...the amount of internal consumption in any multi-level compensation business does not determine whether or not the FTC will consider the plan a pyramid scheme. The critical question for the FTC is whether the revenues that primarily support the commissions . . . are generated from purchases of goods and services that are not simply incidental to the purchase of the right to participate in a money-making venture. A multi-level compensation system funded primarily by such non-incidental revenues does not depend on continual recruitment of new participants. . .
The Commissions recent cases, however, demonstrate that the sale of goods and services alone does not necessarily render a multi-level system legitimate. Modern pyramid schemes generally do not blatantly base commissions on the outright payment of fees, but instead try to disguise those payments to appear as if they are based on the sale of goods or services. The most common means employed to achieve this goal is to require a certain level of monthly purchases to qualify for commissions. While the sale of goods and services nominally generates all commissions in a system primarily funded by such purchases, in fact, those commissions are funded by purchases made to obtain the right to participate in the scheme. Each individual who profits, therefore, does so primarily from the payments of others who are themselves making payments in order to obtain their own profit. As discussed above, such a plan is little more than a transfer scheme, dooming the vast majority of participants to financial failure.
Deciding what a retail sale is can be tricky. Peter Vander Nat, the FTC economist who co-wrote a 2002 paper on the subject, says it depends on intent.I find the FTC economist's comments about internal consumption particularly interesting because they come before his forthcoming paper in JHRM and after Kohm's informal advisory letter in 2002 and after his testimony in Trek Alliance. Taking former and current commentary into consideration, if I am to interpret Dr. Vander Nat correctly it would appear that Dr. Vander Nat is of the opinion that internal retail sales are OK, provided that an individual is not buying for himself or herself simply to maintain their right to receive future commissions.
If people are buying because they want to use a company's products, those sales can count as "retail." If they are buying to stay in the game for future commissions, those sales wouldn't qualify, he said. (I added emphasis)
Usana says it doesn't keep track of distributors' sales to the public, but requires that at least 70% of its products be bought by "end consumers," which includes associates.
Additionally I find it interesting that so many Herbalife distributor/members leave Herbalife each year. If distributor/members were simply buying to maintain a right to their future commissions, I suspect we'd see much higher retention rates than we do coupled with a much higher incidence of inventory liquidations in which those fake internal consumers were simply trying to recoup the cost of the product they purchased so they could maintain their rights to commissions.
The "Vander Nat Intent" has a nice ring to it. I hope he'll consider writing a paper solely on this topic soon.