Talk to ten people about the Direct Selling Industry and you’ll hear ten different opinions ranging from passionate enthusiasm to extreme dislike. While this industry has recently been in the news with tales of activist hedge fund managers crusading against the business model, there are also millions of people who benefit from the products, services and income generated by their involvement with network or multi-level marketing (MLM) companies.
Something you probably don’t know: according to the World Federation of Direct Selling Associations this industry employs close to 100 million people around the globe and accounts for over $182 billion in retail sales. That is not an insignificant sum.
I wanted to get the real story, so I recently spoke with Kevin Thompson, attorney for Thompson Burton PLLC, on current trends and issues facing the Direct Sales Industry with an emphasis on what companies are doing in the areas of online brand protection and distributor compliance to help positively impact the perception of the industry.
Daniel Morton: As an attorney who specializes in the Direct Selling Industry you’ve likely seen a lot over the years, what are some of the greatest challenges you see for new (or existing) multi-level marketing (MLM) companies?
Kevin Thompson: It’s hard for most companies to keep up with the pace of innovation. Network marketing is primarily designed to introduce unique products and services into the marketplace. The sales force is a significant cost which means margins need to be large. In order to command large margins, companies really need to be on the cutting edge. I’ve seen companies launch with a great product mix early but fail to iterate over the long run. It leads to value erosion. And when the value goes down while the prices remain the same, behaviors in the field can get out of line where people focus more on the financial opportunity instead of the product. Companies need to constantly innovate and invest resources to stay ahead of the curve.
How soon should a company put in place a compliance program or department? How does it rank on the list of priorities for a new MLM company?
Ninety-five percent of the time, compliance is an after-thought. In the early stages, companies are so focused on generating revenue, they fail to create systems designed to keep the train on the tracks. I’ve found that when bad habits creep into the field, it’s really difficult to reverse. Compliance should be priority number two. Sales will always be priority number one. Sometimes there’s a conflict between compliance and sales, and that leads to some interesting challenges.
How does a company’s compliance culture affect its growth prospects?
This is how I explain the importance of compliance to help owners understand. Compliance is what I would call a keystone habit. Without it, the whole structure can fall down. In the 80s, Alcoa’s newest CEO, Paul O’Neill, surprised everyone when he said that SAFETY was going to be the company’s number one focus. It shocked the majority of shareholders, who were all hoping he’d give the usual speech about increasing margins, increasing sales, etc. Instead, he focused on a thing that seemed unrelated to revenue. But…by focusing on safety, it led to better relationship with workers, it led to more focus on the machinery, it led to more efficiencies and higher margins, it led to fewer injuries and lawsuits. That one core habit retrained the organization to think through things differently. This is how compliance should be viewed. There’s a tremendous lack of trust for most network marketing companies. By focusing on compliance, companies can go a long way towards establishing trust and ensuring proper behaviors in the field. Focusing on compliance also leads to better corporate decisions.
False or unsubstantiated product claims are a struggle for companies that rely on an enthusiastic but sometimes inexperienced marketing force, what are your thoughts on how best to keep these under control?
Unsubstantiated product claims are a serious challenge in the industry. On the one hand, companies want excited customers. On the other hand, if these excited customers say too much, it can get the company into serious trouble. I believe the product claim challenge is solved by two things: (1) Substantiation; and (2) Education. Regarding substantiation, companies need to have SOME claims that are backed up by scientific data (i.e. substantiated). Those claims can be used by field, no problem. When companies have ZERO substantiation, then all claims violate the FTC’s deceptive advertising laws. Proof of efficacy is vital. The second component is EDUCATION. Companies should never expect their sales people to immediately know what to do. They need to be taught. Education needs to happen from multiple angles, such as email newsletters, video training, live events, etc. Solid education creates an expectation in the field and leads to a more professional sales culture.
There is a lot of confusion about this industry in the minds of the public and the media, what can individual companies do to positively impact the perception of this industry?
There’s no need to exaggerate. Exaggerated product and income claims leads people to join companies and rapidly quit when they learn the realities. The reality is that success in network marketing is like success in any other endeavor: it takes a whole lot of time and effort. If companies really taught their leaders to be patient and invest towards long-term, sustainable income, we’d see a better perception in the marketplace. The good news is that regulators are somewhat helping the industry in this direction. Self-regulation has not helped much, which has led to countless companies pushing the boundaries. Regulators are getting more engaged now, which I think is going to level the playing field.
How has the shift in online marketing practices by distributors impacted the way companies protected their brand and reputation online?
Companies are really confused about how to handle web savvy distributors. On the one hand, they like the energy. On the other hand, the majority of distributors do a poor job online, which creates exposure for the company. Candidly, companies right now are like deer in headlights. I’ve seen companies try to regulate distributors’ ability to create websites (unsuccessfully). I’ve seen other companies really try to encourage distributors to avoid making their own online materials. This is why your service provides so much value: companies can simply outsource the task and have you scan the web for trouble, making it easier on those compliance departments.
What trends do you see affecting this industry over the next 5 years?
I successfully predicted the current state of the industry 5 years ago. It’s not hard to make the predictions because there are not that many moving pieces. Within the next 5 years, we’re still not going to have a Federal statute that clearly defines legitimate network marketing. And the industry’s chosen path of self-regulation will still fall short, which will lead to regulators increasing their involvement. I call this legislation by litigation. This is very dangerous because litigation is a very imprecise tool…it’s like surgery via sledgehammer. There might be some unintended consequences from this litigation. I think we’ll see more companies launch in the industry, but they’re going to be more careful (if they’re smart). I predict that the marketplace will grow more intelligent and stay away from the obvious scams, making those routes less appealing for crooked business owners.
Kevin Thompson was named as one of the most influential people in direct sales in 2014. He has extensive multi-level marketing industry experience and helps entrepreneurs launch their businesses on secure legal footing. As a DSA supplier member, Kevin Thompson is actively involved in the industry to help steer it into a better future. As one of the founding partners of Thompson Burton PLLC, Kevin has helped the firm grow from two attorneys to seventeen in the short span of three years. Thompson Burton was selected as the “Support Company of the Year” in 2014 by the Academy of Multilevel Marketing.
Kevin Thompson’s extended bio and contact information can be found at Thompson Burton PLLC.