Law Library

Customer Programs

On March 4, 1996, the decision in the landmark case of Webster v. Omnitrition[1] rocked the network marketing industry to its foundation.  The case arguably challenged one of the most fundamental tenets of direct selling - personal consumption of products by distributors.

Like most network marketing companies, Omnitrition incorporated the "Amway safeguards" into its program.[2]  The court found the mere inclusion (as opposed to the actual enforcement) of the Amway safeguards in Omnitrition's contractual documents unpersuasive in defeating the plaintiffs' allegations that Omnitrition's program was a pyramid.  It explained:

The key to any anti-pyramiding rule in a program like Omnitrition's, where the basic structure serves to reward recruitment more than retailing, is that the rule must serve to tie recruitment bonuses to actual retail sales in some way.[3]

The "anti-pyramiding rule" to which the court referred were the three Amway safeguards.  The "basic structure" was the compensation plan.

Omnitrition argued that it met the requirements of the Amway safeguards.  The court disagreed, and as regards the company's application of the 70% rule, it wrote:

Omnitrition produced no evidence of enforcement of its 70% rule.  It merely states that, in order to place further orders IMAs must "certify" that they have sold 70% of the product they previously ordered.  There is no evidence that this "certification" requirement actually serves to deter inventory loading.  Importantly, the requirement can be satisfied by non-retail sales to a supervisor's own downline IMAs [distributors].  This makes it less likely that the rule will effectively tie royalty overrides to sales to ultimate users, as Koscot requires.

In addition, plaintiffs have produced evidence that the 70% rule can be satisfied by a distributor's personal use of the products.  If Koscot is to have any teeth, such a sale cannot satisfy the requirement that sales be to "ultimate users" of a product.

It is clear from the court's decision, that the phrase "ultimate users" means "non-distributor customers."

In the opinion of this writer, the single best thing a company can do to legally bullet-proof itself is to implement a customer program.  Even more significant than the legal protection afforded by a customer program, is benefit to the "bottom lines" of all distributors and the company. Indeed, a customer program can be the key to unlocking the greatest secret in network marketing.  That secret is - Customers are good for business!

There are three steps involved in developing a customer program:

(1) product value;

(2) the creation of the discrete category of "customer"; and

(3) tying a distributor's receipt of compensation to the sales of products to "ultimate users" or customers.[4]

The Delivery of Value

Unlike distributors, customers have only one reason for purchasing your products - their intrinsic value.  Since customers do not participate in the compensation plan, they will not purchase products to qualify for checks, trips, big homes, big cars, big hair, or other rewards.  They purchase products solely because of their value.  You may recall from last month's article that "value" is essentially quantified by the formula

Quality + Benefits
Price

Where product value is low or non-existent, there will be no customers. 

Sadly, some network marketing companies cut the legs out from underneath their own distributors by delivering poor product value.  The previous sentence bears repeating - Where there is no value, there will be no customers.  Similarly, where there are no customers, there can be no customer program.  Additionally, where there is no value, there is no opportunity - and there is no future.

The Category of "Customer"[5]

In many companies, the status of "distributor" and "customer" are synonymous.  The rationale most often espoused for this is, "Every distributor should be a customer of the product."  Although this maxim is true, it does not mean that distributors should not develop customers.  Moreover, many company executives mistakenly believe that they want every person in the world to be a distributor.  The truth is, you want every person in the world to be a customer, and you want some of them to be distributors.

In the economy of a network marketing company, the status of "distributor" encompasses several rights.  These include: (1) the right to purchase products directly from the company; (2) the right to re-sell the company's products; (3) the right to enroll others into the company; and (4) the right to participate in the compensation plan.  In contrast, a direct or preferred customer has only one right - the right to purchase products directly from the company.  A customer does not have the right to re-sell products, enroll others, or participate in the compensation plan.

The ultimate customer program is one that encompasses two categories of customers: (1) direct customers; and (2) preferred customers.  Preferred Customers are those who agree to an automatic shipment of products (either an auto-ship or backup order) typically at the same level that is considered "active" for distributors.  Direct Customers are not required to make any purchase commitment.  They simply purchase as much or as little as they want, when they want.  Preferred Customers should be able to purchase at the same price as a distributor.  There are many compelling reasons for this, however, space does not permit me to discuss them in this article.  Direct Customers typically are able to purchase products somewhere between the Preferred Customer and suggest retails prices.

In any event, the second step in the development of a customer program is the creation of a discrete and separate category of purchaser, namely - the Direct (or Preferred) Customer.  Once this step is implemented, the company can move to the final step, which is, a la Omnitrition, the "tying of bonuses to retail sales."

Compensation Tied to Retail Sales

The final step involves tying some or all of the distributors' compensation to customer sales.  Ultimately, such tying is either positive or negative.  An example of "negative" tying is the non-receipt of compensation unless certain criteria are met.  For example, if a distributor fails make sales to at least five customers, or at least 70% of his personal sales volume is not sold to customers, he will not receive a check.

