Misleading Advertising Law

I am a pathetic devotee of Donald Trump's television show "The Apprentice", despite its declining ratings. Who doesn't secretly believe that they too could outperform the any of the contestants?

However, as fascinated as I remain with this television show, I regard Mr. Trump's endorsement of ACN with considerably more skepticism. "ACN reps are allowed to use this words to describe Trump's endorsement Donald Trump has agreed to endorse and promote ACN and our vision. He will be featured in a variety of print and video media over the coming months, all designed to help you build your ACN business. In addition, Mr. Trump will be speaking at select upcoming ACN International Training Events. Representatives are not allowed to use Mr. Trump's name, image, footage, website or any other material in any form at any time. ACN says that it will not tolerate any violation of this policy. If any representative is witnessed acting in a way that might compromise ACN's relationship with Mr. Trump, ACN should be contacted immediately. Consequences will be severe and may include deactivation." (my emphasis)

As I have written before, I doubt that ACN is a pyramid scam in the criminal sense of "pyramid". But I certainly don't think that it is a good business opportunity. Consider what was written at Sub-Board I, Inc.

"It's easy to get excited when someone tells you stories of living a life of luxury. But once you start asking questions and trying out ACN's suggested sales pitches on everyone in your phone book, it quickly becomes clear that what Lullo described on stage won't work for everyone.

He says the company sells phone services--long distance, local, DSL, etc. He says that for $500 you can buy into your dream job.

But once you wade through all the jargon, it's clear that what your $500 has purchased is the incentive to badger other people into giving Lullo's company $500 too.

No matter how many times Lullo and his disciples mention that the business was praised by Donald Trump, it doesn't change the basic dynamic. What you are really selling--the real product--is your friends. Your neighbors. Anyone you can drag into the company's embrace." (my emphasis)

What is the attraction to "buying your dream job for $500"? Well, it looks deceptively simple to succeed,

"It's not the commission that makes representatives money. It's the bonuses for recruiting and advancement within the first month that allows them to make their money back. When you sell seven phone points (one awarded for each service sold) and recruit two other people to pay $500 and become TTs below you with seven phone points each, you get named "Executive Team Trainer."

That position is still one quarter of one percent, but includes an exclusive, first month only, bonus check of $700. In other words, you've made back your $500 investment plus $200 that month." (my emphasis.)

Let's imagine a story in which all ACN reps quit with a profit of $200, after recruiting their two new sales representatives. So nobody loses. Right?

After you quit, ACN has $1500 - your bonus of $700, ie., $800, and your two recruits are busy looking for four more stooges, so that they can cash out for their $200. Then ACN would have the four stooges $2000 - your two recruits' bonus of $1400, another $600. Can the four stooges find eight more "independent sales representatives"? Well, then ACN would have the eight ISR's $4000 - the four stooges' bonus of $2800, or $1200. Do you sense a pattern here? For every "clever" ACN rep who decides to "retire" with his $200 bonus, ACN makes $300 of his or cleverness. Very nice.

Posted by michael webster at 1:03 PM | Permalink | Comments (0) | TrackBacks (0)

I am a sucker for secrets.

When I see advertising copy with the word "secret" in it, long before the logical part of my brain deduces that most secrets are worthless -which also should not be a secret- the part of the atavistic brain hardwired for the click her and buy now has rushed to judgment.

Google's Adsense only makes the temptation to click away on "secrets" links that much easier.

So when the Texas Attorney General announced the resolution of their BioPerformance lawsuit, I was most intrigued to read the press announcement at the BioPerformance website.

At the corporate website, we read "Recently completed testing of BioPerformance Fuel by an independent laboratory using the Federal Test Procedure (FTP) and Highway Fuel Economy Test (HFET) protocols of the Environmental Protection Agency (EPA) in a group of vehicles established a reasonable degree of confidence that the product gives a real improvement in fuel economy and reduction in harmful emissions." (my emphasis)

But further down the page, Wallace Labs who performed this test, state, in effect, our test methods are secrets and you can't have it. Ah, so much for scientific testing - our results which produce a miracle are not reproducible, because they are a secret. So there.

Some other interesting points about the judgment:

Paragraph 2 b) requires BioPerformance to refrain from making any statements about fuel economy or efficiency unless they are in possession of scientific testing showing the specific amount or percent of increased fuel economy or efficiency.

