Updated April 17, 2023
Big Lies of Multi-level Marketing
Imagine a market where there is no hierarchy of distributors, carrying and forwarding (C&F) agents, wholesalers, and retailers. Instead, the company directly supplies products to independent distributors who develop a network of independent distributors under them called downlines. The independent distributors who make up the upline receive rewards for the sales made by the distributors under them, as well as for the products they personally consume. This type of direct marketing is called multilevel or network marketing. In this article, we will understand the concept of multilevel marketing.
According to the direct selling industry, multilevel marketing or network marketing saves enormous costs incurred in establishing distribution channels consisting of distributors, C&F, wholesalers, and retailers. Independent distributors pass on these savings to consumers or other independent distributors.
In most countries, this kind of multilevel or network marketing is popularized among the unemployed, employed, retired, and business people to earn extra income without much effort. The uplines earn income from each new business developed in the downline. In a conventional job or business, one continues to work hard to remain where there are or grow in the career ladder. Still, with network marketing, after the initial effort in developing the downlines, all it requires is to motivate the downlines to work and thereby earn passive income. Passive income refers to any income that results from an initial effort or investment, with no additional effort required after a certain period. Rental income is an example of passive income.
However, despite the alleged benefits, most people who join the scheme end up with poor results, and only a few actually make a significant profit. One needs to be cautious about pyramid schemes that pay older distributors based on payments made by 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) for network or multilevel 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 multilevel marketing brings more money than conventional businesses or jobs. In most cases, a few individuals at the top of the scheme joined in the beginning and developed the downlines that ultimately became wealthy. In contrast, the majority who don’t have downlines or are unable to create one end up losing money or not profiting from the business. Mathematically, the argument by the companies of the models based on the point value system is incapable of enabling huge returns for distributors. Developing a downline requires a thousand people to each create another thousand, and millions of people need to enroll to make the strategy viable.
Some experts have stated that the vast amounts of money made by top performers come from continuous enrolment enabled by downlines, as there are no limits on the number of distributors in an area and no surveys conducted regarding the marketing potential of the region.
2. Independent distributors are business owners
People often say 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. They indeed 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 recruits and sales have to happen in their network to get reasonably good income. The idea of owning a business can be an illusion, as distributors may not have true independence and could be prohibited from selling competing products.In Multilevel Marketing, there is no entrepreneurship but only a marketing arrangement under some stipulated conditions. Distributors must sell products at home or in specially convened meetings to develop new sales and distributors; they cannot be sold in shops.
3. Anybody can succeed in multilevel marketing
Those who persuade new people to join a multilevel marketing point out that anyone can succeed in the multilevel marketing business with a few days of training. 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 possesses innate talents and skills, there may be certain activities that a particular group of people may be unable to pursue. Hence the assurance that you can excel in multilevel 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 understanding the company, product, and marketing plans.
4. Soon as many products and services are sold through MLM
Every day you witness the rapid growth of organized retailing in emerging nations and, to an extent, in developed markets too. You can find new malls, commercial establishments, and exclusive brand outlets of companies edging out small mom-and-pop stores in some regions.
Amidst the rapid growth in organized retail and malls, 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 most cost-effective way to reach consumers, as there is no hierarchy of wholesalers and retailers. However, with a limited number of products and services offered in Multilevel Marketing, consumers have little choice of often expensive products and get lesser rewards if the downline sales or new recruitments to be business diminish.
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. Relationship obligations may lead some to join a business, but they may lack the drive or motivation to work and take the company further. This would estrange their relationship.
The destructive element in the business is the pressure on friends and relatives to join the network or buy products. According to marketing experts, using 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 often showcase a few people who have succeeded in the business through this formula but rarely talk about the majority who either quit the company or didn’t make much money.
7. Multilevel Marketing fosters better relationships
Many people claim that Multilevel Marketing fosters strong relationships within communities, as most events revolve around families and promote cooperation and unity. It may be true that distributors keen on developing the business will have a common goal and may meet often. However, putting too much pressure on individuals to join the network or buy products can also damage relationships. The community or support feeling that recruits get 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. Still, 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 appropriately registered its 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 it fulfills some Christian principles or scriptural prophecies. And creation or worship of wealth is the ultimate in life. They often lose sight of genuine spirituality as taught by religions. Misuse of such principles should signal that the investment opportunity is deceptive. Buyers should beware if a company tries to provide a spiritual dimension to a business.
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 produced by them which may have health benefits or have unique features that warrant charging a premium from customers. There is no way to test such claims, so it is better to exercise caution when joining the 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.
Conclusion
Multilevel marketing 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.
Given the several concerns raised against multilevel 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 have expanded upon the previous requirement that all earnings representations be based upon documented facts by setting forth the specific types of required substantiation and clarifying exactly what constitutes an earnings representation. The DSA Code of Ethics underwent modifications to ensure it meets or exceeds constantly changing stakeholder expectations for consumer and salesforce protections since its formulation in 1970.
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 claims of the superiority and uniqueness of Multilevel Marketing products, consumers and potential distributors should evaluate their competitiveness in comparison to other offerings in the market. It is better to evaluate products that promise miracle cures and guaranteed results before making a decision.
Before joining the business, one should analyze the business plan on a few parameters to ensure its feasibility. It includes the compensation structure, potential expenses, evidence to support claims made by the company regarding the income flow and profits, and the name and contact information of the company. Unless the company convinces the new distributor about the business proposal, they cannot effectively communicate it to potential recruits.
A lawyer or certified accountant may be consulted regarding the compensation plans, claims made by the company, and how legally binding it is.
If a distributor invests money in Multilevel Marketing, they should expect to receive returns. The distributor must be able to utilize the company’s refund policy if the product quality is poor or the business potential is less than expected.
It is better to get the company’s refund policy in writing, and it should include information about returning unused products, including restrictions and penalties. Training and materials costs constitute a significant 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 derive.
More importantly, someone marketing a product needs to answer a lot of questions, such as the annual sales figures, the amount sold to distributors, the expenses incurred for training and purchasing new products, the income earned, the bonuses disbursed, and the amount of time required to devote to the business. It is essential to get a comprehensive picture of how distributors make money, how big a downline is required to make profits, and how long it will take to break even in the business.
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