A "positive" tie allows the distributor to receive compensation, however, it will be a lesser amount than he would have received if he had satisfied all the customer sales criteria.  For the purposes of the following hypothetical, let us assume that the compensation plan is a unilevel that pays a maximum of 9% in each of five levels.  (The concept works equally well with any type of compensation plan.)  A positive tie would reduce the payout percentage for customer sales that are less than those desired by the company.

In this example, if a distributor had four or fewer customers, she would receive only 3% on each level.  If she had five to nine, she would receive 6%.  If she had ten or more customers, she would receive the entire 9%. 

A variation on this theme could limit the number of levels on which a distributor is paid.  For example, if a she had four or fewer customers, she would receive compensation only on her first and/or second level.  If she had five to nine customers, she would be compensated down to her second or third levels.  If she had ten or more customers, she would be paid on all levels.

The significance of a positive tie is that without an adequate customer base, distributors are leaving money on the table.  In the 3%/6%/9% model above, a distributor could double or triple her check simply by acquiring the requisite number of customers.  If a distributor has even a modest downline, who would not be motivated to do so?

Conclusion

One of the great fallacies in network marketing is the mistaken notion that you want every person in the world to be a distributor.  You do not!  The correct paradigm is that you want every person in the world to be a customer, and some of them should be distributors.

This thinking error results from an equally erroneous myth, that direct selling companies bring only one thing to the market - an opportunity wrapped around one or more products.  Assuming for a moment that a company is bringing real value to the market with its products, it is bringing two discrete things to the market: (1) a valuable product; and (2) a valuable opportunity.

Accordingly, the corporate paradigm should be - for those who simply want to purchase our products at the best possible price and greatest convenience, we have a program for you.  It's called the customer program.  For those of you who are attracted to the income opportunity offered by our products, and who want to market and sell our products, we have a program for you.  It's called the distributor program.  But understand this - if you are not interested in marketing and selling our products, don't enroll as a distributor.  Be a customer.

A customer program is the single best thing that a company can do to bullet-proof itself legally.  Moreover, it is also one of the best things the company can do for its and its distributors bottom lines.

If you are a distributor, would you rather have a downline of 500 distributors, each of whom is personally consuming $100 of products every month . . . or . . . would you rather have a downline of 500 distributors, each of whom is personally consuming $100 of products . . . and each of whom has five customers who each purchase $100 of products?  Under the latter scenario, your check would be five times larger.

It's a "no-brainer."  Customers are good for business.

At the end of the day, distributors will spend their time doing whatever provides them the greatest return on their investment of time.  Many compensation plans reward distributors for focusing primarily on distributor recruiting.  The best compensation plans strike a healthy balance between distributor recruiting on the one hand, and product sales/customer acquisition on the other.  Sadly, very few compensation plans actually provide substantial monetary incentives for developing a balanced business - one in which building customer bases and recruiting distributors are equally important.

A customer program starts with the value of the products.  Where there is no value, there will be no customers.  Where there are no customers, there is no legitimate business model.

There will also be no customers if distributors are not rewarded for acquiring and maintaining them.  A company can talk about product sales and customer acquisition until Hailey's Comet returns, but nothing will happen unless and until the company puts its money where its mouth is, and compensates distributors for gathering customers.

As you examine a compensation plan, ask yourself whether "the basic structure serves to reward recruitment more than retailing."  Are there any rewards for retailing or customer (non-distributor) sales?  If so, are they sufficiently substantial to cause the primary activities of distributors to be product sales and customer acquisition?  If not, perhaps you should keep looking.



[1]79 F.3d 776 (9th Cir. 1996).

[2]The Amway safeguards include:  (1) the 90% buy-back, which in Amway, required distributors to buy back from any person they recruited all saleable, unsold inventory upon the recruit's departure from Amway at a price not less than 90% of the recruit's original purchase price; (2) the 70% rule, which required every participant to re-sell at least 70% of the products bought in a given month in order to receive a bonus for that month; and (3) the 10 customer rule, which required each participant to submit proof of retail sales made to ten different consumers in order to receive a bonus for that month.  Since most distributors purchase their products directly from the company, the 90% buy-back requires companies (rather than sponsors) to repurchase the products from terminated distributors.

[3]79 F.3d at 783.

[4]Throughout this article, the term "customer" is always mutually exclusive with that of a distributor.

[5]A customer program potentially contemplates several categories of customers.  For the purposes of this article, a Aretail customer@ is one who purchases products from a distributor.  A "direct customer" is one who is introduced to the company and its products by a distributor, purchases products directly from the company, and whose purchases are attributed to the distributor who enrolled the direct customer.  Some customer programs also include Apreferred customers@ who are often customers enrolled in an auto-ship or backup order program.