THE BIZOP NEWS

There are two different opinions about how much you can earn as a Mary Kay consultant. Over at Pink Truth Tracy opines that

"All these consultants. All these units. All these orders. Surely some are making a living selling Mary Kay products?

Maybe we haven’t looked at the right units. How about Lisa Madson’s unit? I mean, she’s one incredible woman! Her unit even did $2 million retail orders once! So I’m sure she’s teaching her consultants to sell!

Well sadly, no. You see below that November’s numbers show only 12 consultants ordering enough for a $500 profit a month or more. In November, 173 consultants placed orders for the Madson unit. There are likely more than 200 consultants in Lisa’s unit, so based upon 200 total consultants, those 12 represent 6%.

That’s right. 6% (or maybe less) of Mary Kay and Lisa Madson’s unit order enough to get at least $500 of profit if they sell it all."

Over at the Fuschia Blog it is argued that "How many of us remember hearing, and even saying ourselves, that only 2% of the MK sales force are directors? And do we not also remember hearing and saying that only the top 20% of the Company are Star Consultants? We’ve been hearing and saying this for, oh, dare I say – DECADES. I also dare to say that many of the former and current directors that comment on PinkTruth have heard this and said it many times. Maybe even hundreds of thousands of times."

So who is right in this debate?

How would anyone know? Tracy is relying, correctly, upon some published but internal reports. She does a nice analysis of the numbers, but then the Fuschia Blog argues that everyone knows these numbers and that Tracy is banging an empty drum.

But since Mary Kay has sided with the DSA in opposing the new FTC Rule for Income Earnings Opportunities, we have this debate. Had Mary Kay presented on their website the same sort of earnings claim information that Arbonne had, we would not have this debate.

It doesn't make sense for members of the DSA to fight the new FTC Rule, it only looks like the have something to hide. If we believe that many of the individuals who become involved with DSA companies do so for personal reasons, don't require an large income, then what do they have to lose by supporting the FTC's new rule?

Tell the truth about what people can reasonably expect to make with your company -how can that be wrong?

Posted by michael webster at 10:05 AM | Permalink | Comments (0) | TrackBacks (0)

"Most management books, the author says, focus on the question, "What leads to high performance?" But Phil Rosensweig asks a different question: "Why is it so hard to understand high performance?"

To get at the answer, The Halo Effect focuses on nine "delusions" that Rosenzweig claims wrongly influence business thinking -- including one for which the book is named, the halo effect. A company's performance creates a halo, either good or bad, that influences the way the firm is perceived, he notes. When a company is performing well -- sales are brisk, the stock is rising -- people are quick to conclude that the firm has visionary leaders, a superb strategy and a corporate culture that brings out the best in employees. When performance goes down, the company's leaders are suddenly seen as arrogant, their strategy is perceived to be too risky and the corporate culture is stifling."

You have to enjoy a book named the "Halo Effect and Eight Other Delusions" when after finishing the book you can only remember the Halo Effect -which is neat demonstration of the book's main thesis. Rosenzweig argues, effectively with examples, that when we rank outcomes with various attributes, we tend to simply the process by focussing on a single dimension or attribute. For example, if we want to rank the leadership abilities of two companies the tendency is to use the attribute or value dimension of profitability. If one company is more profitable, then we will tend to rank or compare the companies with respect to other attributes using profitability as the proxy measure. In short, profitable companies are winners on every dimension of value. Which is both absurd and prevalent thinking.

Here is a nice example, from my favourite MLM site, Mary Kay Cosmetics on Champions. Here is a Mary Kay description of Champions.

"I've studied champions for many years, and I want to share 10 qualities that I've found to be consistent among them:

1. The victory is won in their head and heart before the work is done.

2. Champions know the rules of the game and they're willing to play better than they've ever played before.

3. Champions believe the risk of victory is worth more than the disappointment of failure.

4. Champions have champion mentors.

5. Champions know there's nothing more powerful than a winning attitude.

6. Champions are motivated by their dream, but are made by their routine.

7. Champions focus on maximizing their strengths, not protecting their weaknesses.

8. Champions have unquestionable integrity.

9. Champions are extra-milers. They don't do just enough to get by; they do the and then some.

10. Champions NEVER give up! I'd like to elaborate a little further on a couple of points. Take #1, for instance: The victory is won in their head and heart before the work is done.

