Business Opportunity Rule

In 2006, the Federal Trade Commission (FTC) proposed a new rule for business opportunities, and gave individuals and companies the chance to give their two cents on the rule. Mary Kay  strongly opposed the rule in a letter to the FTC.

In a nutshell, the “Business Opportunity Rule” would have required the following:

  • The rule applies to all business opportunities, regardless of the size of the initial “investment”
  • Disclosure of five items:
    • Whether or not sellers make earnings claims
    • A list of any criminal or civil legal actions against the seller or its representatives that involve fraud, misrepresentations, securities, or deceptive or unfair trade practices
    • Whether the seller has cancellation or refund policies and such policies’ terms
    • The total number of purchasers in the past two years and the number of those purchasers seeking a refund or to cancel in that time period
    • A list of references.
  • Disclosure of earnings is NOT required (darn!), but if a business opportunity seller DOES choose to make an earnings claim, they must provide PROOF with an “Earnings Claims Statement.”
  • Deceptive practices common to fraudulent business opportunity sellers would be prohibited, including various misrepresentations about the business, fake testimontials, and failure to honor refund policies.

To the average person, these things seem pretty easy and straightforward. These items are simply a chance for a recruiter to provide LEGITIMATE INFORMATION to a potential recruit. These are common sense items, and I see no reason why a legitimate company with a legitimate opportunity would not want to comply.

The proposed rule would not require any business opportunity seller to make an earnings claim. However, if they did make an earnings claim, they would be required to provide additional substantiation in the form of an “Earnings Claims Statement.”

I think the requirement about the Earnings Claims Statement is AWESOME!!! I am tired of Mary Kay recruiters throwing around these “highest check” numbers from sales directors, but not giving any REAL information about yearly income and expenses (and therefore NET income).

Mary Kay Inc. opposes the rule:
Who would have thought that Mary Kay would OPPOSE the new rule, which attempts to protect consumers? Well, all of us anti-MK folks could have told you from the start that MK would be against it. Why? Because if the company is forced to use ACTUAL FACTS in the recruiting process instead of propaganda, then recruiting will become much, much harder.

If Mary Kay is such a fabulous, above-board company, why would they fear a rule such as this? I would think that they’d be ALL FOR something that makes sure potential recruits victims are given REAL and ACCURATE information. WHY WOULD THEY PREFER TO HIDE THE TRUTH?

Simple. That’s the way Mary Kay Inc. does business on a daily basis. The company thrives on deception, which gets them the recruits and the initial inventory orders (also known as frontloading).

You can read the whole letter MK sent to the FTC, or just read the really interesting parts here. My comments are in italics after each snippet from the letter.

  • Mary Kay agrees that it is critical to protect Americans by eliminating business opportunity fraud. However, we believe the proposed Rule would subject Mary Kay and our independent sales force members to impractical, unnecessary and burdensome compliance requirements which would devastate our 43 year old Company known widely for its steadfast commitment to ethical and legitimate business practices.

How would the rule be burdensome? It is just asking that reps provide actual facts about the “opportunity” that they are selling. I think the fact that MK Inc says the rule would DEVASTATE the company, shows that they know recruiters aren’t giving the whole story to victims.

  • As such, we believe it is imperative that the Final Rule not apply to legitimate direct selling companies that have multiple consumer protections already built into their recruiting and sales processes.

What consumer protections are “built into” MK’s recruiting process???

  • A cornerstone of the Mary Kay business model is the fact that a Mary Kay Independent Beauty Consultant is an independent contractor, free to operate her Mary Kay business as she sees fit.

Really? What about all the restrictions on advertising and places the product can be sold? What about the dress code that is voluntarily mandatory? What about all the pressure from the sales directors to do as you’re told?

  • The Mary Kay structure is based on retail sales to the ultimate consumer via Independent Beauty Consultants.