Compare this to the language from Wallace Labs: "Reasonable confidence that ... causing real improvement in fuel economy."

Paragraph 2 h) requires BioPerformance to disclose on their website that the product contains napthelene. Which has not been done as of January 26th, 2007.

Paragraph 2 0) is going to have the real bite, if enforced. It prohibits BioPerformance from making misleading representations about income levels obtainable as a BioPerformance distributor, including by not limited to: displaying bonus cheques or commissions. Reasonable earnings claims can be made as long as the earnings claim is: a) for a certain geographic region, b) states how many distributors were in the region, c) what the average distributor income, and d) how many distributors achieved this average income.

The order would have been better if it had incorporated by reference the proposed new deceptive marketing practices in the FTC's Business Opportunity Rule.

But all in all this is a very good win for the consumers.

Posted by michael webster at 8:25 AM | Permalink | Comments (0) | TrackBacks (0)

TheTexas Attorney General Greg Abbott today stopped a Dallas-based pyramid scheme from illegally marketing the so-called "top secret gas pill" that it falsely claimed would increase fuel efficiency in automobiles. The Attorney General's settlement with BioPerformance and its owners, Lowell Mims and Gustavo Romero, prevents the defendants from continuing to deceptively market their products and ends the State's eight-month legal action against the company.

How are the consumer defendants going to get paid? Is this one of judgments that is simply a piece of paper?

No, apparently "A combination of the defendants' frozen assets and the dissolution of two trusts created by Mims and Romero will provide more than $7 million in compensation to deceived consumers. Mims and Romero may continue to operate any legitimate enterprise, but may not deceptively market BioPerformance pills or similar fuel additive products."

This is a terrific result for consumers, $7 million in real money.

According to the press release, "Attorney General Abbott added: "Texans will not tolerate con artists who prey upon unsuspecting consumers. Though we will continue aggressively cracking down on fraudulent pyramid schemes that profiteer from worthless products, consumers should always be dubious when offered 'miracle' products that are long on hype but short on credible proof." (my emphasis)

Now how do consumers determine that a product is long on hype but short on credible proof?

Well consider this, "The Attorney General further alleged that the worthless product, combined with the defendants' downline marketing scheme, constitutes a product-based pyramid scheme, which violates the Texas Pyramid Promotional Scheme statute. By the defendants' own admission, they recruited 50,000 participants within six months of their scheme's inception."

This type of growth is typical of a product long on hype but short on credible proof. Fast and out of control growth is more likely a cancer than a real sustainable business.

Technorati Tags: texas attorney general, mims, fuel additive products, greg abbott, pyramid scheme, consumers, bioperformance, gustavo romero, fuel efficiency, legitimate enterprise

Posted by michael webster at 10:45 PM | 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.

Technorati Tags: buying a franchise, tupperware, mary kay directors, franchisees, ufoc, ftc, starter kit, micheal, franchises, webster, explicitly, brilliant, radar, collective

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.

Technorati Tags: mary kay, ftc rule, envelope stuffing, traditional franchises, franchise, apparently, business format, frauds, prerequisites

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

At the scam.com forum, there is considerable debate about whether ACN is a pyramid scam.

One poster cites, in support of his theory that ACN is an illegal pyramid scam, two Government announcements, one from Australia and the other from the Canadian Competition Bureau.

In the Australian Federal Court,

"On 15 November 2004 the ACCC instituted proceedings against Australian Communications Network Pty Ltd, a seller of telecommunications services, for alleged breaches of the pyramid selling scheme provisions of the Act.

On 23 March 2005 Justice Selway found that ACN participated in, promoted and induced or attempted to induce persons to take part in a pyramid selling scheme in contravention of section 65AAC of the Act, and that Mr Martin Paech, an ACN director, aided and abetted and was knowingly concerned in those contraventions.

The court also found that Mr Keith Janke and Mr Jonathon Gibbs, two ACN Independent Representatives, were knowingly concerned in and aided and abetted the contraventions, and Gibbschade Pty Ltd participated in the pyramid selling scheme, and attempted to induce other persons to participate in the scheme, in contravention of the Act."

