There are numerous conclusions that one can draw from a careful examination of business volume, when looking at direct selling companies. This article will focus on two-the distinction between a single level and a multilevel direct selling company and a test for legal versus pyramid for a multilevel direct selling company.
A simple definition first: Remember the old saying that is true for almost any business venture? “Nothing can really happen until someone sells something.” Well, business volume is simply the dollar amount that the “someone” pays for the “something.”
In direct selling companies, business volume can be of two types. The business volume directly created by the independent contractor representative is the first type, commonly called “personal volume.” The three most common forms of personal volume are:
1. Purchases for resale to customers.
2. Purchases for personal and family use.
3. Purchases of customers, found by the representative, who order directly from the company.
Please note that some plans are designed to treat the third type of business volume as personal volume, even if the customer also signs a representative application; but such a treatment does not change the nature of the business volume in this analysis. The issue is simply that the representative has found and brought to the company purchasers of the products or services. This business volume is credited to the representative who brought the customer to the company when that representative’s compensation is calculated. If these three types of business volume are the only types of business volume designed into the marketing program-and for which a representative can be compensated-we have a single-level direct selling company.
Most direct selling companies, however, also have a second type of business volume. These companies want the representative to do more than just bring the company business volume as described above. The company also wants the representative to be the “new representative finder.” The legal incentive to induce sponsoring is to offer compensation based upon the business volume generated by the sponsored representative and on the business volume of those they sponsor, and so on. A common name given this type of business volume is “group volume.” The existence of this type of business volume, or more specifically, the availability of compensation paid on this type of business volume, is what makes a company “multilevel” in the compensation sense, even if it does not use a multilevel form of physical distribution. Thus, we have the first distinction determined with a careful look at business volume.
Whether a company is “single-level” or “multilevel” can be determined by applying the analysis of the above two paragraphs. To further clarify, note that a single-level company pays its representatives for their business volume production, while a multilevel company pays its representatives for their business volume production and optionally pays its representatives for the business volume production of the representatives they sponsor.
The next distinction, to my mind, is a make or break distinction and a legality versus pyramid test. Does the money the company make, and does the money paid to representatives, flow primarily from business volume and NOT from the mere act of sponsoring another representative? Ideally, ALL such money flow is triggered by business volume. If ANY money flows to the representative for recruiting another representative WITHOUT a business volume component, the terms “red flag” or “head-hunting fee” are used. In a legal compensation plan, the act of sponsoring alone can never trigger a commission payment. All compensation must be based on business volume, and no compensation can ever flow from the act of sponsoring alone. Even plans that are technically correct in design, but use inappropriate language to suggest the representative is paid for sponsoring, have significant risks. Such an error in design or implementation is a red flag to regulators investigating pyramids. In a legally designed plan, no one-not the company and not any representative-makes money, unless business volume is generated by products and services being purchased by consumers.
To sum up, a careful look at business volume is what distinguishes a single-level direct selling company from a multilevel direct selling company. And looking carefully at the money flow triggered by business volume, rather than just sponsoring, is a strong indication of a legally designed company.