As pressure mounts, what we do now as an industry matters
By: Jonathan Gilliam, CEO, Momentum Factor
Opponents of the channel appear to have taken a war footing, and what we collectively do now as an industry will determine the future of this great business model we love.
Over the past 18 months, the Federal Trade Commission’s targeting of the direct sales channel has become increasingly aggressive and the channel may now be under the most intense regulatory and public scrutiny it has ever faced. Opponents appear to have taken a war footing, and what we collectively do now as an industry will determine the future of this great business model we love.
Let’s start with regulators. The FTC is seeking legislative authority to pursue monetary relief under Section 13(b) of the FTC Act, which, if passed, would give them the ability to effectively shut down companies without due process. They are resurrecting the FTC Act’s Penalty Offense Authority, which would allow them to assess thousands of dollars in compliance fines per social media post, per day. They are pushing for a reversal to the direct selling exemption from the Business Opportunity Rule, which would, among other things, require up to a 7-day “cooling off” period for enrollments. And they are rescinding certain Rules of Practice used in Section 18 rulemaking, signaling an eagerness to create new rules to cripple direct sellers.
All of this is aimed at diminishing, or even eliminating, the channel.
Unfortunately, there is precious little for us as an industry to hold on to. Our standard methods of influence aren’t working. We can lobby until we’re blue in the face (we should continue), but a dysfunctional partisan Congress isn’t helping. We’ve asked regulators to discuss their concerns and invited them to speak at industry events. They’ve declined.
Fact is, the FTC is irate. The Supreme Court has neutralized their most powerful weapon. They want their pound of flesh. They’re dusting off old settled rules and finding new ways to hurt businesses in the channel. We stand by, almost helpless, it seems.
At the same time, a groundswell of anti-influencers on YouTube and Reddit are making a good living generating memes that mock and deride the model, while Netflix produces entertainment and documentaries portraying our companies and field in unflattering ways.
What We’re Up Against
We need to take a clear-eyed view here. The FTC is listening to naysayers and consumer advocates who want to end the direct selling channel altogether, as outside alliances strengthen and opponents collaborate. The commissioners of both political parties are not giving equal time to an industry that serves 41 million people and generates billions in tax revenue.
Consumer advocates: For a short while, Truth in Advertising (TINA.org) and its director Bonnie Patten had begun to show a willingness to better understand direct selling by attending and speaking at numerous industry events, meeting with industry thought leaders, even laying off for a little bit. But when the FTC began signaling a shift in direction, Patten renewed her anti-direct selling vigor and is now attacking the channel as a whole. That misdirected scolding and muckraking has gained her influence and power in the current climate, and she now has the FTC’s ear.
Major media: Another problem for the industry is the media. An upcoming documentary on the LulaRoe lawsuit and eventual settlement—a four-part docuseries called “LuLaRich” from the producers behind the enormously popular “FYRE Festival”—will be a disaster. Shows like “On Becoming a God in Central Florida,” a dark comedy set in the 1990s trashed direct selling and painted it as a cult. John Oliver made the industry the butt of jokes on his late-night talk show. Just because it’s comedy doesn’t mean it isn’t serious.
Anti-Influencers: Social media perpetuates these mischaracterizations, with a non-trivial number of Gen Z influencers leading a reinvigorated anti-MLM movement that has joined forces with long-standing industry critics—a fairly small band of lawyers, academics, and disgruntled former consultants. This group of unlikely allies gathered recently for a virtual conference, led by Dr. William Keep, a well-known MLM opponent. An FTC Commissioner gave the keynote, sharing the dais with young social media influencers who relished in their misperceptions of what the industry represents. Direct sellers were not welcome.
All the while, companies still carry the burden of needing to police the daily online activities of millions of people in the field.
We’re Not Your Mother’s MLM
What really begs the question in all of this is that few of today’s companies are anything like those portrayed in the ’90s-centered “On Becoming a God” series, nor are they as depicted by the FTC. For the most part, gone are the cultish leaders, indecipherable comp plans and profit-center sales tools. The pyramid view is outdated, if it was ever really that accurate in the first place.
Frustratingly, the FTC and consumer advocates are still stuck on direct selling’s structure dating back to the 1980s and ’90s. But those structures were regulated or naturally culled out of the industry long ago. When was the last time you saw a new company using a complex binary or selling physical tools to the field as a profit center? In the age of social media, those companies can’t hide.
