CONSUMER PROTECTION

The cornerstone of the Direct Selling Association’s commitment to ethical business practices and consumer service is its Code of Conduct.

Every DSA member company pledges to abide by the terms as set out in the DSA's Code of Conduct as a condition of admission and continuing membership of the Direct Selling Association of South Africa. All direct sellers are bound by the DSA's Code of Conduct when representing a DSA member company. The DSA's Code of Conduct speaks to both the consumer and direct seller. It ensures that member companies will make no statements or promises that might mislead either consumers or prospective direct sellers.

The DSA's Code of Conduct is enforced by an independent code administrator who is not connected with any member company.

The DSA and its member companies completely distance themselves from pyramid schemes and all fraudulent and harmful business practices.

Direct Sellers at your home/office

Follow the checklist below when meeting a new direct seller at your home/office:

  • Make an appointment prior to the visit
  • Check the identity of the direct seller on arrival
  • Ask to see product literature and order forms - all literature should have the company's name, address and telephone number. (Most DSA member companies will also have the DSA logo on their literature)
  • Do not sign any order forms or contracts until you are absolutely sure of the identity of the direct seller and the company they represent
  • Do not make any cash, cheque or credit card payments unless you are completely satisfied with the credentials and integrity of the direct seller
  • Once you have made payment, ensure you are given a proper receipt
  • Beware of verbal promises on special prices and terms of delivery - check that special terms are clearly written in company literature
  • Check that the product you are being offered is covered by a GUARANTEE

Avoiding Fraudulent Business

The ever-growing popularity of direct selling often motivates dishonest individuals and companies to misrepresent themselves as legitimate direct selling businesses in the hope of enticing victims. Thousands of people have lost money participating in scams and pyramid schemes.

Pyramid schemes

Pyramid schemes are illegal scams in which large numbers of people at the bottom of the pyramid pay money to a few people at the top. Each new participant pays for the chance to advance to the top and profit from payments of others who might join later. This amount could be a small investment or several thousand Rands. Legitimate companies rely on solid product sales over time. A strong base of customers who love and use the products is key to their continuing success. Scams like pyramid schemes, on the other hand, count on you to make a large upfront payment, from which the scheme promoter derives his profit. Building a business over time is not important because the promoter knows the scheme will likely collapse. However, by that time the promoter will likely be long gone - with your money.

How to Identify a Pyramid Scheme

Before you sign up with a company, investigate carefully.. ask yourself these three questions:

  1. Are the company’s products sold to consumers?
    If the answer is no (or not many), stay away! This is a key element. Direct selling (direct selling, multi-level/network marketing and referral marketing), like other methods of retailing, depends on selling products to consumers and establishing a market. This requires quality products, competitively priced. Pyramid schemes, on the other hand, are not concerned with sales of products to end users of the products. If there are products, profits are made on volume sales to new recruits, who buy the products, not because they are useful or attractively priced, but because they must buy them to participate. Inventory purchases should never be more than you can realistically expect to sell or use yourself.
  2. How much are you required to pay to join?
    If the start-up cost is substantial, be careful! The start-up fee in legitimate direct selling companies is generally small (usually for a sales kit sold at or below company cost and possibly a small administrative joining fee). These companies want to make it easy and inexpensive for you to start selling. Pyramid schemes, on the other hand, make nearly all of their profit on signing up new recruits. Therefore, the cost to join is usually high. CAUTION: pyramids often disguise entry fees as part of the price charged for required purchases of training, computer services, product inventory, etc. These purchases may not be expensive or "required," but there will be considerable pressure to "take full advantage of the opportunity."
  3. Will the company buy back unsold inventory?
    If you could be stuck with unsold inventory, beware! Legitimate companies which require inventory purchases will usually "buy back" unsold products if you decide to quit the business. Pyramid schemes, on the other hand, most often do not.