Over the years, I've seen many Sales Directors miss a goal simply because they never believed they could achieve it. These Sales Directors said all the right things to others, but they hadn't convinced themselves that they deserved the victory, or they simply weren't willing to put forth the effort needed to achieve the goal."

Notice how you cannot determine who is a Champion until you see the results of their sales - from which it follows that they must have superb on the other nine attributes. It also appears that Champions are unable to detect fallacies - effect, therefore cause.

Posted by michael webster at 7:31 AM | Permalink | Comments (0) | TrackBacks (0)

Over at one of my favourite analytical sites about network marketing, and Mary Kay in particular, has a fascinating discussion about churning Pink Truth: Churning New Recruits.

How Many Recruits?If I told you that Mary Kay had 700,000 independent consultants in the United States in 2006, this would seem like a fairly impressive number. Surely there must be some of them who are making a decent living from selling product?

How Many Recruits Stay? Well here is where it gets very interesting. According to Pinktruth:

"In 2006, Mary Kay disclosed that the company had over 700,000 independent beauty consultants in the United States. This was similar to the 2005 reported figure of 715,000 consultants in the United States. This implies that at the current time, the number of consultants is staying relatively stable. (i.e. For every consultant recruited, one drops out.)

Mary Kay stated in its response to the FTC's proposed Business Opportunity Rule, that there are 2,400,000 "disclosure opportunities" (meaning interviews) per year. That's 200,000 women interviewed per month. Mary Kay Cosmetics further stated that there are 40,000 new recruits per month. (Thank God those other 160,000 per month said no… a total of two million women per year who turn Mary Kay down.)

At 40,000 new recruits per month…

That means that during 2006, Mary Kay Inc. recruited 480,000 women in the United States, and 480,000 women in the United States quit. Add the 480,000 quitters to the 700,000 (or so) U.S. consultants on the books at the end of the year, and we've got a total of 1,180,000 (yes that's over 1 million) women in the United States who were "in" Mary Kay at some point during 2006.

What a staggering churn rate, though, isn't it? Depending upon how you look at it… 41% of the 1,180,000 involved during the year quit. Or of those 700,000 on the books at the end of the year, 69% of them will quit in the following year. 480,000 women churned and burned in 2006." (my emphasis)

Other Interesting StatisticsThere are some other interesting statistics that will become available when the FTC amends its Business Opportunity Rule to cover Network Marketing.

Section 437.1(e) will require the Network Marketing Opportunity Seller to disclose the number of cancellation or refund request in the past two years. This disclosure would have to be updated every quarter. It is required even if the Seller has no policy covering cancellations or refunds.

In Mary Kay, individuals can return part of their inventory within a year of joining Mary Kay. Many do not or simply sell their product on e-Bay. The new disclosure document makes the refund policy clear, before signing up, before the distributor meetings, and before a commitment is made. It will be interesting to have numbers to compare across different network marketing opportunities.

Posted by michael webster at 8:17 AM | Permalink | Comments (0) | TrackBacks (0)

For a number of years, Tupperware distributors were explicitly regulated as franchisees. Tupperware filed for the available exemptions, so that their UFOC is not available online. But there is doubt that, until 2004, Tupperware treated its distributors as franchisees, read the 2004 franchise exemption letter here.

I had a recent post about whether Mary Kay Directors were buying a franchise, as it is defined by the Federal Trade Commission, and I posted a comment to that effect.

The responses to me question about Pink Truth: Directors as Franchises are collected below, along with my response.

Comment 1:

"Micheal Webster

Maybe that is why in all these years the one thing that stays at such a low price is the starter kit----because they are trying to stay below the radar of FTC---less than $500, so that we are not considered a 'franchise'.

Most of the women on this site are BRILLIANT and I am still reeling at the vast amount of collective brainpower here.

I am much less business savy----BUT something about the $100 changing hands at the point of 'commitment'-----like "earnest money" in a real estate transaction.has always bothered me. It is not like the Starter kit is VITAL to our success----since the contents of this kit have changed COMPLETELY through the years----to now mainly just being a few tapes, some samples and a little product.

For some reason which I cannot figure out , it seems more like they need this $100 to comply with some kind of law----.or to make our CONTRACT BINDING----since maybe without the $$$--we could not be HELD to the contract. I don't know----just a thought.