And according to the Competition Bureau,

"The Competition Bureau alleges that ACN Canada, as it is known, and its participants, through its web sites and at public meetings, recruited new participants by exaggerating income expectations without disclosing the income of a typical participant. Under the Competition Act, it is illegal to make reference to earnings in a multi-level marketing plan without disclosing a typical participant's income. In addition, operators of a multi-level marketing plan must ensure that any income representation made by a participant in the plan includes disclosure of a typical participant's income."

There is a significant problem with relying on these two cases: the Australian Federal Court's decision was overturned, and the Competition Bureau's case did not survive the preliminary hearing. For the latter, you would have had to gone to Corey Lewis's website, a Manitoba Lawyer, to find this information out as it does not appear on the Competition Bureau's website.

I think that these decisions are probably correct, the deception in most modern MLM's relate to the level of average compensation, the number of drop-outs, and the losses that those drop-outs on average have sustained, concepts related to earnings claims. The usual criminal definition of a pyramid should by applied to concepts like Skybiz.

Notwithstanding that these cases no longer can be relied upon, a number of independent consumer watch sites continue to rely upon these two cases to show that ACN is a pyramid scam. For example, over at mlmwatchdog.com there is a report purporting to show that ACN is a pyramid scam - but it has not been updated to reflect the status of these two competition cases.

Does this mean that I think ACN is not employing deceptive marketing practices? Well, this commentator certainly believes that ACN is employing deceptive marketing practices.

But, my own view is that a proper analysis of ACN's marketing practices should start with the proposed 26 new deceptive marketing practices, proposed by the FTC in April, 2006. Tell me what you think.

Technorati Tags: illegal pyramid scam, pyramid selling, acn, canadian competition bureau, accc, network pty ltd, government announcements, independent representatives, selway, contravention, jonathon, telecommunications services

Posted by michael webster at 8:27 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.

Technorati Tags: mary kay, pink cadillac, free car, self imposed, commentators, illusion, mk, deadline, blog

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)

Technorati Tags: mary kay cosmetics, social proof, receipt, embarrassment, atmosphere, scripts, pink, embarrassed

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

FTC Competition Director to Announce Federal and State law enforcement sweep targeting bogus business opportunities and work-at-home scams.

The Federal Trade Commission, Department of Justice, and U.S. Postal Inspection Service will announce a federal and state law enforcement sweep targeting bogus business opportunities and work-at-home scams. The press conference on Tuesday, December 12 at 10:30 a.m. will announce more than 100 law enforcement actions and new education materials. Consumer guests who invested in bogus business opportunities will also be telling their stories.

One bogus business opportunities sweep was done in June 2002, called appropriately "Busted Opportunity". Another one was done in February, 2005 called Biz Op Flop. Any bets that we will see exactly the same type of fraud as we saw four years ago, with the method of operation?

Technorati Tags: bogus business opportunities, work at home scams, law enforcement actions, state law enforcement, enforcement sweep, ftc, postal inspection service, new education, competition director, department of justice, education materials

Posted by michael webster at 12:14 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?

Technorati Tags: pyramid scheme alert, pyramid scams, amway quixtar, wfaa, business in china, level marketers, mastery, mary kay

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.

Technorati Tags: tupperware, ftc, multilevel marketing, franchisor, network marketing business, level marketers, franchise rule, business journal, recession, business opportunities, jurisdiction, disclosure, inclusion

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:

Technorati Tags: pyramid scheme alert, mary kay cosmetics, pyramid schemes, multi level marketing, multi level marketing companies, cfe, spiritual deliverance, robert fitzpatrick, education website, false profits, financial investigations, consumer education

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.

Technorati Tags: mary kay cosmetics, mk, pink, networking marketing, due diligence, nothing wrong, disclose, mlm, blog

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

During the Korean War, the Chinese Communists, in contrast with their North Korean Allies, were able to persuade more American POW's to engage in some sort of collaboration with the enemy. The most extreme of these collaborations involved statements from the soldiers denouncing the American involvement in the Korean war.

How did the Communists achieve this? The American soldier was well trained to give nothing more than their rank and serial number. But the Chinese realized that if they got the POW to commit to some mild statements, such as "America is not perfect", then it would be easier for the Chinese to obtain further commitments. Robert Cialdini, one of my favourite authors on influence, explains this in more detail.

What does this have to do with influencing people and making sales?

