Consumer Protection / Direct Selling in the US / Income and Earnings

Breaking Down The FTC’s Updated Business Guidance Concerning Multi-Level Marketing and Income Disclosure Statements

By Branko Jovanovic and Monica Zhong^[1]

Ensuring that direct sellers’ Income Disclosure Statement (“IDS”) reliably and accurately reflects the actual experience of a typical distributor has long been the FTC’s requirement. On April 30, 2024, the FTC published updated Business Guidance Concerning Multi-Level Marketing (“2024 Guidance”)^[2] that details the current principles and practices that the FTC considers in its assessment of whether an MLM is offering an unlawful compensation structure and operating as a pyramid scheme. While the FTC continues to emphasize that representations about income opportunities should reflect the earnings of a typical distributor^[3] and that any income claims must be based on reliable empirical evidence,^[4] the 2024 Guidance outlines a number of requirements regarding what constitutes deceptive earnings.

Following the release of the 2024 Guidance, on September 4, 2024 the FTC published a staff report titled “Multi-Level Marketing Income Disclosure Statements” (“Staff Report”).^[5] The Staff Report “documents an analysis of 70 publicly available income disclosure statements from a wide range of MLMs”^[6] and shows that many of the reviewed income disclosure statements: “(a) present income data that does not take account of participants who made little or no income, often without clearly explaining the limitation; (b) do not account for expenses incurred by participants, often without clearly stating the limitation; (c) emphasize high dollar amounts received by a relatively small number of participants; (d) do not include information about the limited income that most participants receive, or provide this information only inconspicuously; and (e) use terms and present income data in potentially confusing or ambiguous ways.”^[7]

In this paper we discuss, from an economic standpoint, several ways for MLMs to adapt their income and earnings reports (which are typically in the form of IDSs) to be better aligned with the 2024 Guidance and to alleviate some of the criticism levied in the Staff Report. While these adaptations generally require direct sellers to adopt conservative measures of participants’ earnings and treat the IDS as a risk management tool, we are cognizant of a potential tension between this approach and the IDS as a marketing tool meant to attract potential participants.

Defining “I” in the IDS

The Staff Report notes that “none of the reviewed income disclosure statements clearly explains what data is being presented to consumers. They prominently state that they are sharing information about ‘income’ and ‘earnings,’ but do not conspicuously explain what the terms mean.”^[8] Furthermore, the Staff Report states that “nearly every disclosure statement uses prominent headings that describe the data provided as ‘income’ or ‘earnings’ without further qualification” and that “terms such as ‘earnings’ can mean different things in different contexts.”^[9]

As recognized in the Staff Report, the IDS generally captures the amount of money the direct seller paid to participants, including commissions, bonuses, overrides, and awards.^[10] While retail sales are recognized as a potentially significant source of earnings for distributors, the IDSs typically do not report retail profits because direct sellers usually do not track distributors’ sales to final customers.^[11] Including these retail profits in the IDS would not only improve the document’s accuracy but could also potentially make the IDS more attractive to potential participants.

Capturing Participants’ Costs

Perhaps the most important requirement that the 2024 Guidance repeatedly insists upon is that “claims about earnings should take into account both what participants earn and what they spend.”^[12] In particular, expenses, such as costs for product purchases, travel for conferences, tools or services, and training, must be subtracted from any revenue earned to determine whether the participant has made a profit or lost money.^[13]

While the FTC insists that the IDS ought to account for all costs incurred by individuals pursuing the business, currently, IDSs generally do not disclose or quantify business expenses incurred by the typical distributor that reduce their net earnings.^[14] These expenses fall into two broad categories: those observable in the companies’ business intelligence (distributor-level) data, and those that are generally unobservable.

The observable expenses include direct expenses (fees for registration and renewal, fees for distributor websites, marketing and sales aids, etc.) and expenses associated with enrollment and rank/eligibility maintenance. Direct expenses can generally be assessed using company-wide data and/or the data on distributor-level purchases (often referred to as order-line data).^[15] Some typical and recurring expenses, such as general enrollment costs and costs to attend mandatory training or conferences, can be inferred from company-wide data. However, this data usually cannot capture the disparity in costs incurred by individual participants, as some may meet different enrollment requirements. The order-line data on the other hand, can track participant-specific expenses associated with enrollment (including starter kits and any administrative fees) and eligibility maintenance (minimum purchase requirements). While these costs are relatively easy to identify in the data, their treatment is less clear because they generally provide the purchaser with some consumption value and incorporating them into the IDS could overstate distributors’ expenses.

Unobservable, distributor-specific expenses can include the cost of setting up and maintaining the business, as well as the cost of travel to conventions and other events. While business intelligence and order-line data provide little information on these expenses, a well-designed and executed survey could shed some light on these costs.

Challenges Associated with Reporting Typical Earnings: Projections and Extrapolation

The 2024 Guidance explicitly states that “[t]he IDS should not misrepresent participant earnings, including by annualizing or projecting income that was not actually earned by a participant in the time period the IDS covers.”^[16] This requirement addresses the treatment of distributors who did not participate throughout the period covered by the IDS.