Suzy Q.awesome piece and thanks for telling the truth-----that sure covers the last of the questions I had about what i was doing to make my director mad unintentionally."

Response 1:

I think that you are right. Mary Kay, along with other DSA members, seemed to focus on the low entry costs in their response to the FTC. I was not entirely persuaded by this type of reasoning as it ignored the high cost of being distributor or director.

Comment 2:

"Michael I also read your website with interest. I also wonder why people sitting with frontloaded prodcut aren't franchises. I've read several stories on this site and others where people are sending back upwards of $5,000 worth of product. That would seem like a "significant" amount in my book. But maybe I'm just cheap.

I've been thinking about this column since I read it. I couldn't stand the daily pressure of living like this, pink fog or not. How do you keep your sanity for goodness sake? I'd be a basket case before ending DIQ I'm afraid. There's no way I could handle this constant pressure day after day after day. Ridiculous to put yourself and your family in this much turmoil. IMHO, no amount of money would be worth that."

Response 2:

I also wonder if the FTC is persuaded that since the consultant or distributor can send back the product, for up to a year, whether there is a need for the FTC to assume jurisdiction. But it would appear that the new consultant or distributor would need to know just how many people in their position get stuck with unusable inventory after the year is up.

Comment 3:

"With a genuine franchise or exclusive distributorship, there is usually a lot of pre-screening to make sure you are ready for it.

McD's for example, requires you to have $200,000 and spend time at their headquarters learning how to run the business … RUN the business, not "work" it. And they do a lot of coaching the first few years because they don't make money unkless you sell product.

MK is not a franchise … it's a 'direct sales' business with 'multi-level comission structure'. Everybody buys from MK, but there are comissions based on your recruits."

Response 3:

I think that this is just a misconception about what a franchise is. McDonalds may do intense pre-screening, but that is far from the norm. To determine whether the Mary Kay director's opportunity is a franchise, you have to analyze the definition. For example, most people would be surprised to know that many vending opportunities fit the franchise definition.

Comment 4:

"Typically, franchises are little more particular about saturation of the market. My insurance business is a franchise. They would NEVER allow as many of us to be around as MK does. They are way too protective of their name and the likelihood of failure of the franchisees"

Response 4:

Again, encroachment is a very hot topic in the franchise world. Most of quick service restaurants give their franchisee no territorial protection.

Thanks again to all those who responded to my post. If you have further questions, you can post them here as comments or back on the Pink Truth website.

Posted by michael webster at 11:26 AM | Permalink | Comments (0) | TrackBacks (0)

Pink Truth: Update Regarding FTC Proposed Rule-Making Activities

provides an interesting update on what Mary Kay has been doing with respect to the new FTC Rule.

Apparently, Mary Kay is complaining that "However, the FTC has cast its net so broadly that it could include Mary Kay and other legitimate direct selling companies. Unfortunately, the rule as it is currently proposed could impose requirements on legitimate direct selling companies that would be very burdensome. While we support the government's effort to protect consumers from business opportunity frauds such as envelope stuffing schemes, we want to ensure their efforts do not harm legitimate direct selling businesses, such as Mary Kay."

Frankly, I have never really understood why in some cases Mary Kay isn't regulated as a franchise anyways.

Let's look at the FTC definition of a franchise.

"Traditional Franchises": There are three definitional prerequisites to coverage of a business-format or product franchise (Parts 436.2(a)(1)(i) and (2)):

1. Trademark: The franchisor offers the right to distribute goods or services that bear the franchisor's trademark, service mark, trade name, advertising or other commercial symbol.

2. Significant Control or Assistance: The franchisor exercises significant control over, or offers significant assistance in, the franchisee's method of operation.

3. Required Payment: The franchisee is required to make any payment to the franchisor or an affiliate, or a commitment to make a payment, as a condition of obtaining the franchise or commencing operations. (NOTE: There is an exemption from coverage for required payments of less than $500 within six months of the commencement of the franchise (Part 436.2(a)(3)(iii)).

A Mary Kay distributor is selling trademarked products, but is Mary Kay exercising significant control or offering significant assistance to the distributor?

Well, I would argue that there is certainly the offer of significant assistance to the distributor. There are marketing plans, marketing meetings, and promotional plans put in place to assist the distributor.

