"People love to save money, people love to tell people they have saved money. Thus, marketing discount buying services through network marketing is a great opportunity."

Join The Club

By Jeffrey A. Babener

August, 1998

 

The day has long since passed when network marketing companies focused solely on nutrition, personal care and home care products. In the last decade, the industry has moved at a rapid pace into the telecommunications and services arena. Telecommunications, in particular, has been a singular success and attracted notice by both Wall Street and Fortune 500 companies. Yet another emerging trend has been the offering of consumer benefits services, travel clubs and discount buying services for sale to the general public.

For a monthly or annual fee, customers are offered dramatic discounts on the purchase of prescriptions, eyeglasses, books, groceries, travel, hotels, computers and virtually every product or service available in the marketplace. If the service is priced attractively, it can be a very advantageous purchase for the consuming public.

Network marketing is an ideal way to get a product or consumer service to market that benefits by demonstration or testimonial. Such products or services often sit on the shelves or require massive advertising campaigns to get new consumers. Network marketing marketers share their enthusiasm about a product or service with their friends, relatives, people at work, people at church or other social contacts. As a result, a new product or service may penetrate the market faster and cheaper. There are no ad dollars. Instead, marketers are paid for results. And, in the world of network marketing, discount buying services add another product to the marketing opportunities for an industry that has been used to marketing cosmetics, vitamins and nutritional products. People love to save money, people love to tell people they have saved money. Thus, marketing discount buying services through network marketing is a great opportunity.

Discount buying organizations are able, through sheer volume of buying power, to arrange discounts with manufacturers, and national and local merchants on every product conceivable from automobiles to television sets to vacuum cleaners to groceries. In the typical program, the consumer pays an annual fee for the right to buy goods at discount, either from the discount buying organization, or from third party vendors, with whom arrangements have been made. The savings can be real and substantial, and because of the ease of selling this service many discount buying organizations have turned to direct mail, mail order and multilevel marketing as a method of marketing their services. Over the years, several states have been plagued with abuses by discount buying organizations and have enacted legislation to regulate these organizations. The underlying reasons for this legislation can be found in the preface to the 1976 California statute on this subject in which the legislature made the following findings:

"(a) The Legislature finds that there exist in connection with a substantial number of contracts for discount buying services, sales practices and business and financing practices which result in fraud, deceit, and financial hardships being perpetrated on the people of the state; that existing legal remedies are inadequate to correct these abuses; that the discount buying industry has a significant impact upon the economy and well-being of the state and its local communities; and that the provisions of this title relating to such contracts are necessary for the public welfare.

"(b) The purpose of this title is to safeguard the public against fraud, deceit, and financial hardship, and to foster and encourage competition, fair dealing, and prosperity in the field of discount buying services by prohibiting or restricting false or misleading advertising, unfair contract terms, harmful financial practices, and other unfair, deceptive, destructive, unscrupulous, fraudulent and discriminatory practices by which the public has been endangered and by which the public may in the future be harmed in connection with contracts for discount buying services. This title shall be construed liberally in order to achieve the foregoing purposes."

Thus far, at least fourteen states have adopted statutes regulating discount buying organizations: Arizona, California, Georgia, Illinois, Iowa, Kentucky, Minnesota, Missouri, Nevada, New Hampshire, North Carolina, South Dakota, Tennessee and Wisconsin. Compliance with the statutes is essential as the penalties may bring treble damage fines and have criminal consequences. For instance, in South Dakota, violation of that state statute may result in a felony conviction.

The requirements of most of these statutes is fairly straightforward. Most of the states require that discount buying organizations post a bond to safeguard consumers. For instance, in California, discount buying organizations must post a $30,000 bond. In addition, some of the legislation requires that discount buying organizations establish trust accounts or escrow accounts for prepayments of fees collected from buyers, again to protect the interests of the consumers. The typical legislation prohibits discount buying club contracts from exceeding specified time periods, for instance a year and a half or two years.

Most of the states have followed the Federal Trade Commission's approach with respect to cancellation rights of consumers. The FTC has adopted a rule on door-to-door sales which requires a three-day cooling off period or right of rescission by consumers. Similarly, most discount buying statutes provide that subscribers are entitled to cancel participation in the program within a three-day period. The typical legislation also provides the consumer statutory rights to sue for damages, including treble damages and attorney fees, or to make a claim against the company's bond.

It is interesting to note that various states have chosen different regulating agencies to monitor this area. In some states, buying organizations are regulated by consumer protection divisions, and in others by corporation commissioners, and even one state regulates this area through the insurance commissioner's office.

Most of the states are fairly explicit in the sorts of disclosures that must be made to a consumer at the time he or she subscribes to a discount buying service. California has appeared to have adopted the most comprehensive disclosure requirements of any of the states. In California, a seller of a discount buying service must provide a buyer with several written disclosures, some of which are:

  1. The exact nature of the services it provides, specifying the general categories of goods which are available at the seller's place of business or warehouse, those goods which must be obtained through third parties to which the seller will refer the customer, and those categories of goods which must be ordered or obtained through the mail;

  2. A list, current within the previous 60 days, of at least 100 items which are sold by or through the organization or available to those who contract with the organization, identified by brand name, model and total price, including a reasonable estimate of freight or delivery charges;

  3. A statement of the discount buying organization's policy with respect to warranties or guarantees on goods ordered, and the policy with respect to the return of ordered goods, cancellation of orders by the buyer, and refunds for cancellation or return;

  4. A disclosure as to whether any stockholder, director, officer or other principal in the discount buying organization has been convicted of a crime relating to fraud or has been held liable in any civil action relating to fraud, misleading representations;

  5. A disclosure as to whether any principal in the discount buying organization is the subject of any current injunction or restrictive order relating to business activity.

If you are interested in a network marketing opportunity, but marketing nutritional, home care or personal care products is not for you, then consider marketing a service, namely a discount buying service. It may save you money, it may save your friends money and you may earn some extra income to boot.


Jeffrey A. Babener
Babener & Associates
121 SW Morrison, Suite 1020
Portland, OR 97204
Jeffrey A. Babener, a partner in the Portland, Oregon, law firm Babener & Associates, represents many of the leading direct selling companies in the United States and abroad.

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