To understand this requirement, consider a simple example: A distributor joined a direct selling company in June and earned $25 in November and $75 in December for a total of $100. Annualizing this distributor’s earnings (i.e., stating that this distributor would have earned $1,200), or using the distributor’s average monthly earnings ($50) to impute this distributor’s earnings for each month of the period covered by the IDS would likely be seen as deceptive by the FTC.^[17]

Consider also a scenario where distributor A earns $50 each month for the first six months and nothing afterward, and distributor B earns $50 each month for the last six months, and nothing in the first six months. If the average monthly earnings are calculated ignoring the zero-earning months, the average monthly earnings would be $50 for each month, and the annual average earning would be $600 (the sum of the average monthly earnings). Essentially, the average monthly earnings would be extrapolated for the months where distributors A and B had no earnings, leading to a 100% overstatement of the annual average earnings.^[18]

Challenges Associated with Reporting Typical Earnings: Exclusion of Certain Categories of Participants

The Staff Report states that “most of the income disclosure statements reviewed do not depict the distribution of income across all participants, but instead present a distribution that excludes certain groups of participants.”^[19] The exclusion of certain categories of participants when reporting typical earnings is a common practice among direct selling companies and is not necessarily a form of deception; every direct selling company has some participants who merely signed up to receive a discount on the company’s products and have no interest in selling the company’s products or building a business. These participants are often merely end-user consumers, who will earn little to no income from the company; including these participants in the earnings report deflates the typical earnings across all distributors.^[20]

However, excluding such distributors risks allegations that the IDS artificially inflates earnings by including only those distributors who have achieved some degree of success.^[21] Indeed, the 2024 Guidance explicitly states that “excluding the participants who lost money or earned no money, who failed to qualify for bonuses or commissions, or who are considered ‘inactive’ because they didn’t get any compensation or qualify for a certain type of compensation during a particular time period, is misleading.”^[22]

To illustrate the effect of exclusion of certain categories of participants when reporting typical earnings, consider the following example: A distributor purchases every month, meets the minimum purchase requirement in 10 months, and earns in three months only. The FTC would likely find that the IDS that calculates this distributor’s earning over either 10 months in which the minimum purchase requirement was met, or three months when this distributor earned as an active distributor (those who by definition of the compensation plan are eligible to receive earnings) is deceptive.

Characterizing Distributor Earnings

The 2024 Guidance states that if “the MLM or participant does not have a reasonable basis to know what the typical person in the group is likely to achieve in earnings, they should not make any earnings claims, including lifestyle claims.”^[23] In particular, the FTC states that “if they are atypical, then discussion of those atypical earnings must be accompanied, at a minimum, by a clear, prominent, and unavoidable presentation of the typical participant’s revenue and expenses.”^[24]

Further, the FTC also explicitly states that in order to make any claim of “modest or supplemental income,” the MLM needs to obtain information on the typical net earnings of participants and establish the exact definition of what “modest and supplemental income” represent to consumers.^[25] In essence, this requirement seems to ask that a direct seller conducts an annual survey that would establish the participants’ perception of the terms “modest” and “supplemental” income. However, given the FTC’s general skepticism of survey evidence, it is unclear what type of analysis would be considered sufficient to establish the meaning of these two terms.

Measuring the Typical Distributor’s Earnings

While the 2024 Guidance does not specify the correct metric for measuring the typical distributor’s earnings, the Staff Report appears to endorse the use of “median reported income,”^[26] the value separating the higher half from the lower half of distributors in terms of their earnings. As there may be wide variation in how much distributors earn within a rank, simply calculating the arithmetic mean tells potential distributors little about how much a typical distributor at that rank earned.^[27] Therefore, applying the median may more accurately capture the typical distributor’s earnings and is less sensitive to extreme values.^[28]

Although the earnings and the rank of a single distributor may change dramatically within the period covered by the IDS, parsing their experience by rank and ignoring their overall experience during the relevant period may not speak to the experience of a typical distributor. The Staff Report is critical of such parsing and appears to endorse an alternative approach where the experience of distributors who may have held different ranks during the relevant period may be better captured by reporting the median earnings by the highest rank they achieved in that period.^[29]

Presentation of Information Should Not Give Misleading Impressions

The Staff Report suggests that earnings metrics presented in a way that appears to highlight the experience of a small percentage of distributors who achieve high earnings and downplays the experience of a large percentage of distributors who earn relatively modest amounts, if anything at all, will be considered misleading.^[30] The Staff Report noted that nearly all of the reviewed IDSs devote most of the visual space in the tables to high income earned by the very small number of participants in the higher ranks or specific percentages of participants at the top of the income scale.^[31] This implies that for direct selling companies that feature a relatively high number of unique ranks, the income disclosure tables may be more susceptible to FTC allegations of emphasizing a small number of participants with high income.^[32]

The Staff Report also critiques that reference and display of important income information in many reviewed IDSs are in a “less prominent or conspicuous manner.”^[33] While the Staff Report points to the use of “prominent unqualified headings” and “less prominent” disclaimers (in fact, the word “prominent” is used on nearly all pages of the report),^[34] the report is unclear as to the exact standards the FTC uses to determine whether the display feature is more or less “prominent” in the context of IDSs. However, the Staff Report seems to suggest that actions such as listing out income information as additional rows in the income distribution table and displaying all information in “proximate, equally-prominent text” is considered as prominent disclosure.^[35]

Conclusion

Given the complexity associated with preparing an IDS that would meet the FTC’s requirement, direct sellers may wonder whether to publish the IDS at all. After all, the FTC states that “if an MLM is not a ‘Business Opportunity,’^[36] it is not required to give any information about earnings to potential participants, but any earnings information it does give must be truthful, substantiated, and non-misleading.”^[37] However, if direct sellers opt not to publish an IDS, their distributors cannot make any earnings claims at all—no matter how truthful. Companies must balance the reality that distributors demand and need a voice to speak about their actual experience with the business and the need to create a truthful and accurate IDS.

