Does the Herbalife settlement affect your operations?
I’ve released a few articles discussing the Herbalife settlement and what it means for the industry already. Commissions are my area of expertise so my previous articles focused there, but I’m also intrigued by the operational implications of the settlement. Three of the restrictions we see in the Herbalife settlement will significantly impact their operations and IT teams. Herbalife will have to develop systems for rigorous training, sales tracking, and inventory tracking.
While we can’t know which, if any, of these rules will affect the industry at large, many companies are looking into the settlement, trying to identify steps they can take to insulate themselves against the FTC. Modifying your operations to comply with these requirements might not be a bad idea, so I’ve taken some time to lay each of them out—to evaluate the purpose and value of each restriction as well as the strain of implementing each in your own operational plan.
The training program specified in the Herbalife settlement is very specific and very much centered around how a distributor can know if their business is successful. A customer wanting to become a distributor must first receive training from Herbalife on subjects like how to calculate profit and loss, how to calculate ROI, and so forth. The company also must train distributors on their return policy—so that every distributor knows how they can return product if they are dissatisfied.
There’s then a second training program that distributors must go through if they want to open and operate an Herbalife storefront. New distributors won’t even be allowed to go through this second training until they’ve been with the company for twelve consecutive months. The specifics of this second program are similar to the first. Again—how are you calculating profit and loss? How do you determine if you have enough to make a storefront fiscally solvent?
To put it simply, the objective of this requirement is to avoid any possibility of someone becoming a distributor without intending to, without a full understanding of the risks they’re taking on, or without understanding the mitigating factors to those risks.
In a previous article, I discussed the cultural norm in many companies across the industry of signing everyone up as a distributor. This is one more way regulators are trying to restrict that behavior. If I’m a distributor trying to sell product, I’m not likely to push for my customers to sign up as distributors if doing so involves this kind of time investment on their part. Our CEO, Mark Rawlins, has written multiple times about the difficulty of breaking this “recruit everybody” mindset among distributors. So while I wouldn’t argue that complying with this specific requirement is critical, I would say that if you’re looking for ways to discourage your sales force from blanket recruiting, this is one possible way to do that.
As I read the settlement, in addition to developing the actual training materials, Herbalife must develop a training system that delivers and tracks the training. They can’t simply create training videos, put them on YouTube, give new distributors a link, and call it a day. In order to pass audits, they must keep records that demonstrate that each distributor legitimately received the training. If trainings happen in a distributor’s digital back office, there are ways of tracking whether or not a distributor started their training, how much of it they watched, how many times they watched it, and so on. If the training module has eight videos, but a distributor viewed only five and a half, that information should be accessible to the corporate operations team.
Having a system like this in place makes it possible to develop a policy that says you’re not a fully active distributor until you complete the training—maybe you can accrue earnings, but you can’t receive them until you complete the training. Now, who’s to say that the training videos aren’t playing to an empty living room? But at least you know that the videos were played start to finish before you issued commissions. The burden of taking the trainings to heart ultimately lies with the individual distributor.
One of the more complex and fascinating things that came out of the Herbalife settlement is the strictness with which Herbalife is expected to track retail sales made between distributors and customers. The easiest way for a company to track retail sales is for customers to purchase product directly from the company. But in some situations that’s not the most practical solution. Some Herbalife distributors choose to open storefronts. Herbalife doesn’t know if the sales in those storefronts occurred or not.
Going forward, Herbalife must store auditable data about retail sales happening in the field. In order to submit a retail sale, distributors must collect and document:
- the method of payment
- the products and quantities sold
- the date
- the price paid by the purchaser
- the first and last name of the purchaser
- two forms of contact information (telephone number, address, or email address)
- the customer’s signature
Herbalife is then required to audit the retail sales information they collect to make sure distributors aren’t submitting fraudulent claims—ensuring that the reported customers are real people outside the organization.
This is unique. I’ve never seen anything like this come out of a legal action taken against an MLM. But you can see the reasoning behind it. This ties into the settlement’s restriction on commissionable distributor volume. The limit is meant to be a common sense amount of volume a distributor can personally consume. Any volume a distributor buys but doesn’t consume must be sold to a real customer because someone has to consume the product. The definition of a pyramid scheme is an MLM company selling products nobody actually has a use for—selling products which are nothing but an excuse for the compensation plan to move money around.
Again, no rule like this has come up before so I wouldn’t say that I expect it to become an industry standard. But because it is common for distributors to carry inventory and sell it directly to customers—and since regulatory bodies dislike claims about that type of behavior occurring when it’s not provable—implementing some methodology for tracking that isn’t a bad idea. It can only help you to have those numbers as proof of product consumption.
The best choice for Herbalife—and you if you decide to track person-to-person sales—is to create a clean and simple interface for inputting the required information in the distributors’ digital back office. You want your IT provider—whether it’s in-house or third-party—to fulfill this requirement because capturing the information digitally in the field makes the process easier on the distributor and makes the data easily auditable on the corporate end. Look at what Square’s done, collecting digital signatures and e-mail addresses. There’s no reason a distributor in the field couldn’t input a customer’s credit card information, contact information, etc. and have it logged as a retail sale out of their inventory.
Herbalife can pay commissions only on distributor volume within a personally consumable amount—but they can pay on additional distributor volume if it becomes customer volume via person-to-person transactions. This means that Herbalife needs a way to not only track those sales, but also to compare the inventory carried by distributors to the sales made to those distributors.
All of that data must be accessible—and auditable. It can’t be in a file cabinet of receipts in a back room. These records need to be digital. That puts an onus on your IT solution because accepting, processing, and storing that data isn’t something you want to do with horizontal market software. The last thing you want is an Excel document full of these supposed retail sales and a hard drive full of scanned or photographed receipts. Auditing records stored like that would be a nightmare.
Using the same software solution to capture and store information about purchases made directly with the company and purchases made between individuals out in the world makes it possible to quickly audit whether or not a distributor had enough product to make all of the sales they’re claiming. It also makes it possible for Herbalife to display the balance in the distributor’s back office and thus incentivize distributors to make and track those sales.
Again, it’s hard to know if restrictions like this will become the new normal for industry court cases. But implementing a system like this can only help you. More likely than not, distributors in your sales force are selling product directly to customers—buying more product than they personally consume. It’s not a bad idea to talk to your IT provider to find out what you can do to keep clear and auditable data about the real personal consumption happening in the field.
These operational shifts will be major for Herbalife—working to implement them right away under the FTC’s close watch—but you can make similar, incremental changes to your operations in advance of any regulatory threat. In my article about post-Herbalife commission plan considerations, I emphasized the importance of differentiating customers, limiting blanket-recruiting, and incentivizing your sales force to acquire and sell to customers. While there are many ways to do these things, it’s fascinating to consider the specific ways that Herbalife must accomplish them. Making small changes might actually improve the health of your sales force and customer base. The technology is there—the option is there. Will the industry choose to use it?
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