On July 19th, AdvoCare is changing from an MLM compensation model to a single-level compensation plan. In other words, AdvoCare will only pay distributors commissions for their wholesale and retail sales. The company terminated all compensation of overrides, leadership bonuses, and downline compensation. Over one hundred thousand distributors were affected.
The company moved to this new business model based only on actual sales, as a result of confidential talks with the FTC.. The discussions were about the AdvoCare business model and how they compensate distributors. The company explained that this change was “the only viable option.” The full press release is here.
FTC and Pyramid Schemes
The Federal Trade Commission released guidance in January of 2018 about multi-level compensation structures. The FTC gets involved and sets guidelines to help protect participants:
“Where such an unlawful compensation structure exists, a participant is unlikely to be able to earn money or recover his or her costs through selling product to the public. In such circumstances, participants will often attempt to recruit new participants who will buy product, and pressure existing recruits to buy product, with little concern for consumer demand. Where an MLM has a compensation structure in which participants’ purchases are driven by the aspiration to earn compensation based on other participants’ purchases rather than demand by ultimate users, a substantial percentage of participants will lose money.”2018 Business Guidance Concerning Multi-level Marketing
The guidance goes on to explain a number of factors that can indicate a multi-level marketing compensation plan is potentially problematic:
- Compensation based on mere wholesale purchases
- Compensation based on other payments by participants
- Participants buying products that are not resold
- Incentivizing/encouraging participants to purchase for reasons besides satisfying personal and customer demands (ex: opportunity to advance)
Check out our other articles on the Federal Trade Commission and Multi-Level Marketing.
Class Action Lawsuit Against AdvoCare
In March of 2017, ex-distributors filed a class action lawsuit. The women claimed it was a pyramid scheme. Participants would lose money unless they recruited new distributors. They alleged that the money brought in from new participants was paying those at the top.
They alleged the products sold were really just to mask the pyramid nature of the scheme. The compensation plan encourages inventory loading. The commissions ‘paid’ on retail sales were largely not really sales. Instead, distributors made purchases to meet the personal volume requirements. If they didn’t meet these requirements they couldn’t earn commissions on their downlines. They explain that true retail customers were difficult to come by because cheaper alternatives were widely available. Distributors could not set product prices. Therefore, it was even more difficult to make retail sales.
What is different about AdvoCare?
AdvoCare distributors who made money primarily through recruiting and their downlines, are now facing the loss of the bulk of their AdvoCare income. As these distributors consider their next steps they may wonder — what was different about AdvoCare’s compensation plan. What should they look for in their next opportunity?
In fact, AdvoCare’s multi-level compensation plan is pretty standard for multi-level marketing. For example, most multi-level marketing compensation plans promote distributors and increase bonuses for recruiting new members. Distributors at the top of the pyramid get nearly all of the income.
It can be tricky to evaluate a multi-level marketing company. Ask for complete data that shows actual earnings as well as actual expenses. Look into any fees and sales requirements. Find out how much inventory distributors typically keep on hand. Talk to distributors and consultants who have left the company about their experiences and their finances.