While IDSs are intended to be an accurate estimate of the earnings participants can generally expect by engaging with the MLM’s business, we note that there is no disclosure “preferred for all consumers,”^[38] and that each individual company’s unique compensation structure will be reflected in its IDS.

^[1] Branko Jovanovic is a partner and Monica Zhong is a principal consultant at Edgeworth Economics. The opinions expressed are those of the author(s) and do not necessarily reflect the views of their employer and its clients. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

^[2] FTC, “Business Guidance Concerning Multi-Level Marketing,” April 30, 2024, available at https://www.ftc.gov/business-guidance/resources/business-guidance-concerning-multi-level-marketing.

^[3] See the 2024 Guidance, question 13: “Any earnings claim should reflect what the typical person to whom the representation is directed is likely to achieve in income, profit, or appreciation.”

^[4] See the 2024 Guidance, question 13: “An MLM or participant making claims about MLM income must have a reasonable basis for the claims disseminated to current or prospective participants about the business opportunity at the time it makes the claims. A ‘reasonable basis’ means reliable, empirical evidence that supports the claim, not subjective beliefs or personal anecdotes.”

^[5] FTC, “Multi-Level marketing Income Disclosure Statements,” September 4, 2024, available at https://www.ftc.gov/system/files/ftc_gov/pdf/mlm-ids-report.pdf.

^[6] Karen Hobbs, “FTC staff report analyzes 70 MLM income disclosure statements,” September 4, 2024, available at https://www.ftc.gov/business-guidance/blog/2024/09/ftc-staff-report-analyzes-70-mlm-income-disclosure-statements?utm_source=govdelivery.

^[7] Staff Report, p. 28.

^[8] Staff Report, p. i and footnote 8.

^[9] Staff Report, p. 19.

^[10] Staff Report, footnote 8.

^[11] The Staff Report notes that “14 of the 70 income disclosure statements include a disclosure that the amounts represented do not include retail income—that is, when a participant purchases a product from the MLM at a discount and then resells it (presumably at a higher price). Most of the disclosure statements give no indication that such a revenue source has been omitted, and a few expressly state that they include retail income.” Staff Report, p. 19.

^[12] The 2024 Guidance, question 13. The Guidance further states that for any direct sellers deciding to publish an IDS, either because they elect to do so or because they offer a “Business Opportunity,” the income and earnings information these direct sellers disclose to current or prospective participants should truthfully consider both participants’ income and typical expenses. See the 2024 Guidance, question 24.

^[13] See the 2024 Guidance, question 13. Note that the FTC’s response to question 14 states that “[i]f an MLM or MLM participant does not have access to data showing what participants typically spend pursuing the business opportunity (e.g., product or service purchases, website fees, party costs, and training or conference expenses), they should refrain from making any earnings claims.” In response to question 23, the FTC states that “[i]f an MLM does not have evidence of the typical earnings of its participants (including any costs that its typical participants incur), it should refrain from making any earnings claims and ensure its participants do the same.” The Staff Report notes that “none of the 70 income disclosure statements reviewed provides income figures that take into account all expenses.” Staff Report, p. 12.

^[14] Note that Noland Court observed that “[a]ffiliate witnesses did not carefully track (and, in some instances, did not even understand the difference between) revenues and profits.” Order In Re Federal Trade Commission v. James D. Noland, Jr. et al., In the U.S. District Court for the District of Arizona, May 23, 2023, 17:26–18:1.

^[15] Even the observable expenses can be challenging to assess, especially in instances where the expenses are not readily identifiable. For example, the assessment of costs associated with sales aids may require a thorough review of product description and associated price and volume points.

^[16] The 2024 Guidance, question 24. Curiously, the Staff Report reports that “[o]ne disclosure statement has a table that lists both average monthly pay and average annual pay—but the annual pay is not 12 times the monthly pay, and the table does not explain how the MLM calculated the figure” in the section titled “Unexplained Discrepancies” (Staff Report, p. 20). But this “discrepancy” simply means that monthly earnings were not annualized, recognizing that some participants enrolled in the year covered by the IDS, and that many do not earn in every month.

^[17] The FTC provided the following example: “According to the complaint, when calculating a participant’s annual income, if a participant worked one year — 24 pay periods — but only earned one paycheck for $100, AdvoCare multiplied the single $100 check by 24 pay periods to calculate the participant’s ‘annual average income’ as $2,400. The FTC alleged that AdvoCare’s IDS, therefore, was deceptive in its portrayal of participant income.” The 2024 Guidance, question 24.

^[18] The risk of misrepresenting the earnings of the distributors in the two scenarios above would likely be minimized by reporting monthly, instead of annual, earnings.

^[19] Staff Report, p. 10.

^[20] The Staff Report notes that “[t]he nature of this exclusion varies, but in at least some cases it excludes all participants who received no income as well as potentially others.” Staff Report, p. 10. The Staff Report further states that “[m]ost of the income disclosure statements do not include a prominent, express explanation of the limited nature of the income distribution depicted.” Staff Report, p. 12.

