The FTC announced today that the United States District Court for the District of Arizona granted a temporary restraining order against Vemma for allegedly operating an unlawful pyramid scheme. Those of us in the affiliate marketing industry were understandably concerned given that Vemma announced in 2014 that it was moving from a multilevel marketing (MLM) business model to an affiliate marketing business model.
In fact, Vemma launched an aggressive rebranding of sorts to associate themselves with affiliate marketing, including attending Affiliate Summit and even joining the Performance Marketing Association.
However, what Vemma did was mainly a change in terminology and not in actual business practices. The changes that they made didn’t take them out of the MLM business. They wanted to be “less like Amway and more like Amazon.” And yet the focus of the business was still on recruiting new sellers, not on selling the product.
The Difference Between Vemma and Performance Based Marketing
When we talk about “affiliate marketing” at Affiliate Summit or the PMA or ABestWeb, we are talking about performance based marketing. I, as an affiliate, put up a link on my blog or Facebook page or Twitter. I only get paid if someone buys something through that link. I don’t buy anything myself to join the program. I don’t recruit other people to sell anything. It’s a simple referral transaction in which I am paid for referring a product.
Conversely, the Vemma business model first required “affiliates” to buy an “affiliate pack” at around $500. They were then told to sign up for an “auto-delivery” every month of around $150 to ensure that they always met their monthly minimum of sales. After that, the “affiliates” would then start recruiting other people to duplicate the exact same system. “Affiliates” were incentivized with bonuses to bring other people in under them as quickly as possible and were encouraged to give out free samples to get people to sign up under them rather than buy the products from them.
Vemma didn’t care if any products actually got sold and “affiliates” didn’t make money based on product sales. They made money based on 1) buying products themselves whether they wanted them or not, and 2) convincing other people to sign up under them and also buy products whether they wanted them or not. Internal documents showed that the majority of “affiliates” were actually losing money based on what they were investing each month compared to what they were making in compensation for sales.
Vemma Took Advantage of “Affiliate Marketing”
In my opinion, Vemma understood that it was losing out on potential customers by being dubbed an “MLM” and decided that because Affiliate Marketing is a growing, lucrative business, they should change what they call their business model. They ingratiated themselves into the affiliate industry in attempt to see how they could take all of the GREAT things about what we do (unlimited earning potential, growing number of participants, increasing reputation among big brands, etc) and twist it around for their own needs.
They attempted to use our terminology to avoid being classified as an “illegal pyramid” under Section 5(a) of the FTC Act, 15 U.S.C. § 45(a). But the FTC wasn’t buying it. Because the compensation was based on “recruitment of new participants, not on the retail sale of products or services,” Vemma was indeed an illegal pyramid.
This whole situation is unfortunate in many ways. First, a lot of people invested a lot of money in the hopes of living “the dream” of this great Vemma business. Second, once again affiliate marketing is getting a bad rap for something that isn’t really even affiliate marketing. And third, Vemma missed an opportunity to run a true affiliate program that would have allowed people to make honest money introducing their product to the public. If they truly believed that they had a great product that people would want to buy, they wouldn’t need to run their business the way that they did to make it profitable.
Which Companies Are Next?
Reading the documents in this case, I have to wonder who the FTC might target next. While companies like Tupperware and Mary Kay have been around for a long time and have survived because of the way that they are structured to encourage product sales, what will become of all of the newer companies selling essential oils, mascara, and diet shakes? What about affiliate marketing “gurus” who are selling their 10 step plans that guarantee you will earn passive income by investing in their courses? Hopefully we can continue to educate the public about how to do affiliate marketing the right way and continue to distance ourselves from the companies and practices that are deceptive to the public and focused more on people at the top making money than people at the bottom being treated fairly.
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