Common sense is not all that common. – Anonymous
When putting together a good set of policies and procedures for an MLM startup, common sense requires that companies adhere to something called “the 70 percent rule.” At its core, the 70 percent rule exists as a way to make sure that network marketing companies do not lose sight of why they exist.
The network marketing industry exists as a way to get products to market efficiently and without the need for a multi-billion dollar advertising budget. In other words, it is a great way for small entrepreneurs to compete with large corporate conglomerates.
In 1979, the Federal Trade Commission (“FTC”) legitimized the network marketing industry by concluding that “[t]he Amway Sales and Marketing Plan is not a pyramid plan.” In the Matter of Amway Corp., Inc., et al., 93 FTC 618 (1979). It reached this conclusion for a number of reasons, one of which was that Amway adhered to a “70 percent rule” which was set forth in its policies and procedures.
According to the FTC:
The ’70 percent rule’ provides that ‘[every] distributor must sell at wholesale and/or retail at least 70% of the total amount of products he bought during a given month in order to receive the Performance Bonus due on all products bought . . ..’ This rule prevents the accumulation of inventory at any level.
[T]he buy-back rule, the 70 percent rule, and the ten customer rule are enforced, and … they serve to prevent inventory loading and encourage retailing.
A very important part of this FTC order, a part that is too-often ignored by MLM companies, is the part about how Amway actually enforced its 70 percent rule “to prevent inventory loading and encourage retailing.” The whole purpose for why the network marketing industry exists is to get products to retail customers. If distributors are inventory loading then this purpose is clearly not being served.
The problem with inventory loading, from a business perspective, is that it demoralizes distributors to have a garage full of unsold products. An MLM company with demoralized distributors will not stay in business for very long.
From a legal perspective, the problem with inventory loading is that if distributors continue to buy product that they are not selling then that is a good indication that the product is not truly what the distributors are buying. There is a good chance that what they are truly buying is an opportunity to be involved in an illegal pyramid scheme.
In sum, the 70 percent rule arose in 1979 from the landmark Amway order as one guideline for keeping an MLM busines legitimate in the eyes of the FTC. More fundamentally, however, it is just common sense to require distributors to actually distribute products. Click here to see some of the cases which have applied the 70 percent rule.