Direct selling companies are coming up with creative ways to catch bad actors.

As direct sellers, we’re intimately familiar with Amazon’s disruption of the retail market, otherwise known as the Amazon effect. We can’t deny that it’s driven millions of consumers online, giving both brick-and-mortar outlets and other e-commerce sites a serious run for their money. By and large, our strategy to compete with Amazon has been to emphasize our personalized service, our preferred customer programs and, for those customers seeking something more, our business opportunities. What we hadn’t banked on, however, was that some of the very distributors who represent our brands would leverage Amazon, eBay and other sites to sell our products at discount, unwittingly placing their own businesses—and the businesses of other independent distributors—in jeopardy.

While this practice isn’t illegal, it’s a clear violation of the independent contractor agreement. What is illegal, however, is credit card fraud, and our industry is by no means exempt from that. Increased awareness of these deceptive practices and their associated red flags are helping direct selling companies reduce the number of incidents, but they remain prevalent enough to keep third-party fraud detection companies in business.

Every organization in every industry faces online security risks today. The risks faced by the direct selling industry, however, are unique due to two factors: one, the independent contractor relationship; and two, our promotion and recognition-oriented cultures, which, unfortunately, can motivate for the wrong reasons as well as the right ones.

Friendly & Unfriendly Fraud

The issues boil down to what John Licari, Chief Operating Officer of Total Life Changes, refers to “friendly fraud” and “unfriendly fraud.” Friendly fraud isn’t necessarily fraud per se, but it involves buying and selling our industry’s products in a manner that doesn’t support long-term, healthy business growth. Unfriendly fraud involves the above-mentioned credit card fraud. A single case may be committed by several individuals who open up an account for the purpose of committing fraud, after which they shut down the account, then open a new one somewhere else and begin the process again.

Friendly fraud, according to Licari, “takes a little longer to materialize. They’re pooling their money, they buy as much product as they can at a reduced cost, and then they’re dumping it on Amazon or eBay or anywhere else they can—and still at a profit because they’re able to obtain it at a discounted rate.” Unfortunately, that’s not the only path friendly fraud can take. “A lot of times with friendly fraud, you’re getting a lot of rank advancements, which could trigger inflated bonuses and commission checks. So now all of a sudden, a $1,000 investment might net $1,500 because you gave everyone time to do the math.” Another common tactic is the creation of fake accounts— for example, a distributor who uses her own credit card to establish multiple accounts for customers who don’t exist.

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“One of the biggest mistakes I see people making in this industry is mistaking a flurry of activity for one month as business growth.” —DEBORAH HEISZ , Co-CEO, Neora

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Rethinking Product Promotions

Product promotions are one of the common scenarios during which this behavior takes place. Imagine the typical product promotion: You announce it to your distributors, and the promotion continues for a month or more. Our intention is to motivate distributors to challenge themselves—to find a few new customers, sell a bit more product, welcome a few new team members. And many do just that. Sadly, however, a few try to take shortcuts or otherwise game the system.

“If we give people advance notice, if we keep promotions going on long enough, that gives the potential bad guys time to get their ducks in a row and figure out a strategy to manipulate the promotion or the system itself, either through the customer affiliate program or through the standard genealogy,” Licari continues. “They figure out a way to either get product out, or product in and money out, and by the time you figure it out, they’re gone.”

Whether driven by a desire for rank advancement or something more nefarious, an uptick in these unscrupulous practices has brought about a secondary, yet no less important, challenge to our industry. Distributors who approach prospective customers find that they can’t compete when their own products are being sold on Amazon for a significantly lower price. “What’s really happening there is that they’re [distributors] competing against themselves,” says Deborah Heisz, Co-Chief Executive at Neora (formerly Nerium International). While our industry’s reputation for personalized service is a compelling point of difference, “ it doesn’t overcome the online marketplace,” Heisz says. “We really have to control brand pricing online. It’s a huge hurdle, and it’s something a lot of CEOs are talking about right now.”