^[21] A robust preferred customer program that provides appropriate incentives for individuals to self-classify upon registration gives companies a principled and defensible way to exclude from their IDS individuals who have no desire to participate in the compensation plan.

^[22] The 2024 Guidance, question 24. In addition, “participants should not be omitted from earnings statistics unless the MLM has evidence that they have affirmatively opted out of the income-earning opportunity, not merely failed to qualify for it or not merely exercised any inventory buy-back program.” See the 2024 Guidance, question 24.

^[23] The 2024 Guidance, question 18. The FTC repeatedly emphasizes the differentiation between typical and atypical earnings and considers it potentially deceptive if the earnings claims do not “reflect what the typical person to whom the representation is directed is likely to achieve,” including the disclaimers that “results are not guaranteed” or similar statements. See the 2024 Guidance, questions 13 and 18.

^[24] The 2024 Guidance, question 18.

^[25] The 2024 Guidance, question 19.

^[26] Staff Report, p. 17 and footnotes 39 and 40.

^[27] The Staff Report correctly notes that “while an average can be a useful summary of data that has a relatively small degree of internal variation, it can be misleading when the data is largely consistent but has a small number of outliers.” Staff Report, p. 16.

^[28] Consider, for example, a situation where nine distributors earn nothing and one distributor earns $110. The arithmetic mean in this example is $11, which overstates the earnings of all but one distributor. The median equals zero, which more accurately reflects the experience of the majority of participants.

^[29] Staff Report, pp. 18–19.

^[30] Staff Report, p. 13.

^[31] Staff Report, pp. 13–16.

^[32] By reducing the number of ranks defined for high-performing participants, direct selling companies can not only potentially alleviate the risk of this criticism, but also simplify their compensation plans.

^[33] Staff Report, p. 20.

^[34] Staff Report, pp. i, 4, 7–11, 12, 16, 19–21, 23, 29.

^[35] Staff Report, p. 21, footnote 22.

^[36] Business opportunity, as defined by the Business Opportunity Rule (https://www.ecfr.gov/current/title-16/chapter-I/subchapter-D/part-437), means a commercial arrangement in which:

A seller solicits a prospective purchaser to enter into a new business; and

The prospective purchaser makes a required payment; and

The seller, expressly or by implication, orally or in writing, represents that the seller or one or more designated persons will:

Provide locations for the use or operation of equipment, displays, vending machines, or similar devices, owned, leased, controlled, or paid for by the purchaser; or

Provide outlets, accounts, or customers, including, but not limited to, Internet outlets, accounts, or customers, for the purchaser’s goods or services; or

Buy back any or all of the goods or services that the purchaser makes, produces, fabricates, grows, breeds, modifies, or provides, including but not limited to providing payment for such services as, for example, stuffing envelopes from the purchaser’s home.

^[37] The 2024 Guidance, question 23.

^[38] See Miller, A. M., Snyder, S., Bosley, S. A., & Greenman, S. (2023). Income disclosure and consumer judgment in a multilevel marketing experiment. Journal of Consumer Affairs, 57(1), 92–120, at p. 95. See also Bosley, S. A., Greenman, S., & Snyder, S. (2020). Voluntary Disclosure and Earnings Expectations in Multi-Level Marketing. Economic Inquiry, 58(4), 1643–1662.

Consumer Protection / Direct Selling in the US

Direct Selling Under Scrutiny: Separating Fact from Fiction

High-level academic task force rebuts myths and misinformation about direct selling channel.

By Dr. Patrick Brockett, Dr. Anne C. Coughlan, Dr. Linda Ferrell, Dr. O.C. Ferrell, Dr. Linda Golden, Dr. Charles Ingene, Dr. Lou Pelton, and Dr. Robert A. Peterson

Abstract and Executive Summary

Direct selling (DS) is simultaneously a business model, a channel of distribution, and an activity engaged in by its distributors. In this paper, we provide a framework for analyzing and discuss academic research on the DS distribution model.

We focus in particular on research that develops economics-based analytic models to examine business and legal issues. This focus is motivated by the fact that analytic models are sometimes used as part of the assessment of whether a DS firm operates a legitimate DS channel or an illegal pyramid scheme. These models potentially have a significant economic impact on, and affect the outcomes of legal cases against, the affected DS firms. They may also be cited in the business press and in academic circles, influencing opinions of the viability or legality of the DS business and distribution model. It is therefore particularly important that such research be carefully grounded in sound logical and analytic bases, and that it appropriately reflect whatever key facts about the firm (or about DS in general) are relevant to the model’s scope of analysis.

We first describe direct selling as an economic activity and business model. We contrast illegal pyramid schemes with legitimate DS firms and outline the key definition of an illegal pyramid scheme. This definition is distinguished from the many possible indicia of pyramid schemes that can result from pyramid scheme operation, but do not themselves prove the existence of a pyramid scheme.

