Since late in 2012 we have seen several “Network Marketing” Mobile App companies launch. I use parenthesis because I am still not convinced these companies fit the legal description of a direct selling company aka MLM or network marketing.
I will use Wikipedia for the two most common understandings first then will add a little extra from the IRS.
Direct selling is the marketing and selling of products directly to consumers away from a fixed retail location. Peddling is the oldest form of direct selling. Modern direct selling includes sales made through the party plan, one-on-one demonstrations, and other personal contact arrangements as well as internet sales. A textbook definition is: “The direct personal presentation, demonstration, and sale of products and services to consumers, usually in their homes or at their jobs.” (Read Full Definition)
Direct marketing is a channel-agnostic form of advertising that allows businesses and nonprofits organizations to communicate straight to the customer, with advertising techniques that can include Cell PhoneText messaging, email, interactive consumer websites, online display ads, fliers, catalog distribution, promotional letters, and outdoor advertising. (Read Full Definition)
Now here is what the IRS has to say…
Retail Industry ATG – Chapter 3: Examination Techniques for Specific Industries (Direct Sellers)
Direct selling companies market their products through person to person contact away from a fixed retail location through a network of independent sellers. Frequently these sales presentations are in the home, in the form of a sales “party,” or through door to door solicitations, or sometimes, as part of a get-together – one person to one person. In any case, these approaches are all considered direct sales. In addition, direct selling provides a channel of distribution for companies with innovative or distinctive products not readily available in traditional retail stores, or who cannot afford to compete with the enormous advertising and promotion costs associated with gaining space on retail shelves. (Read Full Definition)
The IRS doesn’t really separate out Direct Selling from Direct Marketing. Although, they do have a whole section on Internet Based Businesses…
Retail Industry ATG – Chapter 3: Examination Techniques for Specific Industries (Electronic Business, Online Retail)
To most people, e-business implies online shopping, but web shopping is only a small part of the e-business picture. E-Business also refers to other business transactions including online stock and bond transactions, Business-to-business purchases (EDI), and electronic telemarketing. In retail businesses the examiner is likely to find that retailers make a substantial percentage of their purchases of goods and supplies online. (Read Full Description)
Now we should also realize there are two completely different associations for the Direct Selling Industry and the Direct Marketing Industry. Again bringing into light that the common understanding is that there are two completely separate business models.
Direct Selling Association:
The mission: The Association’s mission is “To protect, serve and promote the effectiveness of member companies and the independent business people they represent. To ensure that the marketing by member companies of products and/or the direct sales opportunity is conducted with the highest level of business ethics and service to consumers.” (Read Full Description)
Direct Marketing Association:
The Mission: DMA is dedicated to advancing and protecting data-driven marketers in Washington, across the States and around the globe.
So based on the above confusion, for now we will assume that all app companies with a compensation structure attached will fall under the tax code governing Direct Selling even though most of the MLM App companies might not gain membership to the DSA.
The Future Looks Promising…
If all the new MLM Mobile App companies create solid compensation plans, that rewards the affiliates based on the sales of products through their apps, then I would say they are off to a great start.
However, if the compensation plans, rewards affiliates based on recruiting aka, generating the majority of commissions through the sales of “licensing rights” to give away something for free, then I believe there will be huge liabilities, and the affiliates will once again be put into harms way.
Over the next few weeks, I will be traveling and interviewing some of the leaders in the MLM Mobile App industry.
Living An Epic Adventure,