The Facts About the Purchase and Use
of Direct Selling Products by Salespeople
As the association representing more than 200 leading firms that manufacture and distribute goods and services sold directly to consumers, the Direct Selling Association (DSA) would like to set the record straight in response to questions raised about the direct selling business.
Questions and Answers
Q1: What's going on? Why have the stock prices of several publicly traded direct selling companies fallen since last week?
A1: Recently, David Einhorn, a Wall Street hedge-fund manager, raised questions about the use of products and services by direct sellers (called "internal consumption") while on Herbalife's regularly scheduled first-quarter earnings call.
Unfortunately, even though the direct selling industry has definitively demonstrated the propriety of internal consumption to the regulatory community, Herbalife's stock price fell as a result. So did the stock prices of other publicly traded direct selling companies. Markets often react to misinformation and uncertainty, which is what we believe is happening in this case.
Q2: Did Einhorn reveal a widespread problem among direct selling companies?
A2: The direct selling business model is solid and strong. After falling slightly in the wake of the Great Recession, total industry sales grew nearly one percent in 2010 and are expected to show even stronger gains when 2011 numbers are announced in early June. Most publicly traded companies reported strong earnings and income in 2011.
As you can see from the table below, many publicly traded companies have performed very well over the last five years. All direct selling companies derive a certain percentage of their income from internal consumption, and that's perfectly legitimate.
Q3: If this isn't an issue, why is DSA getting involved?
A3: DSA exists to protect and promote the direct selling industry by educating policymakers, the business community and the general public about the nature of the industry and how it works; as well as ensuring DSA member companies behave ethically in all aspects of their businesses through enforcement of the Code of Ethics. Part of our job is to correct misinformation.
Q4: What is internal consumption?
A4: Internal consumption is a term used to describe the purchase of products or services by direct sellers. Nearly 16 million Americans engaged in direct selling in 2011, some as full-time entrepreneurs seeking to build a business and some as part-time representatives hoping to earn a little extra money. Others sign up as representatives simply to purchase products or services for their own use at a discount and never sell to anyone else. Regardless of their income expectations, almost all direct sellers use the products themselves.
Q5: Is internal consumption a legal business practice?
A5: Compensation received by salespeople for products they themselves buy and use, and those bought and used by other salespeople within their organization, is a legitimate, legal and ethical practice and not evidence of any impropriety
Q6: If internal consumption is legal what, then, is the concern surrounding the issue?
A6: The Federal Trade Commission (FTC) and DSA Code of Ethics aim to protect consumers against compensation systems that are funded primarily or exclusively by payments made for the right to recruit other participants. Compensation must primarily be based on the sale of products and services to the ultimate consumer - whether or not that consumer is also a seller of the products. We believe the law, and resultant anti-pyramid enforcement, to be quite clear and settled on this issue.
Click here to learn more about internal consumption.
Q7: What is the "70% rule" and does it apply to all direct selling companies?
A7: The "70% rule" isn’t an actual rule at all. The "rule" was first cited in 1979 when the FTC definitively determined that Amway was not a pyramid scheme. Among the evidence cited was the fact that company policy required 70 percent of inventory purchased during the past month to have been sold in order to qualify for compensation.
Pyramid schemes often disguise themselves by encouraging "inventory loading" - convincing people to buy large amounts of inventory which they cannot easily sell to others and is not returnable. The FTC found Amway's "70 percent" requirement to be helpful in demonstrating that compensation was based on sales, not recruitment, and that no inventory loading was taking place.
Since that decision in 1979, many other companies have proactively adopted policies similar to the one Amway had in place. Additionally, there have been cases when law enforcement has taken action against an alleged pyramid scheme, ultimately requiring the company in question to adopt a version of this policy in order to continue to operate as a legitimate, reformed operation.
The percentage of internal consumption varies by company, and regardless of the level it is not an indicator of a company's overall financial performance or health. The same is true of the 70 percent rule - some companies adopt it, some don't. Importantly, DSA members also must abide by the Code of Ethics designed to protect both representatives and consumers.
Click here to learn more about the "70 percent rule".
Q8: What is the difference between a legitimate direct selling company and a pyramid scheme?
A8: Pyramid schemes are illegal. They prey on unsuspecting victims by masquerading as legitimate direct selling companies using a multilevel compensation plan. Conversely, legitimate direct selling companies contribute to a vibrant marketplace by selling competitive, high-quality products and services and providing a sustainable source of income for those who choose to sell those products.
Click here to learn more about pyramid schemes vs. legitimate direct selling companies.
Q9: What measures does DSA have in place to protect consumers against pyramid schemes?
A9: Pyramid schemes are illegal and companies operating pyramids are not permitted to be members of DSA.
Every member company pledges to abide by the DSA Code of Ethics as a condition of admission and continuing membership in the Association. The Code speaks to both the consumer and the seller. It ensures that member companies will make no statements or promises that might mislead either consumers or prospective sales people.
Click here for more information on the DSA Code of Ethics.