Top MLM Attorney Kevin Thompson has written an excellent article about Front Loading.
In the past, I wrote a detailed article exploring the boundaries of inventory loading. In that article, I gave a few conflicting definitions used to define inventory loading.
The courts have their definition, the FTC has its definition and the Direct Sales Association has its own. Without boring you with the minutia, inventory loading basically exists when distributors purchase product in bulk quantities they can never reasonably sell or use in a month. Why do they do this? They do it mainly to qualify for commissions.
The courts add another layer to this definition that muck it up a little: inventory loading can occur when distributors are purchasing a minimum amount of product in an effort to qualify for bonuses. FTC vs. Omnitrition
Due to people's zeal to make money fast, we're seeing more programs launch that rely on inventory loading. And to be more specific, we're seeing more FRONT LOADING in programs today. Front loading occurs when the new reps are required or financially incentivized to buy an extraordinary amount of product upon enrolling. Legally, the purchase of inventory must always be optional. This is crystal clear, MLM Law 101. So you might be asking, If the initial purchase is made voluntarily, what's the problem?
The answer lies with one word: MOTIVATION
Regulators try to analyze the motivation driving people to purchase the product or service. If the motivation is pure and distributors are purchasing product due to a sincere want or need, the program is in great shape. If, on the other hand, distributors are purchasing product primarily to qualify for additional bonuses, it's a problem. This is known as Opportunity Driven Demand.
Here's the question
If we know that regulators want to see consumers / distributors purchasing product for the right reasons, why do some companies continue to provide distributors with financial incentives to buy a lot of inventory upon enrollment? It's a long question, I know. I'll break it down into two parts:
- Regulators want to see people buying product for the right reasons; therefore,
- why are some companies offering extra rewards to encourage people to buy more product?
BurnLounge got roasted for doing this. If you need a refresher, I wrote a summary on the BurnLounge case. In BurnLounge, participants were required to purchase an expensive, $400+ product product to qualify for a particular bonus. The court concluded that it was the additional financial incentives that ultimately led the distributors to purchase the premium products.
Gerry Nehra recently wrote an article on the subject, titled Where Have All The Products Gone?. He and I both see a dangerous trend: the products are becoming less relevant in an age where people are looking to make easy money with clever pay plans. In his article, Gerry summed it nicely:
The argument that purchases are for intrinsic value is seriously weakened if the purchases are:
Required to be made to be allowed to sign up as a distributor.
Required to be made by a distributor to “open a product center.”
Required to be made by a distributor to qualify for a compensation plan payment.
Required to be made by a distributor to advance in the compensation plan.
Required to be made by a distributor to “re-enter” the same or a different “phase” or “cycle” of the compensation plan.
Required to be made by a distributor to “buy in” to a higher compensation plan title or pay level.
I highlighted the sections that are more relevant for this article on front loading. If we know that regulators want to see pure motivation driving product consumption, companies need to stop adding sweeteners for bulk orders. An example would be when a company offers to pay a distributor at a higher rank for a year IF the distributor purchases a builder pack, usually consisting of a lot of inventory costing between $1,000 and $4,000. I understand the logic of having it: We want them to get started right or We want to reward the 'serious' builders. The real reason why we see the extra sweeteners: they want to create a fear of loss, putting the distributor in a position to make a long-term decision. New distributors ask themselves, Do I buy the minimum and forgo the extra money, or do I go 'all in' and maximize my earning potential?
If you're a company that's considering offering an additional bonus for bulk orders, be careful. To misquote one of the greatest philosophers of all time, Check yourself before you wreck yourself because excess inventory is bad for your health. – Ice Cube.
Front loading by itself does not render a program illegal. However, rest assured it'll be part of the kitchen sink that gets thrown at a company if the company upsets the wrong regulator.