What is a Deceptive Earnings Claim?
In some ways, this an easy question. If a distributor simply lies about about how much they make to sell you the opportunity that is misleading. This recently seemed to happen over at pink truth, in which a Mary Kay distributor's claim of six figure income was shown to be inaccurate.
But in other cases, it is more difficult. Consider Nu Skin, for example.
In 1994, the FTC obtained an order against Nu Skin International which
"prohibits the respondents from misrepresenting the earnings, profits or sales of anyone participating in a sales or distribution plan. It also requires them to disclose clearly and conspicuously in conjunction with any future earnings claim they make both the average earnings of all distributors and the percentage of those distributors who actually achieved the claimed earnings." (my emphasis)
What does Nu Skin disclose about its business opportunity? From their website, we have the following:
While the disclaimer is useful, consider the last line. "The company currently provides neither an estimate of average income from retail sales nor includes distributor retail income in its average commission information."
Think about this. You are selling product, but your wholesaler doesn't know or won't tell you how much money that you will even gross by selling the product retail. What is the reason for this? "Distributors are free to set their own selling price and may personally consume some of the products they purchase." That isn't a reason not disclose or estimate how much money distributors make selling the product retail. Ask the distributor - "how much money did you make selling our product?" We might want to raise or lower our prices based upon perceived demand. Can you imagine that Coke has no idea or estimation about what its bottlers gross retail sales are? Or does McDonalds have no idea or estimate about how much its franchisees gross because some operators may actually eat at McDonalds?
Isn't it important to the FTC 1994 order to know how much of the Nu Skin product is never sold on a retail basis, but is left rotting in the distributor's basement or garage?
Obviously, people are not entering into this business opportunity because of the disclosure about earnings. If you don't know even an estimate of your gross earnings from retail sales, then what are you buying?
You are buying the right to have a commission stream, by selling others the right to have a commission stream. And how lucrative is that commission stream? Consider the following chart.
(Also, in order to read the chart, we have to know what the footnotes refer to. Can you read what is below? Because I cannot.)
The FTC order covered representations about earnings, profits or sales and required that average "earnings" be disclosed.
Clearly, this is not being done. The only disclosure is on the amount of commissions paid to "Active Distributors". As the chart indicates, "these figures do not represent a distributor's profit, as they do not consider expenses incurred by a distributor in promotion of his/her business and do not included retail mark-up income."
Second, notice the use of the term "Active Distributor". Only 35% of people who sign up as distributors actually sell product to another distributor; but only 16% of them actually earn a commission for doing so.
Third, we are not told how many "Active Distributors" remain active, on average and for how long.
Fourth, the average commission is over inflated because it refers only to a commission received by an "Active Distributor", or 35% of everyone who signs up to be a distributor.
Fifth, there is no meaningful disclosure of commissions in column three. The percentages add up to something around 15%, are we to infer that 85% of the other distributors received no commissions? Why isn't that clearly disclosed?
Six, column 4 has no real purpose, except to trick you into believing that there is 64% of making at least $4332.00 in commissions - not true, only a 64% chance if you are already at the executive level - which we don't know how long it takes on average to get to.
I don't understand how you could read this chart and meaningfully understand the promise of this business opportunity.