The only element which might be tricky is the "required payment". For some consultants, who start up with a small inventory, they would not qualify. But what about those people who are pressured by their national sales director to load up on $2,000 or $3,000 worth of inventory to start?

Does this inventory loading qualify as a "a condition of commencing operations"? Is is a requirement? What if the Mary Kay consultant truly believes that she had no other choice but to load up and spend more than $500? Would that make it a requirement? I have never seen an answer to this question in the FTC's staff advisory opinions regarding the FTC Rule.

Posted by michael webster at 11:33 AM | Permalink | Comments (0) | TrackBacks (1)

At the Pink Truth, a Sales Director is Caught Begging for Sales to meet their self imposed deadline for being "a Pink Cadillac Unit".

The Pinktruth blog was previously known as "Mary Kay Sucks", a name which did not last long, for obvious reasons.

Many of the commentators are fierce in their denunciation of the Sales Director, correctly believing that it is deceptive for this sales director to issue a call for increased inventory.

However, only a few of the Mary Kay ladies, or ex-Mary Kay rather, see the psychological trap here for the Sales Director.

Here is one good post:

"You know------if her unit really wanted her to drive a FREE CAR, they'd just all cut a check for $600 and give her the cash!! Then it really would be free. Something to have in reality - free and clear. But no, she wants her unit to provide production so she'll be responsible for $900 + insurance every month and the ILLUSION of being an MK Super Star Director!! And we all know earning the car and keeping the car are two different things. When it takes 2-3 months to get to her, she'll undoubtedly have already lost it!! But Corporate already got their Moo-Lah so what do they care??!!"

The problem for this Sales Director is that the free car, like all items that appear to be something for nothing, is going to end up being quite expensive. She may end up either faking orders to maintain her production level, or worse.

Is there a logical reason that this illusion is so seductive? Or is the Sales Director just a "stupid pimp"?

The basis of this illusion is something I have wrote about before, the logical difference between diagnostic and causal inferences, in a different context.

In this case, we have two inferences:

C) If a Sales Director is successful, and achieves $16,000 per month in sales, then she will obtain the Pink Cadillac. This is a causal story, the success in sales brings about the reward.

D) If the Sales Director has obtained the Pink Cadillac, then she is successful. This is the diagnostic story; we infer from the presence of the car to the existence of genuine high sales.

But, critically, C) can be true, while D) is false. The causal story is easy to believe and justify, but the only evidence we have -unless we are the accountants of the sales director, requires D) also to be true, if we want to infer success from the only observable - that damned Pink Cadillac.

The nifty observation here is that the Sales Director knows if D) is true; but even if it is false, if she can get enough people to believe that D) is true, enough people will act as if it is true.

Posted by michael webster at 8:40 AM | Permalink | Comments (2) | TrackBacks (0)

Pink Truth: Facts, opinions, and the real story behind Mary Kay Cosmetics has a nice discussion about the Mary Kay scripts used. The whole post is worth reading, especially for the comments.

But I wanted to focus on single example, which I believe is not correctly understood.

After you have placed your order,

"She will now bag up your products, take your money, give you a receipt. If you don't buy, she will give you a bag with a book so you aren't embarrassed. Then she will ask you if you will assist her with her training." (my emphasis)

Posted by michael webster at 1:05 PM | Permalink | Comments (0) | TrackBacks (0)

China in or around 1998 had banned all multi level marketers a rash of pyramid scams.

According to officials, "The MPS official said pyramid sellers had had a very negative impact on social stability. He said that some organizers had achieved psychological mastery over members, violating the law and basic ethics by repeatedly brainwashing them with distorted facts."

Some consumer groups, like the Pyramid Scheme Alert, argue that the well established mlm companies operating in North America are guilty of this practice.

It would be very hard to read Eric Scheibeler's book on Amway/Quixtar without have some very serious doubts as to whether the Chinese were correct about the "psychological mastery" of the members by the pyramid sellers.

Notwithstanding, WFAA.com |is Reporting the Mary Kay is Open Business in China. Perhaps Pink Truth will have to get a Chinese translation?

