Last week’s article on The World of Direct Selling discussed “transparency“ with a close focus on direct sellers’ earnings. That focus showed a significant fact: A large group join direct selling companies not because of the earning opportunities provided.
Following up last week’s topic, we will now look into the issue of “personal consumption”.
“What is your opinion on compensating a direct seller and his/her upline for that direct seller’s purchases made for personal consumption?” was the question we asked some of the experts.
Let’s see what they have to say on this…
Jeffrey Babener , Legal Counsel at Babener and Associates
“In the last 10 years, distributor personal use, as a legitimate end destination (sales to the ultimate user) for product/service has been increasingly recognized by courts, legislatures and regulators: In 2013 and 2014, two EU tribunals; now counting, more than a dozen US states have amended MLM statutes; in 2004, an FTC advisory opinion applauded efficiencies of MLM “buying clubs”; even the most recent U.S. 9th Circuit Court of Appeals decision, BurnLounge (June 2, 2014) recognized personal use purchases as ultimate user purchases, and, as legitimate, so long as they were not merely incidental to the business opportunity. The emerging legal standard, legitimate vs. pyramid, is not the existence of personal use, but rather, whether the predominant motivation for distributor expenditure is to qualify for reward in the MLM program as opposed to purchase for personal use or resale. Or as the Burnlounge Appeals court noted, is the focus on promoting the program rather than sale of product to the ultimate user?”
Jack Crowley , Founder & CEO of The Crowley Collaborative Group
“To be successful in representing a product/service in the direct selling arena, the distributor should know and understand his product/service to be in the best position to explain its benefits to prospective customers and potential new distributors in simple, easy to understand terms. The most effective way to accomplish this is to be a user of the product/service themselves…”a product of the product.” Many distributors were customers first and were drawn to the industry based on product satisfaction. Whether for personal consumption or for retail, a sale is a sale and with adherence to the 70% rule (70% retail sales and 30% personal consumption) avoiding a “buying club” environment, there should be no issue with a distributor enjoying a commission or discount on personally consumed products or with their upline receiving overrides on a sale within its organization.”
Jan Gilmore, Principal at Jan Gilmore & Associates
“Personally I find the idea of letting upline’s make an override on their downlines’ personal purchases, not a smart business decision, for a company. Here is my reasoning: 1. A new recruit could be influenced to purchase products because it in the best financial interests of their recruiter/upline. 2. The concept of an override is that it is paid to the upline because they have taught their downline how to to do business and there by increase the chances that more business will happen… not just purchased for personal consumption. 3. It can lead to people buying their position in a compensation plan. If personal consumption can be counted as qualifying business, then a company is paying an override that is really not earned. 4. It leads to laziness… If I am in a position to make overrides, I might decide to cheat the system and just buy my way in, with personal purchases. 5. For contest periods, it allows people to again cheat the system and buy their way in, if they want.”
Alan Luce, Founder & CEO of Luce, Murphy, Fong & Associates
“Fundamentally there is nothing wrong with paying upline sponsors for a direct seller’s purchases made for personal consumption. In my mind, crediting all the downline volume regardless of whether it was sold at retail, sold at a discount or personally consumed is is not the problem when it comes to abusive practices. The problems arise when unscrupulous sellers misrepresent the income earning opportunity and the effort involved in building a business to produce significant income. Buyers’ discount clubs, referral fee programs such as those commonly used by satellite dish tv program providers and others are a common incentive in an open market place. People who love a product and wish to buy it often and use it regularly should not be prevented from buying it at a discount from their local direct seller and direct selling company and the independent upline seller should not be denied the ability to receive bonus credit for that buyer’s profitable volume he/she has created for the company. Regulatory focus should be on the illegal practices of the abusers and not on the sound marketing techniques they abuse.”
“Good question! Internal/own consumption should definitely be encouraged – how can you recommend a product/service if you are not a user? Likewise, why should the upline not benefit from purchases made in the downline, especially when the upline may have no way of knowing who is the consumer? If there are no sales outside the system, the set-up is not deceptive. If there are a few sales outside, then maybe the outside buyers are deceived as to the “true” value, but they pay an agreed price for an item they want. Majority internal consumption does make it more difficult to argue that para 14 of the schedule to the Unfair Commercial Practices Directive does not apply, though.”
Ian Morgan, Partner at Meridian/MMi
“All independent distributors of products and services are business people running their own companies. They purchase product from a supplier and are entitled to a discount usually based on volume of goods and services sold, including goods purchased for inventory. Discounts vary from company to company. I would compare them with a small business running a retail shop and using the products on the shelf for personal consumption. I see no difference in the compensation of a direct sales companies independent businesses to that of a manufacturer selling through a retail distribution chain, of importers, wholesalers, sales agents, and ultimately retailers.”
Charlie Orr, CEO of Immunotec
“Sustainable direct selling companies focus on four core elements: Products and services, income earning opportunities, culture and the people who energize their enterprises. While many join a company to enjoy products and services as a consumer, others join to both use and share products as representatives of the company. Representatives also teach and help others do what they do. Thus, compensation and rewards earned by eligible consumers and representatives reinforce their efforts to support the company’s mission and culture.”
Karen Phelps, Speaker, Author, Coach
“I’ve been on both ends of the spectrum and I’m all for compensating people for personal consumption. The ultimate goal of a direct selling company is to have all of their consultants using the product they sell. Most provide a discount on the products for personal use and I believe those sales should be used for all purposes including rank advancement. Upline leaders should definitely receive compensation for personal consumption of their downline, not to do so is ludicrous, volume is volume it shouldn’t matter where it comes from.”
Paul Southworth, Director General at UK Direct Selling Association
“The whole issue of personal consumption has always provoked major discussion and difference of opinions. The reality is that it is virtually an impossibility for companies to actually know which products purchased are for own use versus for onward sales. It would always be a pure estimate and the volume and percentage would vary with each order placed. With this in mind therefore, a company’s systems for up and down line compensation payments can only operate on the total value and therefore payments have to be made accordingly. Change to this can only come if a company is able to accurately segment their sales force between buyers and sellers.“