Ponzi schemes

A Ponzi scheme (named after an Italian immigrant, Charles Ponzi, who became notorious for using the scheme to defraud thousands in the early 1900s) usually offers abnormally high short-term returns in order to entice new investors. The high returns that a Ponzi scheme advertises (and initially pays) require an ever-increasing flow of money from investors in order to keep the scheme going. The system is doomed to collapse because there are little or no underlying earnings from the money received by the promoter. Several characteristics distinguish Pyramid schemes from Ponzi schemes:

  • Ponzi schemes involve a schemer who acts as a "hub" for the victims, interacting with all of them directly. In a Pyramid scheme, those who recruit additional participants benefit directly (in fact, failure to recruit typically means no investment return).
  • Ponzi schemes claim to rely on some esoteric investment approach or insider connections and often attract well-to-do investors. Pyramid schemes explicitly claim that new money will be the source of payout for the initial investments.
  • Ponzi schemes collapse more slowly, because Pyramid schemes require exponential increases in participants to sustain them. Ponzi schemes can survive simply by getting most participants to "reinvest" their money, with a relatively small number of new participants.

Warning signs - what to watch out for

  • Pressure to sign a contract quickly and agree to pay a large sum of money before sales claims can be investigated or legal advice obtained. Legitimate opportunities will not disappear overnight. It's OK to be enthusiastic about getting involved in direct selling (and in fact it's their enthusiasm and a love for what they do that drives direct sellers) but you should take the amount of time necessary for you to feel 100% comfortable that it is a legitimate opportunity before signing on the dotted line.
  • Promises of fast extraordinarily high or guaranteed profits. It's easy to be swayed by promises of a high income, especially if it's billed as "guaranteed" or "easy." Scam artists try to take advantage of human vulnerabilities, which is often very easy if someone is in a situation where they need cash fast. It's important to remember that, as in any business model, earning substantial sums of money requires time and attention to building the business. In direct selling, the amount of time required varies based on one's goals and the amount of time one anticipates spending on direct selling activities. It may take a relatively short amount of time to begin earning supplemental income, but if your goal is to rely solely on direct selling for your income, it may take several years before you can quit your regular permanent job. Exaggerated earnings claims are an unfortunate lure used by scam artists to entice people to join in. It's most unfortunate because it is possible to make a great deal of money in direct selling through time, effort and dedication to building a business. Those dishonest folks who misrepresent the facts muddy the waters for everyone. Individuals starting with unrealistic expectations are the most likely to fail, far before even approaching realisation of their goals. Even those legitimate direct sellers who accurately represent what money THEY make may still be guilty of making exaggerated claims if they do not follow very specific guidelines for how the information is presented.
  • Claims that profits can be achieved easily. Direct selling requires time, effort and work to sell the products, services and business opportunity. You will not reap profits by just signing up or sponsoring others (recruiting). Direct selling income must be based primarily on the sale of products and services to consumers who will use those products and services - if you are being told this part of the process (sale of products or services to consumers) isn't necessary or is only a sidebar to recruiting, be suspect. Even if you choose to build your business by recruiting others, you'll spend time training and mentoring those recruits so they can be successful direct sellers as well. You need to be actively engaged in your business to truly be successful.
  • A required initial fee which greatly exceeds the fair market value of any products, kits or training. Any fees you are required to pay to the company should be reasonable based on what you get in return. It's fairly easy to verify this in cases where you spend up to R 500 - R 1,000 for a sales kit that includes product samples, a training manual, catalogues and order forms. It is suspect in instances where the fee is substantial, say R 3,000 + and you are not getting much in return other than the right to recruit others. There's no "right" Rand value that indicates a dividing line between legitimate and suspect, so you need to use your best judgment in evaluating any start-up fees and speak to other people who are direct sellers for that company.
  • A large fee is payable before you receive anything in return. This is closely related to the previous item. In most cases, you should be able to start selling right away. Just as you're anxious to get started with the business having made the decision to join, so legitimate companies also want you to get started and selling as soon as possible. Be sure to find out exactly what you'll receive and when you'll receive it before paying any money.
  • Evasive answers by the direct seller or unwillingness to give full explanation of documentation/agreements. Sometimes individual direct sellers may not know the answers to all the questions you may ask but offer to find out and let you know, and this is OK. What's not OK is a dismissive/off-hand attitude about your concerns or an unwillingness to find the answers or direct you to someone who can help you - this should be seen as a warning for you. You should read over your direct seller agreement carefully, ask any questions you have and don't be afraid to contact the company directly if you have more questions.