Posted by michael webster at 11:34 AM | Permalink | Comments (0) | TrackBacks (0)

Multi Level Marketers warn that "In its present form, the FTC's proposed regulation would be devastating, if not fatal, to the direct sales industry," says Keith B. Laggos, publisher of Network Marketing Business Journal, who also warns the change could drive the entire U.S. economy downward into a recession., according to David Wilkening's article Will the proposed FTC multilevel marketing rules crash Tupperware's party?

Tupperware is an odd candidate for inclusion in this article.

Why? Well, for many years Tupperware sold exclusive territories to its distributors and was regulated as a franchisor. The sale of exclusive territories, along with the right to sell a name brand, brought it within the jurisdiction of the FTC's Franchise Rule.

As a franchisor, Tupperware had a very high level of disclosure obligation - much higher and costlier than what is being proposed by the FTC for Business Opportunities. Tupperware is also a public company, with its own costly disclosure and controls. The proposed FTC rule should not cause them any serious extra expense.

As discussed at the Pink Truth, the disclosure requirements by the FTC may not do anything to alleviate some of the relationship issues sales consultants have with Mary Kay, for example. Sales consultants apparently are being urged to pay up to $5,400 to for their start up inventory. Several experienced Mary Kay sales woman believe that this is far too high an inventory level to start with.

But there is something else odd here: if a sales consultant spends more than $500 in six months for the right to sell a name brand product, and there is the offer of significant assistance to the sales consultant from Mary Kay, then prima facie Mary Kay is selling franchises and its sales directors are franchise brokers, unless the a purchase of inventory at wholesale prices.

How, for the purposes of the FTC Rule, does one determine what the wholesale price is of a product which is never sold in a retail store? Is Mary Kay giving its product at their cost to its sales consultants? Doubtful, so how much of a $5,400 “full Mary Kay” store might be considered a franchise fee, for the right to sell Mary Kay products?

What is the rationale for requiring the franchise fee to be greater than $500? The FTC described the rationale this way. 'The record supports the proposition that the rule should focus upon those franchisees who have made a personally significant monetary investment and who cannot extricate themselves from the unsatisfactory relationship without suffering a financial setback. Implicit in the concept of franchising, as viewed by the Commission, is the assumption of a financial risk by a franchisee in entering into a franchise relationship.'

Well, if you have $5,400 worth of stock that you find out that you cannot sell, and a disclosure document might have revealed that 90% of sales consultants were in the same boat, isn't this a significant monetary investment that the FTC should be protecting? Why wait for Spring, regulate now.

Posted by michael webster at 8:10 AM | Permalink | Comments (0) | TrackBacks (0)

Last week over at the Pink Truth: Facts, opinions, and the real story behind Mary Kay Cosmetics, there was a press release which I though I would reprint here:

"Milwaukee, WI November 22, 2006 -- Pyramid Scheme Alert announces that Tracy L. Coenen, CPA, MBA, CFE has been named to the organization's Board of Advisors. Her consumer education website, www.PinkTruth.com, which exposes and analyzes the business and recruiting practices of Mary Kay and the plight of Mary Kay salespeople, has received over 4,000 visitors a day.

Pyramid Scheme Alert is one of the most widely recognized and highly respected organizations fighting against pyramid schemes and abusive multi-level marketing companies. The organization is led by Robert FitzPatrick, author of the book False Profits: Seeking Financial and Spiritual Deliverance in Multi-Level Marketing and Pyramid Schemes.

Coenen is a nationally-recognized expert on fraud and financial investigations. She is a Certified Public Accountant (CPA) and Certified Fraud Examiner (CFE), and holds a Master of Business Administration (MBA). She is also an Adjunct Professor at Concordia University - Wisconsin, and serves as Adjunct Faculty for the Association of Certified Fraud Examiners. Coenen is a columnist for Wisconsin Law Journal, guest writer for Fraud Magazine and a graduate of the Criminal Investigator Training Program at the Federal Law Enforcement Training Center (FLETC)."

Is the Tracy's blog making a difference? Well let's check her traffic against www.marykay.com and watch it over time. As of November, 2006 here is the picture:

Posted by michael webster at 1:40 PM | Permalink | Comments (0) | TrackBacks (0)

One of my favourite reading from the networking marketing field is Pink Truth: Facts, opinions, and the real story behind Mary Kay Cosmetics.

Although the blog can sometimes stumble, in the comments section, the author is generally restrained, but deadly accurate in his/her questions about the Mary Kay set-up.