We next define and discuss various logical and analytic errors that can lead to the misdiagnosis of a legitimate DS firm as an illegal pyramid scheme operator. While many such error types are possible, we focus on four that we find to be particularly important in evaluating the analytic literature on DS and pyramid schemes:

The “Begging the Question” fallacy, in which the research in effect presumes the existence of a pyramid scheme through its (implicit and/or explicit) assumptions, and as an unsurprising result, concludes the existence of a pyramid scheme;
A variant on the “Begging the Question” fallacy in which the research effectively models a pyramid scheme through its omission and/or misrepresentation of substantive facts on which the determination of legality versus illegality depends;
The “Fallacy of the Converse,” in which the converse of a true if-then logical statement is incorrectly asserted to be true on the grounds that the original if-then statement is true. For example, even if the statement {if a firm operates a pyramid scheme, then one can expect to see some or all of a set of resulting indicia at some point in time} is reasonably true, it is not automatically true that the converse statement {if one observes a set of pyramid scheme indicia at some point in time, then the firm must be operating a pyramid scheme} is also true; and
A special case on the “Fallacy of the Converse,” in which the research ignores standard policies and protections that characterize legitimate DS firms, and therefore starts with an inaccurate premise that these policies and protections do not exist.
All of these modeling errors are substantive. This means that correcting any of these errors overturns the model’s results. Such a model is thus not a reliable tool to assess whether a DS firm does, or does not, operate a pyramid scheme.

We apply this framework to the analysis of a recent working paper, “The Alchemy of a Pyramid: Transmutating Business Opportunity Into a Negative Sum Wealth Transfer” by Andrew Stivers, Douglas Smith, and Ginger Zhe Jin (“SSJ”). We find that this research begs the question, omits and/or misrepresents substantive DS firm facts, and commits a fallacy of the converse by omitting consideration of standard DS firm policies that mitigate a pyramid scheme analysis.

Specifically, SSJ “begs the question” of whether or not a DS firm operates an illegal pyramid scheme by explicitly assuming a pyramid scheme in its list of “stylized assumptions” – which duplicate the conditions for a pyramid scheme defined in the Koscot case. Thus, the authors cannot deliver on their research goal of answering the question “What makes an MLM firm a pyramid?”, because they have already assumed the pyramid scheme outcome from the beginning.

Further, SSJ commits another “begging the question” error in explicitly assuming that the firm in its model commits fraud by purposefully misrepresenting the business opportunity to its prospects and distributors. Because a pyramid scheme cannot persist through time without such fraud, the authors again essentially presume a pyramid scheme outcome.

These first two critiques fully invalidate the SSJ research, whose authors state that its goal is to answer the question: “What makes an MLM firm a pyramid?” One cannot achieve this research goal by assuming a pyramid scheme as the basis for a model that then produces the inevitable result that a pyramid scheme exists.

Nevertheless, other errors further weaken the SSJ analysis. Many substantive facts about DS firms – which are important to the resolution of the model’s claimed purpose – are omitted or misrepresented. Among them are:

Its omission of any income sources to a distributor other than bonus awarded for mere recruitment without regard to sales (such as retail markup income or the economic benefit of personal consumption at wholesale prices);
Its misrepresentation of the basis on which bonus/commission income is awarded by DS firms, by assuming they are only awarded for pure recruitment;
Its omission of products that have market value to consumers;
Its omission of consideration of distributor differences on substantive dimensions that matter for the research question at hand;
Its omission of active choices by distributors concerning what to sell, how hard to work, how to price products for retail sale, how much to invest in training, whether or not to seek to recruit other distributors, or how much to personally consume;
Its misrepresentation of the DS firm’s objective as the maximization of one-period profit, with no consideration of the legal implications of the fraud it implies; and
Its omission of consideration of standard consumer and distributor protections offered by legitimate DS firms.
We discuss other substantive and technical problems with the SSJ model in Appendix B.

The SSJ paper concludes with a set of recommendations to control pyramid scheme threats. Because of the shortcomings we find in the model and analysis, we find that any such recommendations similarly rest on shaky foundations and are unreliable as cures for the question at hand.

We use our framework to offer an analysis of a subset of other economics-based analytic modeling papers in the DS area in Appendix A. We emphasize that our goal is not to argue that all such analyses are flawed. Indeed, economics-based analytic models are productively used in many applications and should continue to be applied to analyze firms’ operations, participants’ decisions, profitability, and growth. We hope that assessment of these efforts will be aided by applying guidelines for reliable and applicable scientific inquiry into various aspects of the DS distribution model. Read full paper →

Direct Selling in the US / Journal of Direct Selling Research / Salesforce

Professional and Personal Benefits of a Direct Selling Experience

By Dr. Robert A. Peterson

Direct selling is simultaneously a channel of distribution and a business model that offers entrepreneurial opportunities for individuals to market and sell products and services, typically outside of a fixed retail establishment, through one-to-one selling, in-home product demonstrations, and/or online. As a distribution channel, direct selling is ubiquitous and, in 2016, touched the lives of an estimated 20.5 million Americans. Individuals are drawn to direct selling for a multitude of reasons beyond a desire to earn a living as a full-time direct seller or to earn extra money or make a special purchase as a part-time direct seller.

The research reported in this Executive Summary documents the impact of a direct selling experience on 14 business and professional skills as well as on 13 personal life skills. A substantial majority of the current direct sellers surveyed, more than three-fourths, agreed that they benefitted from their direct selling experience in terms of improved business and professional skills, and that skills gleaned from a direct selling experience transferred to their personal lives. Moreover, there were significant and positive relationships between self-perceived skill levels and self-perceptions of direct selling success and performance in a non-direct selling job. Findings regarding the impact of a direct selling experience on personal life skills in particular suggest that a direct selling experience can have a powerful influence beyond direct selling per se and, as such, can indirectly contribute to the betterment of society.

