MLMAttorney’s most requested video of the month: What Is the U.S. and International Trend in Recognizing the Validity of Personal Use by Distributors in
Pyramid Cases?

In short, is it legal to motivate distributors to buy products in order for them to qualify for the compensation plan rewards as opposed to purchasing product/services for their own personal use or for resale? This question greatly impacts direct selling companies and their owners/executives. Read the recent Burnlounge decision on our website.

In the last 10 years, distributor personal use, as a legitimate end-destination for product/service has been increasingly recognized by courts, legislatures and regulators. In 2013 and 2014, two European Union tribunals; now counting more than a dozen U.S. states have amended MLM statutes. In 2004, an FTC advisory opinion applauded efficiencies of

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Your cost of goods is calculated as your acquisition or manufacturing cost. The more frequent question we come across relates to pricing. Most MLM experts agree that you must have adequate margins to pay commissions and to make a profit. Different products and services carry different profit margins. In addition, smaller margins may be satisfactory with high-priced products because there is still room for profit. Most MLM companies are likely to pay total commissions equal to between 30 and 45 percent of the price sold to distributors for resale, or prices for which consumers buy directly from the company. A typical company will try to achieve a minimum 5-7 times markup to allow for commissions, overhead and profit. Typical markup for resale by distributors is 25% of their purchase price. A good place to visit this issue is at the MLM Startup Conference, offered by www.mlmlegal.com, where experts discuss margins, pricing, profit, proformas, and a whole lot more.

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The term “pay to play” is actually a negative term in the direct selling and MLM field. It is used to reference a program which encourages independent distributors to make purchases to qualify for commissions and rank advancement. Obviously, personal use is not unusual in the direct selling industry. However, programs in which distributors are driven to purchase product or service, more by the desire to qualify than by a genuine desire to use the product for personal use, are sometimes referred to as dominated by “pay to play” and this may suggest that the product or service does not stand on its own in the marketplace.

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The issue of levels has not been the focus of the Federal Trade Commission (FTC) or state attorneys general in the enforcement of pyramid laws.

The issue of levels has not been the focus of the Federal Trade Commission (FTC) or state attorneys general in the enforcement of pyramid laws.

The issue of depth of levels seemed to be a major focus prior to the internet and other non-postal (mail) means of communication. In the late 1980’s the United States Postal Service (USPS) examined numbers of levels to make a determination of whether or not, in its opinion, the depth of levels created a “lottery” element under U.S. Postal lottery laws that forbid payment based on chance. Various cases and consents sorted out a safe harbor (at least from the U.S. Postal Office standpoint) for at least four levels (not necessarily agreed to by the direct selling industry). Separately, the Postal Service looked for evidence of “supervisory requirements.” Most companies adopted specific supervisory requirements of sponsors to demonstrate some managerial activity by distributors. For the past 25 years, little recruitment activity is conducted by U.S. mail and it has been a long time since the U.S. Postal Service has expressed a serious interest in this subject. The issue of levels has not been the focus of the Federal Trade Commission (FTC) or state attorneys general in the enforcement of pyramid laws. Instead, the focus for the last two decades has been on the whether or not product/service

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In everyday life, roughly nine out of ten successful people had a mentor.

In everyday life, roughly nine out of ten successful people had a mentor.

Multilevel marketing companies are built on the mentorship model where top-tier salespeople recruit salespeople below them to sell products and services. The top-tiered salesperson makes a commission on the products and services that they sell, as well as on the sales of those in their downline. This model encourages recruiting of new salespeople, while also allowing new recruits to have a mentor who will answer questions and provide examples of success.

In everyday life, roughly nine out of ten successful people had a mentor. Whereas, those who don’t have strong mentors in network marketing are those whom are more likely to fail or quit. Therefore, when it comes to choosing a sponsor/mentor, the best thing to do is to look for one that is seasoned, successful and willing to provide the critical network marketing mentorship that you need to be successful. And when it comes time for you to sponsor and mentor, be sure to train your recruits in the successful ways that you’ve been taught. Their success equates to your success.

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A Vice President of Marketing should have a demonstrated record of building, managing, and sustaining network marketing sales organizations.

The two leading causes of MLM company failure are lack of capital and the inability to recruit. In fact, your need for capital is in inverse proportion to your ability to recruit. Many of the leading direct selling companies have been founded by individuals with long track records of building downline sales organizations. If you possess that talent, along with good product or service, you are well on your way. However, if you don’t possess such capabilities, it may be necessary to hire such talent, often in the form of a Vice President of Marketing.

A Vice President of Marketing should have a demonstrated record of building, managing, and sustaining network marketing sales organizations. You don’t just want a hand holder. You want an individual who has the capability of locating founding distributors and working with them to build a broad-based sales

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How much does it cost to start an MLM company?The costs of startup vary widely, depending on the type of product/service being offered and the need for infrastructure. It is obvious that a company which is engaged in its own manufacturing, ownership of warehousing and distribution facilities, etc. will expend much more than a company which is furnished by suppliers of private label products or is involved in a service-type product. With respect to the initial infrastructure costs of a startup MLM, it may be reasonably expected that a company will expend, during the first year, $100,000-$200,000 for four key infrastructure elements:

1)      Legal

2)      Software

3)      Compensation plan design

4)      Creative design for online and offline promotional materials

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Recruiting in Rocky SoilIt is not just about you…

Too often, network marketers are tone deaf as they recruit and sell. It is easy to fall into the easy path in which talking points, which extol the virtues of the product and opportunity, are presented to potential customers or recruits without first understanding the mindset of their audience.

Standing in the shoes of your customer and recruit is essential. There is a reason that Fortune 500-brand companies engage in significant market research and focus group activity before launching products. They understand that “having a good product” is not enough to close the “bonding” loop. Unless, you are the rare genius of Steve Jobs, who was able to create a new product, for which there was no market, and to anticipate that “if we build it, they will come,” then there is no escaping the hard work of finding and preparing the “soil” for planting.

And it’s not about the coffee…

And, as good as the product or opportunity may be, one must realize that the relationship may be the driving factor in success. In a recent book by Starbucks’ President, Howard Behar, It’s Not About The Coffee, Mr. Behar explains that the success of Starbucks was stumbled upon; ie., that Starbucks is not a coffee seller that seeks relationships with its customers, but rather it is a company that fosters store experiential environments that bond relationships with customers first, and a company that sells coffee, second.

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The MLM industry doesn’t simply embody cosmetics and plastic containers anymore. Although cosmetics and nutritional products are still leading sellers in the MLM industry, new companies are coming up with new products all the time. Today, the direct selling industry offers nearly every product available to retail consumers, and new products and services are being offered all the time. One of the newest categories of service being offered by direct selling companies include energy products: electricity, natural gas, and green energy services, among others.

MLM companies are beginning to direct their attention towards men. The most famous, perhaps, is Man Cave. Direct selling is such a successful business model that even Donald Trump joined the bandwagon with his own MLM company, The Trump Network.

The Direct Selling Association has over 70 product and service categories offered by direct selling companies, from vacuum cleaners to coffee, from jewelry to insurance, from photography to cutlery. MLMLegal.com offers over 700 MLM company profiles in categories ranging from wine to emergency preparedness, from loans to greeting cards, to hobby and crafts.

There are a lot of choices with so many products and services being offered by direct selling companies. With so much to choose from, what are your favorite products (or services) to sell in your direct selling business? If you are a MLM customer, what products do you prefer to purchase?

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