Ha! What about “personal use” consultants? There’s no sale to an end user through a consultant. What about all the initial inventory purchases and the fact that commissions are paid based upon orders to the company, and not actual sales? Doesn’t this mean that the sale to the ultimate consumer is NOT really the focus of MK Inc.?

  • All products sold to end consumers are backed by a 100 percent Satisfaction Guarantee.

Not true. When the “end consumer” is a consultant or former consultant, the 100% guarantee has restrictions. The most notable is that a product purchased buy a consultant for HER OWN USE cannot be returned if it is more than 1 year old. That’s not a 100% guarantee. Consultants and ex-consultants have also reported being denied product returns all together, even when they occur within the first year of purchase of the product.

  • Indeed, it is this flexibility of schedule that allows these women the luxury of staying at home with their children or conducting their Mary Kay business in conjunction with their full- time employment.

As always, the “stay home with your children” myth is being propagated here. Running to warm chatter, unit meetings, recruiting events, and appointments does not constitute being home with your children.

  • No compensation is earned by anyone on this Starter Kit purchase, i.e. for “introducing a new Independent Beauty Consultant.

No kidding. That’s why the push to buy inventory is so strong.

  • At those classes, she can take orders for products and then at a later time purchase product from the Company at wholesale to fulfill those orders. Alternatively, if she chooses, an Independent Beauty Consultant can purchase an inventory of product to have on hand at her skin care class to fill any orders she may receive immediately. The choice of whether or not to buy inventory (including how much or how little she may want to purchase) is completely up to her.

Here we go with the “inventory is optional” spiel. Yes, in theory it is optional and the choice to buy it rests with the consultant. In reality, however, the sales director puts the squeeze on as soon as the agreement is signed. She pressures and pressures and pressures to buy inventory right away. It is said that each DAY a new consultant thinks about the inventory purchase, her wholesale order goes down by $600. I don’t think there’s research to back th is up, but I bet it holds fairly true. Recruiters try to get you to purchase inventory right away, before you have the time to think it through and realize that it’s not necessary. (And then if you quit and send back your inventory, your director will ridicule you and say that you should have thought through the purchase.)

  • All Independent Beauty Consultants purchase their products and inventory directly from Mary Kay at the same wholesale price. There are no levels of wholesalers between the Company and the consumer, therefore all members of the independent sales force purchase Mary Kay products directly from the Company at the same published wholesale prices for resale to consumers of their choice at retail prices they set.

The idea that all members of the sales force purchase at the same price is really a myth. Since sales directors RECEIVE COMMISSION ON THEIR OWN WHOLESALE PURCHASES, that means that they essentially get a LOWER purchase price from the company. So everyone doesn’t really get the same price, do they?

  • Independent Beauty Consultants can earn money through two avenues of income. First and foremost, they earn money from the profit they receive from the retail sale of Mary Kay@ products. Then, if an Independent Beauty Consultant chooses to introduce others to Mary Kay, she can receive compensation based upon the retail sale of products by those individuals.

The real money is made in recruiting and wholesale orders of the recruits, and the company knows that. To suggest that the profit from sales of products is the more common way of making money is a lie. Further, the recruiter does NOT make commission from RETAIL SALES. The recruiter earns commission based upon the WHOLESALE ORDERS to the company

  • The low cost of a Starter Kit with a 100 percent, 30 day buy back guarantee, the 90 percent inventory repurchase provision, the direct relationship of the Independent Beauty Consultant with Mary Kay, the flexibility in selling products from inventory or ordering via Mary Kay, and the ability to work-part time around other important personal obligations makes the Mary Kay opportunity a low risk venture with little or no need for burdensome or onerous disclosure requirements.

Here, Mary Kay Inc. is touting the fact that it is a low-risk opportunity, and therefore the disclosures shouldn’t be needed. Huh? It still has a risk, so why NOT give facts to recruits. The logic used here is simply a bunch of crap.