Four hundred ninety-five current direct sellers and 465 former direct sellers were surveyed for the present research. Findings from this research have several practical implications for recruiting, training, and retaining direct sellers. These findings and implications are briefly summarized below.

Reasons for Joining Direct Selling Company

Twelve (12) possible reasons why the direct sellers surveyed joined their current direct selling company were investigated.^[1] The most frequently stated reason for joining a direct selling company was “I believed that the products are of such value that I wanted to share them with my friends, neighbors, and the public.” Eighty-one percent of the survey participants stated that this was a reason they joined their current direct selling company. The least frequently cited reason for joining a direct selling company was “I wanted a full-time working career;” 35 percent of the direct sellers surveyed gave this as a reason for joining their direct selling company. In general, the reasons for joining a direct selling company can be categorized as “people/social,” “financial” (income/job), and desire for a specific “product.”

The median number of reasons survey participants gave for joining their current direct selling company was seven (7). Thus, on average survey participants stated that seven of the 12 studied reasons were in fact reasons why they joined their current direct selling company. There were no substantive differences across the current direct seller segments studied regarding the number of reasons given for joining a direct selling company.

However, of the current direct sellers surveyed regarding their reasons for joining a direct selling company:
Males were more likely than females to want a full-time direct selling job (54% versus 31%).
Eighty-one percent of the female direct sellers stated that they wanted to purchase their direct selling company’s product(s) at a discount for themselves and/or their family versus 61 percent of the male direct sellers.
Fifty-seven percent of the male direct sellers were interested in the recognition that they would receive for their [sales] efforts compared to 39 percent of the female direct sellers.
Seventy-two percent of the male direct sellers were interested in enhancing their personal development (i.e., becoming more confident, better business-minded) through direct selling, whereas 53 percent of the female direct sellers stated such an interest.
No differences were observed regarding reasons for joining a direct selling company between urban and rural direct sellers, or among direct sellers who had been with their direct selling company for various time periods.
Proportionally more millennial direct sellers (46%) than non-millennial direct sellers (28%) joined their current direct selling company because they wanted a full-time working career. Millennials also wanted to feel more at ease in front of other people relative to non-millennials (56% of the millennials so responded as compared to 32% of the non-millennial direct sellers).

In addition, current direct sellers differed markedly from former direct sellers with respect to the number of reasons and the specific reasons given for joining a direct selling company. Whereas 35 percent of the current direct sellers stated that they wanted a full-time direct selling job, only 16 percent of the former direct sellers stated that they wanted a full-time direct selling job. This suggests that direct selling may currently be perceived as more likely to be a career option than it was in the past. Moreover, given that the demographic profile of direct sellers may be approaching that of the United States adult population, the “pool” of potential direct sellers may be expanding.

Skill Improvements Due to Direct Selling Experience

The present research examined 14 business/professional and 13 personal life skills that might be improved or fostered by a direct selling experience.^[2] Survey participants were first asked whether they “strongly disagree,” “somewhat disagree,” “somewhat agree,” or “strongly agree” that their direct selling experience was beneficial in terms of improving or fostering each of the 14 business/professional skills. For example, they were asked whether they “strongly disagree,” “somewhat disagree,” “somewhat agree,” or “strongly agree” that “I improved my decision-making skills” (as a consequence of their direct selling experience).

Similarly, survey participants were asked whether they “strongly disagree,” “somewhat disagree,” “somewhat agree,” or “strongly agree” that they had been able to transfer each of 13 skills emanating from their direct selling experience to their personal lives. An example of these skills is “I enhanced my critical thinking ability.” Seven of the skills investigated were included in both the business/professional and personal skill sets studied.

On average, more than three-fourths of the current direct sellers surveyed somewhat or strongly agreed that both their business/professional skill levels improved and that their personal lives benefitted due to skills emanating from their direct selling experience. Consequently, in an absolute sense the current direct sellers surveyed believed that “lessons learned” through their direct selling experience were helpful in both their business/professional careers and their personal lives. Across the seven skills that were common to the business/professional and personal life skill sets, survey participants indicated that the skills they acquired from their direct selling experience were slightly more beneficial to their personal lives than to their business/professional careers.

Even so, despite the high absolute level of overall agreement that a direct selling experience improved or fostered skill levels, perceptual differences did occur between male and female direct sellers. With respect to business/professional skills that were believed to have been improved due to a direct selling experience, proportionally more male direct sellers than female direct sellers believed that their sales skills had improved (88% versus 77%) and that they undertook more [business-related] initiatives (87% versus 73%).

With respect to skills applicable to a direct seller’s personal life, self-perceptions of the eight skills listed below significantly differed between male and female direct sellers, with male direct sellers proportionally more likely than female direct sellers to believe that improvements in the eight skills studied occurred because of their direct selling experience:

Enhanced critical thinking ability (88% versus 74%)
Better at coping with and managing stress (85% versus 69%)
Better at problem solving (90% versus 76%)
Feel more at ease in front of an audience (84% versus 71%)
Better at time management (87% versus 77%)
Improved entrepreneurial skills (90% versus 78%)
Improved decision-making (87% versus 78%)
Better at managing finances (83% versus 73%)

Differences between male and female direct sellers with respect to their reasons for joining a direct selling company and the skill levels gained from a direct selling experience suggests a variety of managerial implications. Additional research is required to understand motivations underlying said differences as well as their implications. For example, direct selling companies might consider instituting, emphasizing, and/or communicating different recruiting, training, and retention programs for men and women.