Cash In Hand Instead Of Product

Last year, The Times of London reported that luxury brands like Burberry had taken to burning their excess stock so as to avoid having their products sold at discount, and to maintain exclusivity and prestige. Burberry disclosed in its 2017 annual report that it had burned $37.8 million of unwanted products that year alone, three times more than in 2014. It may seem extreme, but it’s food for thought. If direct selling companies allow excess inventory to be sold at discount prices, are we unintentionally diminishing the perceived value of our own products?

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“If direct selling companies allow excess inventory to be sold at discount prices, are we unintentionally diminishing the perceived value of our own products?”

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Neora has just revamped its compensation plan with built-in bonuses to reward those who are actively building and cultivating a customer base. “We’re putting more cash in their hands instead of free product,” Heisz says. “There’s a big problem with giving product versus cash because you’re potentially incentivizing [distributors] to do something that jeopardizes their own business and the company. We want to make sure they’re motivated to talk to people about our products and the business opportunity.”

Short-Term Flash Sales

At Total Life Changes, flash sales have replaced the traditional longer-lead, longer-term product promotions. It’s a change that Licari says has been an effective measure against fraudulent or otherwise questionable purchase activity, and it rewards distributors who are connected to the company and actively engaged in their businesses. Every Friday at 2 p.m. Eastern, TLC delivers a broadcast announcing a flash sale lasting anywhere from 10 to 60 seconds. The company usually decides what will be on sale 15 to 30 minutes before they go on the air. Shorter-term sales, Licari adds, protect against the erosion of brand value.

To illustrate his point, he talks about a regional furniture store where he’s based in Michigan. On nearly any day of the year, the store is running a “50 percent off” sale along with additional incentives like no interest and deferred payment. Any shopper who happens upon the store at a time when a sale isn’t running likely won’t be motivated to make a purchase when she knows another sale is just around the corner. Keeping sales targeted and short based on limited quantity benefits those distributors who are working the business, and it keeps perceived product value high.

Some direct sellers are reducing the dollar amount of product for which distributors may qualify during a promotion, and others have moved toward sampling programs and away from using fullsized product for promotions as a means of curbing fraud.

“For us, it’s about making sure the behavior [distributors] are focused on is not requiring them to stockpile product. That’s bad for them and for us,” Heisz adds. “I think the biggest driver of fraud in our industry is programs that unintentionally incentivize people to spend more and acquire more product than they’re comfortable having. Then they move that product via Amazon or eBay to recoup some of that investment. That’s what I see most often.”

Can We Beat Amazon At Its Own Game?

Amazon will never be able to compete with the kind of personalized service an independent distributor delivers to her customers every day. But is that enough? When it comes right down to it, if a prospective customer can pull out her phone, tap her Amazon app and find your product for less, will she be willing to sacrifice service for a discount? After all, if she doesn’t like the product, Amazon has made it relatively easy for her to return it. In fact, while Amazon may not have much of a customer service presence, consumers don’t seem to be deterred. What this all boils down to, then, is price.

“One of the main complaints we get from distributors is, ‘What are you going to do about Amazon?’” said Danny Lee, President and CEO of 4Life, during a recent Direct Selling Association Companies in Focus event. “What can anybody do about Amazon? The last time I checked, Jeff Bezos isn’t taking my call.” Given that this our reality, “when it comes to our industry, the real question is … how are we adding value, how are we making it easier for our distributors to do business?”

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“If we give people advance notice, if we keep promotions going on long enough, that gives the potential bad guys time to get their ducks in a row and figure out a strategy to manipulate the promotion.” — JOHN LICARI, Chief Operating Officer, Total Life Change

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At 4Life, the answer has been to price products more competitively. “The company’s goal is to empower distributors not only to offer consumers a superior product but at a price 25 percent lower than Amazon, along with the icing on the cake: personalized service and the option of a business opportunity in the future if the customer is interested.” 4Life initially used a third-party organization to enforce its retail prices on Amazon and now manages tracking and post-market surveillance on its own with a small in-house team.