  • If adopted the proposed Rule could create significant barriers to entry and have a devastating impact on our legitimate business, requiring Mary Kay to drastically alter our 43-year old sales methods by subjecting us and our independent sales force members to impractical, unnecessary and burdensome compliance requirements.

Again, what is so burdensome about providing FACTS about sellers and earnings????

  • A Mary Kay business is built on relationships – and the enthusiasm an Independent Beauty Consultant has with her family, personal friends, or co-workers when she tells them about our great Company, our products and her Mary Kay business. Women decide to become Independent Beauty Consultants after attending a skin care class and experiencing for themselves the effect of using our high quality products, or attending a guest night event and hearing compelling stories of personal growth and development, or learning how being an Independent Beauty Consultant has positively changed the personal situation of a family member or friend. The inspiration and enthusiasm associated with these events is a strong motivator which helps new Beauty Consultants to ‘hit the ground running in their Mary Kay businesses. The ability to nurture and channel this enthusiasm can often mean the difference between success and failure for a new Beauty Consultant. Requiring a seven day waiting period will stifle this enthusiasm and lessen the chance of the individual’s participation and /or success.

The company is all but admitting that they need women to sign up right away after they get excited, because if they think it through, they are less likely to join. When a company relies on this spur-of-the-moment sale to peddle it’s goods (or opportunity, in this case), that tells me there’s something wrong with what they’re peddling.

  • In our opinion the presale disclosure requirement is a significant barrier to entry – and makes the simple decision of becoming an Independent Beauty Consultant unnecessarily burdensome and complicated while delaying the ability to “hit the ground running” after her introductory experience.

The decision is so simple, that recruits should not be allowed to know the REAL EARNINGS of consultants??? Not being informed about this is kind of like taking a job without being told what your salary will be.

  • Furthermore, we believe the proposed Rule’s disclosure requirements and waiting period needlessly creates an “air of suspicion” in the mind of a prospective Independent Beauty Consultant.

Really? Because I think the fact that you don’t want anyone to think it over or discuss it with their spouse is what really looks suspicious!

  • Such suspicion would be misled in light of our 43 year history with legitimate and ethical business practices coupled with our built-in consumer safeguards, but nonetheless, these concerns would impact Mary Kay’s ability to continue to tell the Mary Kay story. This disclosure requirement would suggest a level of risk that simply does not exist.

The business practices are NOT legitimate and ethical. The company relies on frontloading, which is a total scam. They talk about a low level of risk with the starter kit and the buyback policy, but once you really get into the business, you see that it is high risk with the large inventory packages that are pushed and the deception used by the sales directors.

  • We also believe that the proposal to require geographic references (alternatively known as the 10 person rule) is an unnecessary, unmanageable, and impractical burden on our Company and sales force and could have a devastating impact on sales force recruiting, sales force income and our Company revenues.

Yep. If recruits knew the true saturation level, they wouldn’t sign up!

  • It would be virtually impossible for an Independent Beauty Consultant to disclose the required reference information because she would likely not have this specific information immediately available for a particular prospect that she might unexpectedly meet at a social gathering, skin care class, or other event.

Again, if the recruiter had to provide legitimate information instead of relying on excitement to sign people up, it would hurt the chances of recruiting.

  • With a sales force over 700,000 individuals, a large number of which are new each year, the burden of effectively complying with such requirements would be virtually impossible.

This is the information we’ve all been waiting for!!!! The company is admitting that tons of their 700,000 U.S. consultants are new each year. Woo hoo for that huge turnover!!!

  • Our experience shows that an Independent Beauty Consultant meets with a minimum of five prospects before recruiting one. Based on a conservative rate of sales force recruiting and turnover, we have 40,000 new Independent Beauty Consultants each month, with a total of 2.4 million disclosure opportunities each year.

Couple this with the information above…. 700,000 U.S. consultants. 40,000 new each month equals 480,000 new each year. Voila! Turnover rate in the U.S. of 68.6% per year.