FTC and Network marketing
- Do you direct sell your products and services?
- Do you use non-employees to sell your products and services?
- Do you engage in multi-level marketing? Network marketing?
If so, listen up.
The Federal Trade Commission (FTC) has just issued a set of non-binding rules regarding the use of network marketing, also known as multi level marketing. This guidance is designed to assist multi-level marketers in applying core principles to their business practices and helping them stay out of earshot of the FTC.
Multi-level marketing shows up in many different ways. Marketing savvy companies utilize different structures and methods of selling in order to extend their reach. While there may be varied ways of structuring multi-level marketing programs, at the core is the need for consumer protection. If you engage in any form of multi-level marketing, where you use non-employees to sell your products and services, be careful. Understand these guidelines and/or consider engaging competent legal counsel. .
What is Direct Selling?
The FTC defines direct selling as “a blanket term that encompasses a variety of business forms premised on person-to-person selling in locations other than a retail establishment, such as social media platforms or the home of the salesperson or prospective customer.”
What is Multi-Level Marketing?
It is a form of direct selling. Multi-level marketing is where one distributes their services and products through a network of salespeople who are not their employees. They are independent contractors. These salespeople don’t receive wages or salaries, instead they’re often compensated through commissions. Such marketing schemes are evidenced by uplines and downlines. A downline is the network of one’s recruits, and the recruits of those recruits, and so on. An upline, is traditionally the person who recruited you. Not all multi-level marketing companies have unlawful compensation structures, but some do and we call them “pyramid schemes.”
In a decision by the FTC, it defines unlawful multi-level marketing structures as follows: “Characterized by the payment by participants of money to the company in return for which they receive (1) the right to sell a product and (2) the right to receive in return for recruiting other participants into the program rewards which are unrelated to the sale of the product to ultimate users.” In re Koscot Interplanetary, Inc., 86 F.T.C. 1106, 1181 (1975).”
Elements of a successful multi-level marketing program.
The FTC has determined that not all multi-level marketing programs are created equal. Some actually adhere to the rules and are mindful of protecting consumers. Here are some elements the FTC has determined make up a successful multi-level marketing program:
- It should ensure that the program accurately represents the business opportunity it offers, both through its own marketing materials and messaging and through the representations its participants make to current or prospective participants.
- It should ensure that compensation paid by the multi-level marketing program is based on actual sales to real customers, rather than based on wholesale purchases or other payments by its participants.