Compliance and Regulation Rules for Direct Sales Companies

Compliance and Regulation Rules for Direct Sales Companies

The Federal Trade Commission (FTC) has been cracking down on direct sales companies for years—and became even stricter during the Covid-19 pandemic. In a way, the FTC is just doing its job. It is in charge of protecting consumers from fraud—and many scammers did take advantage of public fear to promote their products.

But will the direct sales regulations that punish a handful of violators limit the efforts of legitimate direct sales companies? Let’s look at both sides of the story.

Fighting False Claims and Clickbait Ads  

On April 20th, 2020 the FTC slammed a warning against 10 huge multi-level marketing companies for selling unapproved products that would supposedly cure or prevent the coronavirus.

These companies sold health supplements and juices. Social media posts claimed to “boost immunity by 500%”, and one even used the slogan “#FlattenTheCurveWithImmunity” on its website. According to the FTC, these made a direct promise that their products would protect users from the pandemic, and gave figures that were not supported by scientific research.

In April 2021, the FTC continued its crusade, issuing warning letters to health centers and herbal supplements. By then, it had also released the COVID-19 Consumer Protection Act. This means marketers who are proven to make false claims about the prevention or cure of the virus will be given a $43,792 fine per violation.

These direct sales regulations affect the way that any beauty or wellness brand can promote its products. For example:

  • They cannot make claims without clinical testing—which is a problem for natural or homeopathic brands that typically do not have the huge research budgets of global pharmaceuticals.
  • Companies cannot directly claim that an ingredient can lower health risks, whether it is for COVID-19 or cancer.
  • They cannot use superlatives, such as testimonials like “This product helped me beat arthritis forever!”

Monitoring Recruitment Processes

The FTC has also warned against aggressive recruitment campaigns which promise higher earnings, more freedom, or guaranteed success. Even testimonials of top salespeople declaring their income (“I earned $5,000 a month while working from home!”) have fallen under scrutiny.

The FTC is particularly strict for multi-level marketing companies and pyramid schemes, where salespeople have to purchase the product or recruit others in order to advance up the ladder. In their circular on Business Guidance Concerning Multi-Level Marketing, it explains that these have an “unlawful compensation structure” because it pressures people to recruit others in order to earn, rather than a real demand for the product.

The FTC describes this problem as “inventory loading” – or required purchase of products – and is considered illegal and subject to fines or even business closure. Even direct sales companies that guarantee money-back can be issued a warning.

According to the FTC, inventory loading takes advantage of the sales recruits. If they are unable to sell products, they will rarely return them to the company because of a complicated process, or a tendency to blame themselves for “not being a good salesperson.” So they will never recover their initial investment, while those higher up in the marketing ladder earn from recruitment fees or wholesale purchases.Social Selling Wellness Products

The Marketing Challenge of Direct Sales Companies

There are direct selling companies that try to take advantage of customers and salespeople, but most are legitimate businesses that serve a real need.

Strictly speaking, multi-level marketing is only one type of direct selling. Top brands like Avon, Amway, HerbaLife, and Mary Kay have been around for decades—and are known for high-quality products that are more affordable and accessible than brands in big department stores.

Fighting reputation and government restrictions

Their direct sales model brings the product directly to consumers, through “consultants” or “partners” who work with their local community and can provide personalized service and demonstrate the product in unique and enjoyable ways. We all remember how our parents loved their Tupperware parties or got makeovers from the neighborhood Avon lady.

Unfortunately, these reputable direct sales companies are affected by the direct sales regulations, which limit their ability to grow the company or promote their products. So, aside from fighting the public misconception and mistrust of direct sales (caused by unscrupulous brands with shady pyramid schemes), they must also walk a minefield of rules set by governing bodies like the FTC.  

Direct Sales Compliance and Regulation: Guidelines and Rules for Selling

The FTC has set these guidelines for all direct selling companies for advertising and marketing.

  • You must present reasonable basis or objective evidence for a claim. This includes giving clinical studies or citing the scientific source
  • Companies must avoid misleading images, such as expensive homes or cars, that implies that participants can get similar results
  • You must avoid promises of making career-level income, including phrases like “become a stay at home mom” or “quit your job and earn $$$$$ a month”
  • Companies cannot use testimonials from a successful minority (ex: top salespeople) unless you also state the amount they earned or lost
  • You cannot show a hypothetical earnings scenario. For example, you cannot say: “Recruit 30 people, and if they sell just $1,000 of product each month, you will get $1,500—without doing a single thing!”
  • Product endorsers (whether celebrities or reviews from users) must have used the product, and their claims must indicate that this is a personal experience and not evidence of a claim
  • Ads with endorsers must say “results may vary” or “results not typical”
  • Articles and ads that show “Before and After” photos (typical in diet supplements or weight loss programs) must state other lifestyle changes or factors that contributed to a person’s success
  • Expert endorsements, such as using a doctor or nutritionist, must clearly state the nature and limits of the person’s expertise

The Future of Direct Selling in the New Normal

Social Selling Essential Oil ProductsDespite these challenges and strict government regulations, the direct selling industry has a huge opportunity for growth in the New Normal. People now prefer buying from local sellers or consultants, rather than risk the trip to a big mall. In this case, a makeup brand sold through a local direct seller may perform better than a luxury brand sold in Sephora.

Marketers are also talking about the importance of “value-based selling” – or getting customer purchase and loyalty by focusing on service and satisfaction. Value is no longer just about the price, but positive experiences and personalization. A direct seller who personally understands the customer, and is both a neighbor and a trusted friend, has a great advantage over a website chatbot or a random salesperson in a store.

That said, the most successful direct sales companies will not try to lure customers with extravagant claims and fancy images. These are traditional advertising methods that no longer work on a more skeptical customer. They must tap their greatest strength – the passion and persuasiveness of their consultants and salespeople – who in turn must know their product and their customers inside out.

The best direct sales companies will give accurate product information, and provide real benefits and rewards to the customers. They do not need to make false claims to sell their products, and direct sales compliance is already built into their commitment to being a brand that people can trust.