Cialdini also discusses the "quintessential American compliance setting", the Tupperware party. It is his view that there are four "weapons of influence" being used at the typical party demonstration. First, at the beginning of the party or demonstration, a number of silly games may be played and those persons not "winning" the game will be offered a loot bag -reciprocity. Second, is commitment: everyone is asked to declare how Tupperware will change their lives. Third, one the selling begins, and everyone at the party sees other people re-affirming their the value of the Tupperware product, social proof kicks in. All of these people cannot be wrong can they?

Finally, what Cialdini calls the "real power" of the party is that fact that the request to buy comes from a friend, whom you presumably like well enough to at least attend their party or demonstration. The sales pitch is not from a "professional" but an amateur neighbour. Even when you know that your friendship is being pitched for a sale, you comply. Interesting.

But Cialdini, who wrote this originally in 1984, has not kept up with evolution of the party or demonstration systems. He doesn't explain the further attraction of the network marketing aspect, at its worst the pyramid scheme illusion. Nor does his explanation resonate with why Tupperware has failed to keep sales consultants in their system in North America for the past seven years.

Any ideas as to why Tupperware or the party sales system is faltering in North America?

Technorati Tags: robert cialdini, chinese communists, american pow, tupperware party

Posted by michael webster at 5:32 PM | Permalink | Comments (0) | TrackBacks (0)

In a very interesting story, Charles Duhigg wrote, on November 13th, 2006 in the The New York Times about Why Short Sellers Want to Crash the Tupperware Party. The story was repeated at Kim Klaver's Network Marketing Blog and also at Ty Tribble's MLM Blog.

Mr. Duhigg reports that a number of short sellers are apparently betting that the FTC Business Opportunity Rule will become law and the resulting disclosure requirements will cramp recruiting.

"Analysts say the companies' real concern is that the new rules will undermine their ability to attract new sales representatives.

"If companies have to tell recruits that the average income is only $1,400 instead of the $50,000 advertised on their Web site, or that the average salesman only lasts two months, a lot fewer people are going to sign up," said Mimi Sokolowski, an analyst with Sidoti & Company who follows Tupperware Brands, Nu Skin Enterprises and other publicly traded multilevel marketing companies. She said that if the proposed rules pass without modification, recruitment in the United States could fall by as much as 40 percent."

The full story is a bit more complicated. Take for example Tupperware. For at least seven or eight years, Tupperware was regulated as a franchise in the United States, which required considerably more disclosure than the FTC wants with the new business opportunity rule. So, you would think that Tupperware's recruiting stock would improve with the more minimal business opportunity disclosure.

But Tupperware has been losing its sales force, according to its SEC filings, for almost five years in North America. Tupperware has simply failed to convince the public that their product is worth more than the plastic from the local dollar store, in my opinion. This accounts for their failure in North America better than the possibility of a new disclosure obligation.

Technorati Tags: multilevel marketing companies, tupperware party, network marketing, kim klaver

Posted by michael webster at 9:53 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.

Technorati Tags: mary kay consultants, sales territories, franchisor, encroachment, distributorship, stealing, business opportunity

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

The FTC has announced:

"The manufacturer of a magnetic "fuel saving" and emissions-reduction device that did not save fuel or reduce emissions will pay $4.2 million to settle Federal Trade Commission charges that his advertising claims were false. The FTC will seek to provide redress to consumers who bought the device based on the false advertising claims. In addition, the defendants will be banned from selling or manufacturing magnetic fuel savings and emissions reduction devices.

"Consumers are looking for ways to increase fuel efficiency and save money at the pump," said Lydia Parnes, Director of the FTC's Bureau of Consumer Protection. "There are some practical ways to do that, like following the maintenance schedule in your owner's manual, combining errands, and avoiding jack-rabbit starts. The fact is that many products that claim to save fuel don't work, and worse yet, may damage your car and end up costing you more."

In October 2004, the FTC filed a suit in U.S. district court alleging that marketers, and the resellers working with them, were making deceptive claims for FuelMAX and Super FuelMax products. The Web site operators and their affiliates - spammers who drove traffic to their sites - made claims such as:

Increases gas mileage 27%;

Reduces Fuel Consumption;

Reduces Emissions;

The FTC alleged that the magnetic "fuel saver" does not save fuel, does not increase gas mileage, and does not reduce emissions. The agency charged that the false claims violate the FTC Act. The agency also alleged that by providing promotional materials with false claims to affiliates, the defendants provided them with the means to violate the FTC Act". (my emphasis)

Who were all the marketers and resellers and how much were consumers bilked? Apparently, the FTC is going to get $2.4 million from the con criminals, but how much of that will actually be returned to consumers and how much will end up in the general coffers of the FTC?