Several days ago, in the post above, Pink Truth pointed out that when MK offers the consultants a "special deal" it was also a signal that MK was discontinuing the line. Pink pointed out that in the past, MK would make this offer, but fail to disclose that MK would be discontinuing the line. And as such, the offer was deceptive.

Now, there is nothing wrong with having a discount sale, but if MK doesn't tell its consultants that this is the end of the line, it risks being accused of front-loading -dumping inventory on its sales force that it knows cannot be sold.

There is a simple way to check local demand for your MK product, a neat due diligence trick for MLM -check your local eBay. If there is a lot of product being dumped on eBay, it would probably pay to stay away from this particular line.

The relationship between a company and their distributors, salesforce, and consultants is similar to the relationship between a franchisor and franchisee: the former wants gross sales, and the latter wants net profit. Sales consultants would be wise to keep this in mind when joining the network marketing party.

Posted by michael webster at 7:03 PM | Permalink | Comments (0) | TrackBacks (0)

In any distributorship, franchise, or network marketing business opportunity the question of encroachment, or “stealing customers” is a hot topic.

Over at Pink Truth, How to recruit the customers of other Mary Kay consultants there is a discussion about this topic which has attracted a good deal of discussion.

The basic problem any sales force faces is how to grant sales territories. Should they be exclusive, semi-exclusive, or completely wide open.

While competition for sales from other concepts is just that, competition from your own franchisor, distributor or other sales consultants is seen as much different.

We will accept competition, but not from our family members.

The FTC Rule on Business Opportunities, section 437.5(n), is useful to read. This section would prohibit misrepresentations made directly by the seller or through a third party about the terms of the territory offered to a prospective purchaser.

As was pointed out, Mary Kay’s sales contract includes the following term: “Customer names and addresses furnished by Beauty Consultant to Company in connection with optional programs shall remain the sole property of Beauty Consultant and will not be used by Company or disclosed by Company to other parties without Beauty Consultant’s permission, except as may be required by law.”

This would appear to make it clear that a consultant need not worry about having her customers poached by another consultant, unless of course the customer name was not furnished by the consultant to Mary Kay “in connection with [an] optional program”. Is this deceptive? I don’t know.

But, in any event, it is apparent that the Mary Kay network marketers need the protection of section 437.5(n) to properly evaluate both the opportunity and ongoing compliance with their sales contract.

Posted by michael webster at 10:33 AM | Permalink | Comments (0) | TrackBacks (0)

If the FTC's new proposed Business Opportunities Rule becomes a Rule, then all you will know about such direct sellers as Mary Kay will become available in a two page disclosure document.

But as reported on Pink Truth: The blog formerly known as Mary Kay Sucks Mary Kay's General Counsel wrote an extensive letter to the FTC in opposition to the proposed Business Opportunities Rule.

The letter opposing the FTC's reform of the Franchise Rule can be read here.

The basic gist of Mary Kay's opposition to the new disclosure requirements is this: 1) we are a reputable company with our own internal consumer protection scheme, Reputation, and 2) the proposed disclosure would be costly, Cost.

Mary Kay, like many other direct sellers and franchisors, however completely fail to understand the relation between Reputation and Cost. Let us suppose, despite the withering attack by Pink Truth on Mary Kay's claim to honesty and integrity in its dealings with its sales force, that Mary Kay represents the high water of integrity.

Should Mary Kay have to disclose its high character to potential recruits, if that disclosure is costly -assuming as we have done that they are of the highest rank?

Well, the answer is yes. This surprising inference is due to what economists call the "market for lemons". As Steven Woda wrote in a different context about eBay resellers, credible signals of reputation have to have teeth and must be costly to maintain.

If Mark Kay was on the direct seller, with no new entrants on the horizon, then the case for mandatory disclosure is weaker. But Mary Kay and the other direct sellers have the reputation of the direct market selling industry to maintain, as will as their own individual reputation.

In the new world of speedy access to bad facts, in which sites like Fighting Fatigue, and Up Your Cadillac, along with other general network marketing sites such as Falseprofits are asking difficult questions, Mary Kay would be foolish not to adopt the FTC's new regulation with gusto and indeed improve upon it.

Posted by michael webster at 10:33 AM | Permalink | Comments (0) | TrackBacks (0)