In the past several years at our firm, we’ve onboarded dozens of new entrants into the channel. Nearly all of them have innovative, social media-friendly products, they are mobile- and e-commerce-enabled from the start, and their comp plans are simple and reward product sales first. In fact, many of them categorize all newcomers as customers, not consultants, thereby setting segmentation up for success. They’re more like gigs. Today’s direct sellers offer legitimate products and profit mostly from product sales to customers. Think the FTC is going to spend resources chasing these upstart companies who are doing it right? Not likely.
More than anything, we are up against the public’s outdated perceptions of an industry that, for whatever reason, they don’t see as evolved for the better. We have to show them.
What We Have in Our Favor
The good news is the FTC has limited resources and, at the moment, they are primarily focused on antitrust concerns elsewhere. We don’t know how they will move forward with the channel. Will it be the low-hanging fruit of obvious fraudulent claims, or attacking legacy companies to draw publicity and make examples? Or perhaps they will actually go after the most egregious bad actors who rely on giant buy-ins, recruitment-focused business plans or shady cryptocurrency transactions. Those are the companies really hurting people.
The Field Is Our North Star
While this renewed negative attention can be intimidating, direct sellers have fought many battles before and overcome just as many obstacles. What we need to do now is fight. Engage. Resist. Given the current climate, there’s no time for passivity or waiting for others to take the lead—not when families and livelihoods are at stake. Companies may collide and compete, but for now we must focus on our common interests.
Let’s make the millions of people whose livelihoods depend on our stewardship the heart and soul of our best efforts. They are who we all work for and the reason this industry exists in the first place. So what can we do?
Mobilize the army. The people we are responsible to protect—the field—are also our most valuable allies. Uniquely, our channel is made up of millions of everyday people, people who depend on the income generated from this business. Voters. I propose we step up and ferociously support an organized, high-profile mobilization of our vast armies of happy customers and productive field members to serve as industry champions. Specifically, our field can be guided to participate in the FTC’s comments period of the rule-making process for the review of the Business Opportunity Rule, as well as all subsequent rulemaking attempts. This was led brilliantly years ago by the DSA, to great success.
Differentiate between customers and builders. Many companies still cling to enrollment numbers like a vine in quicksand. Yes, aggressive segmentation may be difficult for legacy companies whose business plan is reliant on distributors buying the company’s products for their own use. But segmentation is important to regulators as it demonstrates what they see as true demand for a product versus what is purchased for commissions, qualifications or other non-retail reasons. From a practical standpoint, treating customers as potential enrollees and targeting them with recruitment messaging is ham-handed, mostly ineffective, and not respectful of their personal preferences. It creates frustration at the lower ranks and increases churn. If these individuals can be clearly tagged as preferred customers who are just in it for the discount, it completely changes the ratio of customers versus enrollees, and we will be able to show a distinguishable line.
Quit squabbling. Stop worrying about other companies and competition. It drains energy that could be channeled to common foes. Focus not just on your company’s image but on the overall optics of the channel, and take it upon yourself and your company’s marketing teams to educate the public on the benefits of direct selling along the way. The force-multiplier of hundreds of companies spreading the right message of what this industry can do would accomplish a lot more than hiding from the “MLM” label. (Let’s just say it: If your company pays out in multiple levels of commission, your company is an MLM—time to own it! Not necessarily the label, but the model.)
This model works and enables people from all walks of life to grow personally, socially and financially. Shout it from the rooftops!
Weed your own garden. Monitor and enforce your policies with everyone in your organization, evenly and fairly. In our compliance practice, we sometimes encounter hesitation from clients to discipline field leaders from higher ranks in the field. This is a major irritant for regulators: In their eyes, inconsistent treatment of the field is a primary indication of a pyramid scheme. So get this right. Make examples of people who don’t follow policies. Remove bad actors and target improper claims from distributors through technology, education, and messaging. Deemphasize making big money.
How We Unite the Industry
We know the FTC is coming for us. So, first, when the comments period opens for the update to the Business Opportunity Rule, we need to be ready to mobilize and comment en masse.
