Big Lies of Multilevel Marketing –
Imagine a market where there is no hierarchy of distributors, carrying and forwarding (C&F) agents, wholesalers, and retailers. Instead, the company directly suppliers products to independent distributors who develop a network of independent distributors under them called downlines. The independent distributors who constitute the upline get rewarded for sales made by distributors under them and for products consumed by themselves. This type of direct marketing is called multi-level or network marketing. In this article, we will be understanding the concept of multilevel marketing.
According to the direct selling industry, multi-level marketing or network marketing saves huge costs incurred in the traditional business of establishing distribution channels consisting of distributors, C&F, wholesalers, and retailers. These savings are passed on to consumers or other independent distributors.
In most countries, this kind of multi-level or network marketing is popularized among the unemployed, employed, retired, and business people to earn extra income without much effort. Once the downlines are developed, each new business generated by them leads to income for the uplines. In a conventional job or business, one continues to work hard to remain where there are or grow in the career ladder, but with network marketing after the initial effort in developing the downlines, all it requires is to motive the downlines to work and thereby earn passive income. Passive income is any income derived from an initial effort or investment which comes after a period with no extra effort required. Rental income is an example of passive income.
However, despite all the benefits they are said to have, most people who join the scheme end up with poor results and only a few are seen to be making. One needs to be cautious about pyramid schemes that pay the older distributors based on payments made by new recruits and not based on product sales. In most countries, pyramid or Ponzi schemes are illegal and liable for punishment with fines and imprisonment.
Is it Multilevel Marketing (MLM)
Here are ten reasons (or lies) of network or multi-level marketing, everyone needs to be cautious about:
1. Multilevel marketing is a profitable business compared to conventional ones
Network marketing companies take great pains to establish that multi-level marketing business brings more money than conventional businesses or jobs. Most often, it is a handful of people at the top of the scheme who joined in the beginning and developed the downlines that end up being rich, while the majority who don’t have downlines or is unable to create one end up losing money or not profiting from the business at all. Mathematically, the argument by the companies of the models based on the point value system is not capable of enabling huge returns for distributors. If thousand people are needed to develop a downline, these thousand need to create another thousand each and millions of people need to enroll to make the strategy viable.
Some experts said that out huge money shown to be made by some of the best performers come from the constant enrolment that is enabled by the downlines as there is no limit on the number of distributors in an area and no surveys regarding marketing potential in the region.
2. Independent distributors are business owners
It is often said that independent distributors own their businesses. It may be partly true as they are not bound to report to anyone and can fix targets to work on. It is true that they earn income based on the sales generated by them and their downlines, but they don’t have a claim on a company’s shares, dividends and profits. Most distributors would be lucky if they earn extra income as more number of new recruits and sales has to happen in their network to get reasonably good income. Owning a business is an illusion while and there is actually no independence as you are sometimes forbidden from being a distributor of a competing product. In Multilevel Marketing, there is no entrepreneurship but only a marketing arrangement under some stipulated conditions. Products can’t be sold in shops. It has to be done at home or in meetings specially convened to develop new distributors and sales.
3. Anybody can succeed in multilevel marketing
Those who persuade new people to join a multilevel marketing point out that with a few days of training, anyone can succeed in the multilevel marketing business. Marketing is a specialized skill set in any organization, and to be a good marketer, a lot of hard work is required to develop interpersonal skills, presentation skills, selling skills, leadership skills and above all, motivational skills to lead a team. Just as each individual has some inborn talent and skills, there may be some activity that a particular set of people may not be able to venture into at all. Hence the assurance that you can excel in multi-level marketing has to be assessed individually based on aptitude, whether the individual likes to go out and meet people, develop strategies to sell and devote more hours to understand the company, product, and marketing plans.
4. Soon as many products and services will be sold through MLM
Every day you witness the rapid growth of organized retailing in emerging nations and, to an extent, to develop markets too. You can find new malls, commercial establishments, exclusive brand outlets of companies edging out small mom and pop stores in some regions.
Amidst the rapid growth in organized retail and malls, the Multilevel Marketing companies make people believe that retailing is witnessing a downtrend and more companies are moving into network marketing. However, even in developed markets, only one percent of retail sales happen through Multilevel Marketing.
5. Network marketing is the best way to reach out to consumers
Multilevel Marketing companies point out that their strategy is the best and cost-effective way to reach out to consumers as there is no hierarchy of wholesalers and retailers. However, with a limited number of products and services offered in Multilevel Marketing, consumers end up with a limited choice of often highly expensive products and get lesser rewards if the downline sales or new recruitments to be business diminishes.
