase in the general terms and conditions or behind hyperlinks and drop-down menus.
• Obtain the express informed consent of the account holder to any charges. 
• Make cancellation procedures as easy to use as the buy or sign-up procedures.

4. Design Elements That Obscure or Subvert Privacy Choices

The final type of dark pattern identified at the Commission’s workshop was digital design elements that obscured or subverted the privacy choices of consumers. The panelists noted that this type of dark pattern was often related to options for handling the users’ data.

This type of deception was found in many design elements and included interfaces that failed to provide consumers with the option to definitively decline data collection or use, confusing toggle settings leading to unintended privacy choices, purposeful hiding of privacy choices, and highlighting only choices that enabled data collection and using default settings that maximize data collection and sharing.

“Dark patterns also raise special enforcement challenges,” the report states. “Because dark patterns are covert or otherwise deceptive, many consumers don’t realize they are being manipulated or misled. 24 Workshop participants theorized that even when consumers do realize they have been deceived, many don’t report their experiences, some out of an unnecessary feeling of embarrassment at being tricked.”

The Commission’s report recommends that businesses adhere to the following guidelines to avoid legal action for deceptive privacy practices:

• Limit liability from data exposure by minimizing data collection.
• Collect only the data necessary to provide the service requested.
• Avoid default settings that lead to unexpected data collection.
• Make privacy settings easy to access and understand.

Commissioners United in Targeting Dark Patterns

While the Commissioners have been divided along party lines in many of their decisions since the Democrats gained control of the executive branch in 2020, their vote to authorize the release of the dark patterns report was unanimous.

Samuel Levine, Director of the FTC’s Bureau of Consumer Protection, comments on the release of the report: “Our report shows how more and more companies are using digital dark patterns to trick people into buying products and giving away their personal information. This report—and our cases—send a clear message that these traps will not be tolerated.”

Agency Releases Policy Statement on Gig Work

In a second September vote, the FTC approved the adoption of a new policy statement on regulatory enforcement related to gig work. In announcing a crackdown on companies that take advantage of gig workers, the Commission outlined its renewed focus on protecting gig workers and independent contractors from unfair, dishonest, and anti-competitive practices.

Misclassification Concerns 

Three areas of concern within the current labor market are cited in the statement—the first being “Control Without Responsibility.” The Commission expresses concern that some companies take advantage of independent contractors by limiting their independence through policies designed to “prescribe and control” the contractors’ tasks in ways that are at odds with their independent status.

The FTC considers problems such as this to be the result of misclassification, which it argues deprives workers of rights such as the right to organize, have access to overtime pay, and health and safety protections.

The report also warns against the use of algorithms that “dictate core aspects of workers’ relationship with a given company’s platform.” The Commission highlights its concerns that the decentralized nature of the gig environment, the lack of options to organize, and the high turnover rate found in gig work all contribute to the workers’ diminished bargaining power.

Concentrated Markets

The report draws attention to markets with high concentrations of businesses running online platforms, leading to anticompetitive business practices. The Commission believes that companies may take advantage of “network effects” that serve to establish a company’s market dominance and reduce the ability of other companies to enter the market. 

The report states that, with increased market power, companies will be “more likely to have and exert market power over gig workers or engage in anticompetitive unilateral or coordinated conduct.” This weakened competition among gig companies can potentially result in the suppression of wages, a reduction in job quality, and the imposition of “onerous terms” on gig workers.

Regulator Eyes on Income Claims and Contracts

The report emphasizes that the Commission has recently put companies using gig workers on notice with the recently initiated rulemaking proceedings to address deceptive claims. It has also issued Notices of Penalty Offenses related to earnings claims and testimonials that violate Section 5 of the FTC Act.

Of particular interest to direct sellers, the FTC’s report reminds companies that deceptive claims or nondisclosures about startup costs, training fees or other expenses would also be a violation of Section 5.

The report draws attention to contract terms that may be unfair or deceptive for gig workers. The Commission believes that companies using nonnegotiable contracts with “lopsided provisions,” such as take-it-or-leave-it terms, as well as non-compete provisions, may place them in violation of Section 5.

Kevin Thompson, founding partner at Thompson Burton PLLC, emphasizes the importance of transparency when companies discuss requirements and income with prospective representatives.

“The FTC’s emphasis on protections for gig workers boils down to one thing: transparency on the amount of work required,” Thompson says. “These ‘gig’ companies, and candidly network marketing companies, are never clear on the amount of work required to actually generate the income. 