There were no significant differences in self-perceived skills between urban and rural direct sellers or among survey participants with different lengths of time working with their current direct selling company. Similarly, there were generally no significant differences between millennials and non-millennials with respect to self-perceived business/professional skill levels resulting from their direct selling experience.

However, three self-perceived skills differed between millennials and non-millennials in the context of their personal lives. Proportionally more millennials than non-millennials agreed that their direct selling experience improved their decision-making skills (86% versus 78%), helped them improve their interpersonal relationships (87% versus 75%), and made them more able to cope with and manage stress in their personal lives (81% versus 70%). These differences suggest that consideration be given to creating different recruiting, training, and retention programs for millennials and non-millennials analogous to those for male and female direct sellers. Moreover, similar to the male and female direct seller differences observed, differences between millennials and non-millennials should be subjected to additional research.

In an absolute sense, a majority of all direct sellers studied, current as well as former, believed that both their business/professional and personal life skills were improved by their direct selling experience. From a relative perspective, though, current direct sellers believed that their direct selling experience improved all of the business/professional and personal life skills studied to a significantly greater degree than did former direct sellers. Moreover, self-perceived skill level differences between current direct sellers and former direct sellers were in general greater for personal life skills than for business/professional skills. For example, the largest difference between the two groups occurred for the self-perceived personal life skill “I am better at interpersonal relationships.” Seventy-nine percent of the current direct sellers somewhat or strongly agreed with this skill statement as compared with 52 percent of the former direct sellers who somewhat or strongly agreed with the statement. Such differences in perceptions may reflect better company training programs now than in the past, differences in the demographic makeup or motivations of the two groups, or a combination of differences in training programs and the demographic makeup or motivations of the two direct seller groups. Additional research is recommended.

Direct Selling Success

Survey participants were asked, “How successful do you consider yourself compared to other independent contractors in your direct selling company?” Based on a 7-category rating scale anchored by “much less successful” and “much more successful,” 45 percent of the survey participants who were current direct sellers rated themselves as successful (i.e., they responded “5,” “6,” or “7” on the scale). Using the same approach, only 25 percent of the former direct sellers considered themselves successful direct sellers. As before, this perceptual difference may be due to better company training programs now than in the past, differences between the two groups—including actual success—or both company training and direct seller characteristics. Indeed, to the extent that perceptions reflect reality, the self-perceived performance of former direct sellers may be a reason they left direct selling.

Responses to each of the 27 business/professional and personal life skill statements were significantly and positively related to responses to the self-perceived success scale (p<.001) for the current direct seller sample. Similarly, summary indices of business/professional and personal life skill responses respectively correlated significantly (p<.001) with self-perceived direct selling success. This means that survey participants who believed their direct selling experience improved their business/professional and personal life skills also believed they were more successful direct sellers than other direct sellers in their company. Again, if perceptions reflect reality, this implies that a direct selling company should target skill improvements during recruiting and training since doing so should benefit the company financially and its direct sellers both financially and personally.

Performance in Non-Direct Selling Jobs

Eighty percent of the survey participants who were current direct sellers stated that they also had a job other than direct selling. (This reinforces the conclusion that direct selling tends to be a part-time pursuit.) These survey participants (and former direct sellers surveyed) were asked whether they agreed or disagreed with the statement, “Because of my direct selling experience, I perform better in other, non-direct selling jobs,” using a 4-category rating scale ranging from “strongly disagree” to “strongly agree.” A substantial percentage of the survey participants who were current direct sellers and who held a non-direct selling job—84 percent—noted improved performance due to lessons learned through their direct selling experience. As might be expected, given differences in reasons for joining a direct selling company and self-perceived skill levels between current and former direct sellers, the percentage of current sellers (84%) believing their direct selling experience helped them perform better in a non-direct selling job was significantly larger than the corresponding percentage (66%) observed for former direct sellers. Likewise, proportionally more male direct sellers (90%) than female direct sellers (80%) believed their direct selling experience helped them perform better in a non-direct selling job.

Self-perceived performance in a non-direct selling job was significantly and positively correlated with self-perceptions of direct selling success. In addition, survey participants holding a non-direct selling job also believed that skills emanating from their direct selling experience improved their performance in their non-direct selling job. Moreover, survey participants who stated that one reason for joining a direct selling company was to improve their personal development (i.e., become more confident, better business-minded) also believed that skills emanating from their direct selling experience enhanced their performance in a non-direct selling job.

Finally, each of the 27 business/professional and personal life skills studied was significantly and positively correlated with perceived performance in a non-direct selling job. This finding corroborates the suggestion that a direct selling company target the improvement of skills of its direct sellers since doing so is beneficial to both the company and its direct sellers. When recruiting direct sellers, a company can communicate that even if a direct seller does not remain in direct selling, he or she can obtain skills that will improve performance in a non-direct selling job. Simultaneously, individuals considering a direct selling job may use that job to gain valuable skills that can be applied in a non-direct selling job as well as in their personal lives.