Most often, the company urges the new distributors to make a list of their family members, relatives and friends and get in touch with them first. Some may be obliged to join a business based on the relationships but may not have the urge to work or the motivation to take the business further. This would estrange their relationship.
The destructive element in the business is the pressure being put on friends and relatives to join the network or buy products. According to marketing experts, trying to use personal relationships to build a business can destroy one’s social foundation.
6. Point system and rewards are attractive
Network marketing companies prepare a model of rewards and points values (PV) earned through sales and bringing new people into the fold. They sometimes present a hypothetical or sometimes exaggerated picture of the revenue flow from the business, and it is often difficult for new distributors to explain this to new downlines they create. And they most often showcase a few people who have succeeded in the business through this formula but rarely talk about the majority who either quit the business or didn’t make much money out of it.
7. Multilevel Marketing fosters better relationships
It is often said that Multilevel Marketing creates good relationships in the community; most of the events are family-based and hence foster cooperation and unity in the community. It may be true that distributors who are keen on developing the business will have a common goal and may meet often, but it also has the potential of damaging relationships if too much pressure is put on them to join the network or buy products. The community or support feeling that new recruits get is entirely based on their purchases. Such relationships may not last if targets are not achieved or purchases and enrolments decline, the communion also falls apart.
8. Multilevel Marketing business is legal
In many countries, Multilevel Marketing business is legal, but in some provinces, the local authorities may not have permitted such companies to conduct business as they have to comply with tax regulations, registration, and other regulations. It is, therefore, in the interests of new distributors joining the network to see whether the company has properly registered their business and activity as per statutory rules and regulations in force at the state and federal levels.
9. Multilevel Marketing business is a spiritual movement
Multilevel Marketing companies sometimes try to promote the movement as a spiritual movement claiming that it fulfills some Christian principles or scriptural prophecies. And creation or worship of wealth is the ultimate in life. They often lose sight of the genuine spirituality as taught by religions. Misuse of such principles should be a signal that the investment opportunity is deceptive. If a company tries to provide a spiritual dimension to a business, buyers should beware.
10. Multilevel Marketing products are superior products
Multilevel Marketing companies often market their products as superior products, patented and specially made with ingredients or materials made by them which may have health benefits or have superior features that warrant charging a premium from customers. There is no way to test such claims, and hence it is better to exercise caution when joining such business. Wearing a jacket or vest can cure your health ailments, or some nutrition powder can help build stamina; all could be exaggerated claims.
Multilevel Marketing business may have created a parallel path in marketing and doing business. Indeed some companies may have succeeded in developing new products and creating some independent distributors who made good profits. However, this business is not for everyone, just as marketing is not everyone’s forte.
In view of the several concerns raised against multi-level marketing, the American Direct Selling Association (DSA) has announced a new set of consumer and sales force protection standards that went into effect on January 1, 2016.
Recent amendments to the code of ethics had expanded upon the previous requirement that all earnings representations be based upon documented facts by setting forth the specific types of substantiation that is required and clarifying exactly what constitutes an earnings representation. The DSA Code of Ethics formulated in 970 has undergone modifications to ensure they meet the consumer and salesforce protections or exceed constantly changing stakeholder expectations.
If the income to a distributor is based on recruiting new people into the business and not on product sales to the public, it is more or less a Ponzi scheme or pyramid scheme. It is better to keep such schemes. Despite the tall talk of the superiority of Multilevel Marketing products and their unique nature, consumers or potential distributors need to assess how competitive it is compared to other offerings in the market. Those that guarantee miracle cures, guaranteed results are better evaluated before a decision is taken on it.
More importantly, the business plan should be analyzed on a few parameters before deciding to join the business. It includes the compensation structure, potential expenses, evidence to support claims made by the company regarding the income flow and profits, name and contact information of the company. Unless the new distributor is convinced about the business proposal, it can’t be possibly communicated to new recruits.
A lawyer or certified accountant may be consulted regarding the compensation plans, claims made by the company and how legally binding is it?
Whatever money invested in Multilevel Marketing should bring returns to the distributor, in case the product quality isn’t good or business potential is less than expected, distributors must be able to tap on the refunds policy of the company.
It is better to get the company’s refund policy in writing, and it should include information about returning any unused products, including restrictions and penalties. Training and materials costs constitute a major chunk of expenses in this business. It is better to ask how much time other distributors have spent on such programs and the benefits they derived.
More importantly, a lot of questions need to be asked to a person marketing an – annual sales of the product, how much was sold to distributors, expenses on training and buying new products, income and bonuses disbursed, how much time needs to be devoted to business. It is important to get a comprehensive picture of how distributors make money, how big a downline is needed to make profits and how long it will take to break even in the business.
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