Direct Selling Terms and Definitions

March 12, 2013

this information has been sponsored by Direct Selling Education FoundationIf you’re considering a direct selling opportunity you may hear a number of terms that are unfamiliar to you. In order to properly evaluate any opportunity, it is important to understand what these terms mean and how they might affect your direct selling experience.

Direct selling vs. direct marketing – is there a difference?
Direct selling is the sale of a product or service outside of a fixed retail location, typically through either a person-to-person or party plan method of selling. Direct sellers are independent contractors who sell a company’s product or services and are compensated based on their sales. On the other hand, direct marketing primarily encompasses direct response, mail, catalog and telephone sales.

What is the difference between direct selling and multilevel marketing (MLM)?
Direct selling refers to a distribution method, whereas multilevel marketing refers more specifically to a type of compensation plan found in direct selling. A direct selling company that offers a multilevel compensation plan pays its representatives/distributors based not only on their own product sales, but on the product sales of their "downlines" (the people representatives/distributors have brought into the business, trained and developed; and, in turn, the people they have brought into the business).

What is the difference between network marketing and party plan?
Traditionally, network marketing has referred to a one-on-one sales experience where a seller demonstrates the products or service to an individual or a couple. In a party plan, a direct seller will generally present to a group of people, often in the home of a hostess who invites her friends and family to the event. Guests have the opportunity to browse through the products and make an order while at the party (although digital technology now allows people to have “virtual parties,” make reorders and provide customer service remotely while still providing a high level of individual attention). Many direct selling representatives use a combination of these methods when making sales.

What is the difference between single level and multilevel compensation plans?
In a single level or “traditional” compensation plan representatives/distributors are compensated based solely on their own product sales. In a multilevel compensation plan, representatives/distributors are compensated based not only on their own product sales, but on the product sales of their downlines (a team of people representatives/distributors bring into the business, train and lead).

Is MLM legal?
Yes. Multilevel marketing is an acceptable way to compensate individuals for the sale of products and services. Conversely, pyramid schemes are fraudulent and illegal.

What is a pyramid scheme?
A pyramid scheme is a system in which participants are rewarded primarily for bringing others into the scheme. Payments by new recruits to join the business go to the recruit’s sponsor and that person’s sponsor, etc., and the only way to recoup one’s investment is to in turn recruit more people into the system. Compensation is dependent primarily upon this recruitment, rather than the sale of real product to real consumers. In a legitimate plan, compensation is based on the sales of real product to real customers - including other salespeople who actually use the product themselves. The costs associated with joining a legitimate plan are minimal and generally just enough to cover the cost of product samples or other items to help the seller get started.

What is an independent contractor?
An independent contractor is a person who performs work for another company under terms specified in a contract or other agreement. Independent contractors are not employees of the company and work as much or as little as they desire. They are “self-employed” and are responsible for calculating and submitting taxes on their income (i.e. taxes are not withheld from payments to independent contractors). Direct sellers are treated as independent contractors under federal and state law, including being statutorily defined as non-employee independent contractors for federal employment tax purposes under section 3508 of the Internal Revenue Service tax code.

What is a “downline” and an “upline”?
In a multilevel compensation structure a downline refers to those one has personally recruited and trained as well as the recruits of their recruits and so on. An upline is the person who recruited (sponsored) a seller, as well as their sponsors. Compensation is generally paid for several levels of recruits, but varies by company. Compensation plans can be complicated so it is important to fully understand how you will be compensated before signing up. This is also a good opportunity to verify that your compensation will come from the sales of products and services – not just the act of recruiting.

Once you are familiar with the terms associated with direct selling you will be able to approach your decision to join a company with confidence. Remember – it’s important to read and understand all parts of an independent contractor agreement before signing. A good opportunity will still be there tomorrow so take your time in deciding what is right for you.

What is the DSA Code of Ethics?
"The cornerstone of the Direct Selling Association's (DSA) commitment to ethical business practices and consumer service is its Code of Ethics. Every member company pledges to abide by the code's standards and procedures as a condition of admission and continuing membership in DSA.
The DSA Code of Ethics speaks to both the consumer and the seller. It ensures that member companies will make no statements or promises that might mislead either consumers or prospective sales people. Pyramid schemes are illegal and companies operating pyramids are not permitted to be members of the DSA.
The DSA Code of Ethics is enforced by an independent code administrator who is not connected with any member company. The code administrator will do everything possible to resolve any complaints to the satisfaction of everyone involved, and has the power to decide on remedies. All member companies have agreed to honor the administrator's decisions."