In brief, a substantial majority of the current direct sellers surveyed in this research—more than three-fourths of the individuals surveyed—agreed that their direct selling experience improved their skill levels for 14 business/professional skills and 13 personal life skills. Self-perceived skill levels were in turn related to perceptions of direct selling success. To the extent that current direct sellers believed that their direct selling experience improved their skill levels, they also believed that they were more successful than other direct sellers in their company.

Additionally, those direct sellers surveyed who also held a non-direct selling job believed that their direct selling experience improved their performance in this non-direct selling job. And, analogous to self-perceived direct selling success, the more direct sellers believed that their direct selling experience improved their business/professional and personal life skills, the better they perceived their non-direct selling job performance to be.

While these direct selling experience-related benefits existed across all direct sellers surveyed, certain groups of direct sellers (i.e. male direct sellers or millennial direct sellers), appeared to differ in the benefits gleaned from their direct selling experiences. As such, based on the present research, a direct selling experience can lead to personal as well as societal benefits that go beyond the economic value of direct selling per se. At a minimum, the present results suggest that an individual’s perceived self-efficacy can be enhanced due to a direct selling experience. Read full paper →

^[1] See the DSEF report “Professional and Personal Benefits of a Direct Selling Experience” for a list of all reasons studied.

^[2] See the DSEF report “Professional and Personal Benefits of a Direct Selling Experience” for a list of all skills studied.

Direct Selling in the US / Industry Reports / Journal of Direct Selling Research

The Economic Impact of Direct Selling Activity in the United States

By Dr. Robert A. Peterson

Direct selling is a business model that offers entrepreneurial opportunities to individuals who, as independent contractors, market products and services to consumers, typically outside of a fixed retail establishment through one-to-one selling, in-home product demonstrations, or online. Direct sellers are called distributors, representatives, consultants, associates, or various other titles. They may participate in direct selling in various ways, including selling products and services themselves or through their sales organizations, providing training and leadership to their sales organizations, referring customers to their company, and purchasing products and services for personal use. Compensation is ultimately based on sales and may be earned through personal sales and/or the sales of others in their sales organization.

In 2022, direct selling generated $40.5 billion in retail sales in the United States—the second-highest in direct selling history—and involved an estimated 6.7 million individuals who were actively engaged in building their own direct selling businesses and/or earning supplemental income.

Despite its ubiquity and contribution to the economy, the full economic impact of direct selling in the United States has not been formally or comprehensively assessed for nearly a decade. Therefore, the purpose of the present analysis was to estimate the economic impact of direct selling activity in 2022 through the application of an input-output economic model. Given the retail sales generated by direct selling (i.e., its Direct Effect), the model (implemented by means of IMPLAN^® software and data) estimated the:

Indirect Effect (upstream or supply chain sales) due to direct selling and
Induced Effect (downstream sales due to household spending) associated with the Direct and Indirect Effects.

These three effects—Direct, Indirect, and Induced—collectively represent the economic impact of direct selling activity on the nation’s economy. In addition, the analysis estimated the fiscal (tax) implications of direct selling activity in the United States.

Executive Summary

An input-output economic analysis of 2022 direct selling sales activity was undertaken using IMPLAN^® software and data obtained from the federal government.^[1] Direct selling (retail) sales data were provided by the Direct Selling Education Foundation. The purpose of the analysis was to estimate the economic impact of direct selling activity in the United States in 2022. To provide a context for interpreting the 2022 economic impact of direct selling activity, the economic impact of direct selling activity in 2004, 2010, 2015, and 2016 was also investigated.

Results are reported in terms of Direct, Indirect, and Induced Effects using a measure of gross economic output sales dollars. Gross economic output refers to the cumulative value of production. Unlike Gross Domestic Product (GDP), gross economic output includes intermediate goods and services. (GDP is synonymous with total output less intermediate inputs.)

Using the Direct Selling Education Foundation estimate of $40.5 billion in direct selling (retail) sales in 2022 as a starting point, the total economic impact of direct selling activity in the United States in 2022 was estimated to be $111.4 billion. The $111.4 billion economic impact consisted of:

The Direct Effect of direct selling, $40.5 billion
The Indirect (upstream or supply chain) Effect of direct selling, $31.0 billion, and
The Induced (downstream or household) Effect of direct selling, $39.9 billion.

Because of (1) the analytic approach and (2) the nature of the industry (i.e., the widespread use of independent contractors), the total estimated economic impact of $111.4 billion should be considered conservative.

The derived multiplier emanating from the IMPLAN^® analysis was 2.75. This multiplier means that nationally $1.00 in direct selling (retail) sales produced an economic impact of $2.75 in 2022. The 2022 derived multiplier is 18 percent larger than the 2016 derived multiplier (2.34) and 24 percent larger than the 2010 derived multiplier (2.21). These increases were primarily due to increases in the Induced Effect across the respective years.

In 2022, the economic impact of direct selling activity produced an estimated $9.5 billion in federal taxes and $6.0 billion in state and local taxes, or $15.5 billion in total taxes. This represents an increase of $4.9 billion (a 46% increase) in tax revenue from 2016. The total value of direct selling activity (i.e., the Direct, Indirect, and Induced Effects) added to the nation’s Gross Domestic Product in 2022 was estimated to be $111.4 billion, which represents an increase of $28.3 billion from 2016 (a 34% increase). Read full paper →

^[1] IMPLAN® is widely used in industry and government analyses. See www.implan.com.