Recognizing The Behavior That Leads To Success

Rank advancements, bonuses and incentive trips may lead to self-inflicted pressure to order more inventory than a distributor can reasonably sell. With those factors in mind, direct selling companies are examining how they can reward those distributors who are focused on growing and nurturing their customer base versus selling a specific amount of inventory—which can be little more than a means to an end. While they’re well-deserved for hard-working distributors, rank advancements and bonuses are “great, but they’re a one-time thing. It doesn’t build business,” Heisz says. “One of the biggest mistakes I see people making in this industry is mistaking a flurry of activity for one month as business growth. You put in a program and you get all of these sales for one month, but then the next month, you’re right back where you were, if not lower, because everyone has all of the product they need for three months.”

Ensuring that we’re rewarding the behaviors that lead to a sustainable business will support our continued efforts to eliminate misconceptions about the direct selling industry. “I would love to get to the point in this industry where we’ve taken the stigma away because we’ve proven over and over again that this is a great place to start a business at a low cost,” Licari says. “We’re not selling Lamborghinis in bikinis; we’re selling middle America the opportunity to earn an extra $200 to $300 a week by selling our products. There’s a ranking and recognition system, but we’ve chosen to celebrate both sides of the spectrum equally, and that helps us minimize fraud to a certain extent. ‘Ms. Middle America’ who’s probably 35, has a minivan and two kids playing soccer will be celebrated at TLC for making $250 a week just as loudly as someone who made five figures in a week. That’s our dream.”

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Stopping Fraud Before It Occurs

A 2017 study conducted by LexisNexis® Risk Solutions determined that for every dollar of fraud, businesses incur an average of $2.66 in losses. Third-party fraud detection companies like Sift, Threat Metrix and iServe help companies of nearly every industry affiliation detect and reduce fraud and spot trends so they can get ahead of would-be offenders. These services employ such technology as Artificial Intelligence to conduct fraud analytics at the pre-gateway state of the transaction before an order is processed. Direct selling companies are not only using these services, but they are also employing dedicated staff to verify the authenticity of orders that are flagged based on various criteria—for example, orders exceeding a particular threshold.

Safety technology aims to strike the balance between making it harder for fraudsters to complete a transaction while maintaining a seamless check-out for its distributors. Kevin Lee, a Trust and Safety architect at Sift, has led various risk, chargeback, spam/scams, and trust and safety organizations at Facebook, Square and Google. He refers to the strategy as “dynamic friction—you want to be able to throw a sledgehammer at a bad guy, take him out, but you cannot apply that same approach to 100 percent of people on the platform. You’re really taking a scalpel approach—targeting a specific subset of that population that is aimed to do bad things.”

Red Flags To Consider

“A very common promotional abuse tactic is promotional funneling—creating fake accounts to redeem additional promotional offers,” Lee continues. “Typically, these fake accounts tend to have identifiable patterns including similar email addresses. From a technology standpoint, we’re looking at user behavior to understand patterns of abuse so that companies can prevent this from happening in real time. With such digital trust and safety tech in play, companies can add friction dynamically so that only suspicious users—in this case suspicious sales reps— have to do things like provide additional credentials.”

Anyone who monitors fraud will soon spot emerging trends and red flags—for example, concentration in a specific geographic location; according to John Licari, Chief Operating Officer of Total Life Changes. “Montreal is a hotbed for fraud right now for us.” Inevitably, as more fraudsters are caught, the number of cases will decrease there, only to pop up in some other location. Subsequently, some zip codes may require dual authentication.

While some factors don’t necessarily mean that fraud has taken place, they do send up red flags nonetheless. For example, a seller with multiple customers all coming from the same device, IP address or street, or who otherwise are in very close proximity.

Fraudsters are a savvy group running a multitrillion-dollar business. “Often times, it may seem like an arms race,” Lee says. “Companies will institute rules or put some kind of monitoring in place, but they’re only putting in those rules because they got burned by someone or some group. And really, the danger there is that fraudsters will go one below the threshold,” or do just enough not to get caught. An additional concern, he adds, is that the institution of rules is likely to introduce friction to your high-performers’ buying experience, when in fact you want to do everything you can to help them sell more. Those hurdles can turn your superstars off or otherwise cause frustration.