AFFILIATE MARKETING PROGRAMS
by David G. Eisenstein, Esquire
How They Work
In addition to providing added capabilities to traditional network marketing models, the World Wide Web has brought an innovation on the concept of network marketing itself to the forefront, referred to as Affiliate marketing programs. Companies promoting their products through user/marketers refer to their independent distributors as Affiliates and pay them on a scaled down version of a network marketing compensation plan, usually paying down only one or two levels of Affiliates in a uni-level compensation plan arrangement. Affiliate programs can be an excellent promotional device for a web based business.
The problem with these types of programs for the Affiliate with respect to their income generation capabilities, is that the Affiliate can only build wide (horizontally) and not deep (vertically), thereby severely limiting income potential, just as is the case with most network marketing uni-level compensation plans. This limitation is only partially mitigated by reason of the fact that the web which can be surfed by millions of people per day at what one might consider warp speed, through links from an Affiliate's web site to other websites (e.g., the product or service provider's website), allows a type of horizontal growth of sorts which is comparable to the more vertical geometric growth of the network marketing downlines, through the network marketing concept of "doubling."
Affiliate programs pay the affiliate for referring people to the company's products, services or web sites. Essentially once signed up to be an affiliate, a person makes a commission that can vary between 5% - 15% of the purchase price for any product or service that the affiliate referred someone to, followed by that person making a purchase of some item, such as a popular DVD or book. The affiliate becomes the sales person for the manufacturer, retailer or that web site. It does not usually pay much but it is easy for anyone to sign up to become an affiliate and easy to add the necessary content to a new affiliate's web site. Software readily available to a payor website also provides the affiliate a "transparent" look into the status of his or her progress in generating customers for the payor website. This is not unlike the recent technological innovations in the network marketing industry's use of the internet to generate sales and the computer software reporting upgrades that allow for real time or nearly real time reporting of all relevant facts of the marketer's success.
There are also affiliate programs that do not require the person clicking through to spend any money and the affiliate still gets paid. Here, the payments are truly pennies per "click through" but if an affiliate has a high traffic site, even those pennies can add up. Search engines have utilized these types of affiliate programs to build usage on their engines.
There are user friendly computer programs available for a relatively inexpensive purchase price of as little as a few hundred dollars that will put a person or company in the business of signing up affiliates who post banners on their websites that can be clicked on by visitors who then move on to the payor's website, presumably to make a purchase and generate a commission to the affiliate in the process.
Their Legality
The legal questions which confront network marketing programs, also known as multi-level marketing programs, also confront Affiliate marketing programs which are more than just one tier or level deep. If an Affiliate marketing program allows affiliates to recruit even one level of affiliates under them, that by definition would be a multiple level program.
Under California's "Endless Chain" statute , one of the more archaic penal code sections criminalizing pyramid schemes still on the books anywhere, but one which is still used by the Attorney General and the District Attorneys of the state to pursue "bad" acting MLMs, it does not matter how many levels of distributors/affiliates a distributor/affiliate can have under him or her. One will suffice to invoke the statute, so long as what is really going on is the payment for recruiting rather than payment of a commission for the sale of a "real" product or service. Since only one level of distributor/affiliate is all that is required, one might ask, how could this possibly amount to an endless chain? Two answers. First, payment for recruitment is the evil sought to be eradicated by the statute. Second, from the company's standpoint, paying people for recruitment of one level under them would result in further such recruitment by that new level, so on and so forth, ad infinitim.
A more modern approach would be that taken by Texas. But even Texas' more enlightened regulation of network marketing under the statute in question prohibits "payment for recruitment." All of the states with laws on this subject prohibit payment for recruitment of distributors/affiliates. Again, even one level of recruitment by the affiliate/distributor is sufficient to invoke Texas' anti-pyramid legislation, if commissions are not being paid for the sales of real products, instead of for recruitment.
Its legislation has been widely embraced by the network marketing industry because it allows commissions on sales for personal use by participants in the marketing plan to be considered properly commissionable sales, rather than payments for recruitment which the FTC , most notably, has repeatedly argued such payments constitute. Most Affiliate marketing programs make provision for sales to persons who are not, or do not become, affiliates, not just sales of products or services to those who are in the Affiliate marketing program of the company. These sales to non-participants in the pay plan along with sales to distributors/affiliates for their personal use are arguably a company's "retail" sales. Arguably, it seems that is to virtually every regulator except for the FTC.
One thing is certain, any network marketing program or Affiliate marketing program which is begun and/or operated without any expectation that many if not most of the company's sales of products and services will be made to those who are not participating in the marketing program of the company, is in for eventual scrutiny by one or more regulators. In making such "retail" sales the company must allow for sales by its affiliates/distributors to non-participants in the pay plan at a price which is the suggested retail price or other reasonable retail price set by the independent distributor/affiliate. Otherwise, price fixing and employment issues may come into play, where too much control over price is exercised. Beware of any network marketing or affiliate marketing pricing which has only one price per product for everyone, as opposed to a wholesale and retail price differentiation.
The FTC maintains that sales to participants in the compensation plan for their own personal use are not "retail" sales, and thus, not sales upon which commissions should be paid. This is curious because, no network marketing company, except for some with "party plan" compensation plans can say with a straight face that their sales are primarily to non-distributors. The battle over this issue rages on in Washington, as the Direct Selling Association has been lobbying the FTC for years, with only modest success, to get the Commission to come around to the point of view that there is really nothing inherently evil about sales for their own personal use to those who participate in the pay plan.
Anti-pyramid legislation is only one aspect of regulation which network marketing and affiliate marketing companies all face. The FTC really gets aggravated by, and thus often pursues, those companies or distributors/affiliates that make exaggerated earnings claims. Never try to promote a new company, or an existing company, for that matter, by claiming what someone can potentially earn or even what the top earner is earning. The FTC and many state AGs have definite expectations for companies that have distributors/associates in the way their income is represented. The incomes must be represented to the public, if at all, in the form of median income for all distributors/affiliates broken down by level of rank within the company. Most companies, even if they bother to figure medians, see no advantage to putting those figures out for public consumption.
