AdvoCare, one of the largest multi-level marketing companies in dietary supplements, announced that it will be revising their business structure from a multi-level marketing structure to a direct-to-consumer model only. The company is calling their new revised structure a "single-level distribution model."
“Over the years, we have made many changes to the AdvoCare policies as the regulatory environment has shifted. Based on recent discussions [with the FTC], it became clear that this change is the only viable option,” says Patrick Wright, AdvoCare’s chief executive officer.
AdvoCare notified more than 100,000 distributors on May 17 that, effective July 17, 2019, AdvoCare will revise the business model to a single-level distribution model. Commissions will now only be paid on direct-to-consumer sales, and no longer on building the network of distributors. The preferred customer discount of 20%-40% will remain.
This is not the first time the FTC has put the pressure on a MLM company. The FTC forced Herbalife to restructure back in 2016, costing Herbalife $200 million in damages to those who worked within the network.
To better understand that change, let's showcase the "old" model vs. the "new" model.
Old Model
Person A becomes a distributor. They make money one of two ways:
- Sales of product to consumers (D2C)
This would be the margin % the distributor charges the end consumer for a product. For example, person A buys a pre-workout from AdvoCare for $20. Person A sells this product to Person B for $50. Person A just made $30. - Commissions on network growth
This is the multi-level marketing approach. Let's take Person A from the previous example. If Person A is able to "recruit" Person B and Person C to also become AdvoCare distributors, Person A can make commissions on Person B and Person C's buy-in amount into the program, future orders and THEIR network of distributors they build. For example, Person A recruits Person B and Person C to be in their network. Person B buys $5,000 worth of AdvoCare products giving them the preferred discount of 20%. Person C buys $10,000 worth of AdvoCare products giving them the preferred discount at 40% (the more you purchase the higher % discount you qualify for). Person A just made commissions on $15,000 of initial orders. Person A will also make recurring commissions on future orders from Person B and Person C. If Person B and/or Person C recruit people into their network, Person A would ALSO receive commissions on the NEW recruits orders. This stream of commissions continues to the bottom.
New Model
- Sales of product to consumers (D2C)
This would be the margin % the distributor charges the end consumer for a product. For example, person A buys a pre-workout from AdvoCare for $20. Person A sells this product to Person B for $50. Person A just made $30.
The Difference
There are a lot of networks of distributors within AdvoCare and other MLMs. The ones on top of these networks are the earners - the ones that make six figures plus a year. These people will have to find new ways to make money within the new structure, or they will ultimately have to stop being involved with the company and find another avenue to make a living. Only a small percentage make a living working with AdvoCare, but the new structure will impact that living.
Fitness Informant's POV
On Episode 29 of the "Be Informed. Live Fit." podcast we talked about the business structure of MLMs and why it isn't considered a pyramid scheme. The fact they have a tangible product is why. However, I always questioned the business integrity of a MLM. The FTC is too.
This is another big chip to fall, in addition to the 2016 case against Herbalife. Now the Herbalife case may have been a little different, but the FTC is now cracking down on these multi-level marketing concepts realizing that it is more about the recruitment than it is about the tangible product.
I am very happy to see this. I do not like the quality of products created by MLMs. Because of the way the business was structured, they had to create cheap products and sell at higher rates. With AdvoCare removing the MLM feature from the company, this is commission dollars they COULD put back into the production of the product; but let's not kid ourselves, that isn't going to happen.
The same products will still be massed produced. Some people will stick around and try to sell as if they are an AdvoCare supplement store from their basement, but most will go away.
Other MLM companies that also may feel the pressure are Insagenix and Thrive (Level) among others. We shall see if the domino effect occurs here.
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