Technorati Tags: ftc, false advertising, magnetic fuel, trade commission charges, jack rabbit, consumers, errands, fuel efficiency, fuel saving, fuel savings, maintenance schedule, parnes, redress, lydia, costing, save money

Posted by michael webster at 2:10 PM | Permalink | Comments (0) | TrackBacks (0)

What State Offices can you get information regarding Business Opportunity Disclosure Laws?

"Twenty-six states have business opportunity laws. Most of these laws prohibit sales of business opportunities unless the seller gives potential purchasers a pre-sale disclosure document that has first been filed with a designated state agency.

State business opportunity laws typically cover every imaginable type of business opportunity that might be offered. If a business opportunity seller is not required to provide pre-sale disclosures by the Franchise Rule, these disclosures will almost always be required by the laws of the states listed below.

The disclosures required by state business opportunity laws differ, and usually provide more abbreviated information than the FTC’s Franchise and Business Opportunity Rule requires. However, most of these laws provide important rights and remedies for business opportunity investors, including required security bonds to cover investor losses.

If you are considering purchasing a work-at-home or other business opportunity, and reside in a state with a business opportunity law, we encourage you to find out more about the protection provided by your state statute before you invest."

This last bit of advice is, unfortunately, useless or likely to be misunderstood. You cannot phone, write, or communicate by email with these State Offices and expect them to vet your favourite business opportunity, nor will they direct you to any specific attorney or lawyer for assistance. Nor does it mean anything if the business opportunity is registered with the State Office. And I certainly would not rely upon the provision of a bond to cover my losses, either.

Generally, the point of knowing what information you are entitled to allows you with confidence to ask for and demand that information. Probably the most important information to demand is a list of "prospective" purchasers so that the cost of due diligence can be shared among the group. You won't pay much more than $500 if there is a good chance that the $500 will turn out to reveal very bad news.

Posted by michael webster at 10:32 PM | Permalink | Comments (0) | TrackBacks (0)

The Texas Business Opportunity Act provides a number of required disclosures:

Disclosure Requirement

Under the Texas Business Opportunity Act, the seller must provide you with the following information at least 10 days before you sign a contract or turn over any money to the seller:

The names and addresses of all persons affiliated with the seller in this particular business;

A copy of a current financial statement of the seller;

A complete description of the actual services the seller agrees to perform for the purchaser;

If training is promised, a complete description of the training, length of training, and cost of travel or lodging during the training;

If services are promised in connection with placement of equipment or products, the full nature of the services and the nature of agreements to be made with the owners or managers of business locations;

If the seller or his or her representatives have been adjudged bankrupt or have been subject to a judgment in a civil suit involving fraud or embezzlement during the past seven years, he or she must tell you;

If the seller makes representations about sales or earnings potential, he or she must disclose both the total number of people participating in the business opportunity for the past three years and the total number of people who have actually achieved the represented sales or earnings within the past three years.

Cancellation. The seller must give you the following statement in writing as part of the disclosure requirement: If the seller fails to deliver the product, equipment, or supplies necessary to begin substantial operation of the business within 45 days of the delivery date stated in your contract, you may notify the seller in writing and cancel your contract. (my emphasis)

Imagine how powerful this information would be if it was public, and could be tested by independent third party agents. It is of no use if only disclosed 10 days before the purchase as there is not sufficient time to conduct the due diligence properly.

Technorati Tags: texas business, opportunity act, business opportunity, business locations, current financial, financial statement, bankrupt, purchaser, disclosure, judgment

Posted by michael webster at 11:30 AM | Permalink | Comments (0) | TrackBacks (0)

One of the typical deceptive practices used by business opportunity sellers use is to parade the "big earners" out for display. The FTC has proposed several ways of dealing with the deceptive marketing practice. But since the late 70's Amway has been forced by the FTC to state that over half Amway recruits make nothing and the rest average $64/month. I don't know how current these numbers are, but it doesn't seem to make a difference to Amway's ability to recruit.