Longer-term, we need to tell our story in a way that will drown out the media’s outdated narratives. We are doing positive things—providing work opportunities, personal development, freedom, independence, and really amazing philanthropy all over the world.
We need to unite around the only real legislative weapon we have, the Direct Selling Association. As direct selling’s primary public face, the DSA gets a lot of grief from the channel for not doing enough, doing too much, charging too much, etc. But they are working every day to protect our businesses. Their institutional knowledge is invaluable, their relationships with legislators are crucial to getting a seat at the table, and their accomplishments have enabled your company to prosper through decades of public and regulatory conflicts.
For example, DSA was the driving force for winning an exception to the Business Opportunity Rule twelve years ago—a rule that would have directly impacted your company. It’s the same rule the FTC is reviewing now. Support the DSA. Support Joe Mariano and his team. If you’re not happy with their position or action on a particular issue, join a committee, write a letter, make your opinion known. They need your support and feedback.
Likewise, Peter Marinello and the Direct Selling Self-Regulatory Council (DSSRC) are doing the difficult, but crucial, work of holding companies accountable by monitoring, enforcing, and adjudicating misleading claims made by the field. Their work runs interference for the FTC by identifying and admonishing those companies who just won’t play by the rules, thereby protecting those who do. For every Digital Altitude they refer to the FTC, a compliant, by-the-book company is protected.
The DSSRC is the tip of the spear. They are facilitating the downfall of deceptive companies and bad actors. That’s what everyone wants! We don’t need the FTC shutting down legitimate companies. We are a self-regulated industry, and we have an independent, transparent organization working hard to educate companies, scout for claims, and regulate the channel. We need to lean on this fact—tax dollars should not be used to aggressively pursue a legitimate industry that is successfully regulating itself. Regulators in other industries work hand in hand with self-regulating agencies, direct sales should be no different.
Another catalyst for change is that, for the first time, field leaders find themselves at risk. Because of AdvoCare, they now know they can end up in court or even have their homes taken from them. That was a big wake-up call. They thought their company could protect them, and it couldn’t.
The ongoing FTC-Neora litigation should serve as another wake-up call. A full 70 percent of Neora sales go to customers who have never once participated in the business plan. The company has a $20 buy-in for enrollees. 20 bucks! This is not a pyramid by any stretch of the imagination, yet the government is spending millions trying to end it.
Finally, we must continue to vigilantly monitor and control what distributors are doing and saying. To accomplish this, technology and education are essential. Companies and distributors must refocus their messaging to center on their product and opportunities to take the emphasis off of money-making. That starts at the top.
A Renewed Focus Will See Us Through
For years to come, direct sellers will have an advantage. Our secret weapon? Passion and laser focus on the needs and success of the millions of people whose lives we transform every single day. We also enjoy solid representation on Capitol Hill and friendly congressional reps, many of whom have personal histories or connections with the channel.
We are blessed with brilliant business and legal minds who work with the best in C-Suite leadership. And we have access to state-of-the art technology to help this fast-changing business evolve and adapt to any and all challenges. With all this, we can prevail if we can stay united as a channel, step up our defense and advocacy of the channel, and maintain an unflinching focus on the big picture.
Jonathan, this is a superb article! It does a fantastic job of addressing all of the individual elements that are coming together to create The Perfect Storm. Unfortunately, not all of the issues you have raised can be simultaneously addressed by the industry. Accordingly, we need to focus on what we KNOW are the biggest areas of exposure (and targets for the FTC and TINA).
As an industry, we are fortunate that the FTC has already broadcast its top two MLM targets for use with the Penalty Offense Authority: (1) income claims; and (2) deceptive/unsubstantiated product claims.
Each and every direct selling company needs to have a thermonuclear proctoscopic assessment of both types of claims that exist within all corporate resources. Having worked with over 1,000 direct selling companies over the last 30 years, I can tell you that the vast majority of companies need to make substantial changes. Unfortunately, most of them naively believe that “it’s those other companies that need to clean up their acts”.
In truth and in fact, the industry has for decades been irresponsible and played “fast and loose” with income claims and product claims. In addition, it has consistently turned a deaf ear and a blind eye to the increasingly shrill messages of the FTC and federal courts. Consequently, the direct selling industry is getting ready to reap what it has long sown.
The great news is that there is still time to make the needed changes.