The upside is always presented, but there’s usually a lot of unpaid work required to do the job. With network marketing, an obvious example would be a lack of disclosure on the amount of travel required. While we think it’s intuitive that a business owner would factor in travel, these sorts of costs are seldom discussed with prospective participants.  It’s a problem and the FTC has clearly grown tired of it,” states Thompson.

Commission Divided on Gig Worker Protection

The Commission’s vote to adopt this policy statement broke down party lines, with Republicans Noah Joshua Phillips and Christine Wilson voting against adoption.

In oral remarks at the Sept.15 open Commission meeting, Commissioner Christine Wilson expressed her concerns that the FTC was veering from its primary objective to protect consumers.

“Issuing yet another policy statement may generate news stories, but it does not provide relief for consumers…We should not abandon consumers in pursuit of prevailing but mercurial political winds. We should preserve the consumer welfare standard as the touchstone of our mission,” Wilson stated.

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Best practices for your councils, committees and focus groups

By:  Jenna Lang Warford

“These are ways to tap into the superpower of collaboration.”

– Garrett McGrath, President, ANMP

How does a company motivate its field to shift from ennui to excitement? In the direct sales channel, this can depend on insight from a sales field without W2 status. When launching promotions, rolling out new products, or even nailing the wow factor with incentive trips, the difference between the field yawning and jumping into action can be a matter of simple tweaks. The key is reaching out to those who already know what gets the most results. 

While getting this crucial input seems straight forward, there are a few best practices that direct selling companies can utilize to make this process as smooth and effective as possible. 

Garrett McGrath, who has served in multiple C-level roles in the channel and currently serves as president of the Association of Network Marketing Professionals, says, “Leadership councils are an excellent way to tap into the super power of collaboration.”

Implementing the right training and coaching to distributors whether it’s someone newer or a seasoned distributor is challenging but key. Newer distributors make up most violations we see, it makes training and educating their generation early on important. On the other end of the spectrum, we have our seasoned distributors who have been working their direct selling business for years and years and are pretty set in their ways of how they talk about and work their businesses and it’s difficult and proves more challenging to train their generation because they are unlearning and learning at the same time. 

LaRane Jensen, Director of Compliance, LifeVantage

 

Platforms and conduct continue to be a top priority and challenge for most companies, including New U Life. Technology has reshaped the industry and how independent business owners navigate this unique sales channel. Information is quickly shared with friends, colleagues and even friends of friends. But when content is shared that isn’t compliant, it quickly spreads like wildfire and takes a plethora of resources to put it out. Education and training are vital to our success and longevity and absolutely worth the attention it needs and deserves.

Rodney Davis, Director of Compliance, New U Life

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Well-written agreements will benefit both the company and the consultant

By:  Brent Kugler, Guest Contributor

Because many companies favor keeping transfer upon death policies in their consultant agreements, it is critical that these policies are drafted in a manner to not conflict with other key provisions in the agreement.

As important as it is to ensure that the transfer upon death provision does not conflict with or negate language in the consultant agreement, it is just as important for companies to avoid mistakes when facilitating the transfer of the business to the heir or beneficiary.

Many—some would even say a majority—of direct selling companies have provisions in their consultant agreements that allow a sales consultant to pass their business to an heir or

beneficiary upon their death. It’s a great marketing tool. How many jobs, professions, or business opportunities allow a worker to pass their hard work and success on to their children or heirs? 

Top field leaders share ‘no agenda’ insights for corporate executives

By:  Jenna Lang Warford

“Some companies have great products, but they’re not customer focused. Some companies have a great rewards plan, but not great products. It’s like baking a cake; leave out one ingredient, like integrity, then the cake’s going to fall apart.” – Maranda H., Representative, Bella Grace Global 

According to the Direct Selling Association, direct selling’s U.S. sales in 2021 beat the record high of 2020 by 6.4% growth. American consumers are more open than ever to purchasing from direct sellers, with 67% liking the personalized service provided. Combine that with the fact that 79% of people looking for entrepreneurial opportunities are favorable toward direct sales (in comparison, “gig work” was only 2 points higher), and it’s possible that the channel could see continued growth. 

Inflation, COVID-19 and Ukraine conflict continue to pose challenges

By:  Dave Rauf

Herbalife

Herbalife outperformed lowered expectations during the second quarter, and the company’s CEO says economic headwinds that hurt sales through the first six months of 2022 are stabilizing.

The Los Angeles-based direct selling giant reaffirmed projections to return to growth in the fourth quarter, following two consecutive quarters of sales declines after a record-breaking 2021.