Let us suppose that that the above numbers were accurate: 50% of Amway recruits make nothing and the average earnings of the other 50% are $64/month. Why could Amway continue to sell this opportunity? Is there some simple cognitive failure among recruits that accounts for them discounting or ignoring these earning claims?

Technorati Tags: amway, ponzi scheme, deceptive practices, deceptive marketing, ftc, extrapolate, opportunity sellers, business opportunity, scheme works, discounting, induction, cognitive, recruit, earning, suppose, earnings

Continue reading "Who Else wants to be Rich?" »

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Section 437.5 of the FTC's proposed business opportunity rule lists 18 prohibited practices, a) to r). Since four of these practices contain conjunctions, I believe that there are actually 22 deceptive practices, and since Simon and Garfunkel didn't pen a song about 22 ways to leave your lover, I call this thread 26 Ways to Leave Your Money.

Kim Klaver asked me to post the entire list of 22 deceptive practices, which are from the Federal Registrar Vol. 71, No. 70/Wednesday, April 12, 2006.

Here is the list, which I have taken the liberty of writing in plain English, or a plain as I can be.

1. Tell a prospective distributor that they have contracted out of the protection offered by the FTC Biz Op Rule.
2. Provide, orally, visually, or in writing information inconsistent with the disclosure document.
3. Provide, orally, visually, or in writing information with inconsistent with the earnings claim document.
4. Include in the disclosure document more information than is required by the FTC Biz Op Rule.
5. Provide misleading information about the gross, net income or profits, that other prior purchasers have earned.
6. Tell a prospect that the FTC or some other government prevents the seller from making an earnings claim.
7. Fail to make available to prospects written substantiation of the seller's earnings claims.
8. Fail to make available to the FTC written substantiation of the seller's earnings claims.
9. Provide misleading information about how commissions, bonuses, incentives and other rewards are paid.
10. Misrepresent the essential nature of goods being sold by the prospect.
11. Provide misleading information about the nature of support that the prospect will receive.
12. Tell the prospect that the seller, lead generator, or locator will likely find customers, accounts or locations.
13. Misrepresent the seller's refund or cancellation policy to the prospect.
14. Fail to provide the refund or cancellation, when the terms in 13 are meet.
15. Advertise the distributorship as an employment opportunity.
16. Offer the prospect an "exclusive" territory, when the terms of the territorial protection are not exclusive.
17. Offer the prospect an "exclusive" territory that intersects another territory assigned to another purchaser.
18. Tell the prospect that some trademark holder, or government agency directly or indirectly endorses the opportunity.
19. Misrepresent to the prospect that some reference, ie shill, has is a purchaser of the opportunity.
20. Misrepresent to the prospect that some reference, ie shill, can provide an independent reliable report about the company.
21. Fail to disclose that you have paid your references.
22. Fail to disclose that you have personal relationships with your references.

This is my rendering of the proposed practices into plain English, but please consult the FTC Business Opportunities Rule.

Technorati Tags: deceptive practices, disclosure document, simon and garfunkel, prospective distributor, ftc, inconsistent, conjunctions, kim klaver, biz op, business opportunity, earnings, liberty

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Who knew that the FTC could sentence corporations to die? But according to court documents filed on behalf the MLM corporation Seasilver, if the corporation had to pay the full $3 million to the FTC that they agreed to it would be a death sentence for the company.

The FTC announced what may turn out to be a death sentence, several days ago. Seasilver failed to pay $3 million dollars to the FTC by September 2004 and now the entire $120 million is owed.

Perhaps the entire corporation should ingest massive quantities of Seasilver's new products, to stave off death? Previously, Seasilver had made miraculous medical claims for its products, which may have included preventing death. Unfortunately all these claims were debunked by Quackwatch. The death sentence can be read here. It has the virtue of being short and quick, as opposed to the stipulated final judgment entered into in 2004.

What is the best part of this story, for the consumer? That another health fake mlm was shut down? That consumers will be refunded some $120 million?

Technorati Tags: seasilver, ftc, quackwatch, death sentence, unfortunately, final judgment, mlm, massive quantities, medical claims, court documents, stave, stipulated, miraculous, virtue, corporations

Continue reading "Who knew that the FTC could sentence corporations to death?" »

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