My latest at Yahoo: The Problem with Multi-Level Marketing

(Reproduced)

A few years ago, a member of my college’s alumni association called and wanted to “speak business”. A few hours later, he landed up at my office and after an introduction, asked me:

“Do you want to be really FREE?”

Me: “Huh?”

“How would you like to run your own business?”

I was the co-founder of a software startup, which I suggested qualified as running my own business. But he persisted:

“No, I mean imagine you can take holidays when you like, without worrying about money. You can retire, and still keep making money…”

As you’ve probably realized by now, he was pushing me to join Amway, which is a worldwide “network marketing” company, a concept otherwise known as multi-level marketing (MLM). After a very long and frustratingly meandering discussion, Amway turned out to be this company selling consumer goods like shampoos, detergents and dietary supplements.

You were supposed to join a “program” where you paid a fee (currently Rs. 995), and used these products or sold them to your friends. You got a commission on every sale, and if you enrolled any of your friends into the program, you got a piece of their pie as well. The products were overpriced, but supposedly fabulous. I was then propositioned to join, and in the manner of all politely bankrupt individuals, I smiled and refused.

That was fortunate. Although I hear a number of individuals have made substantial amounts of money being Amway superheroes, MLM wouldn’t work for a person like me. And the reason is emotional – I cherish friendships and relationships to the point that I neither want to sell or be sold anything, especially if it’s overpriced shampoo.

MLM, on the face of it, is noble – you get a piece of what you would spend anyway, and you get to build an organization (“downline”) which keeps feeding you money back as it grows. But the specifics in the real world muddy the waters.

First, the products tend to be quite expensive – this is the case with at least three MLM organizations I’ve seen. The pitch here is that the products are superior, and in any case you make some of the money back. But even with the 20% kickback, paying Rs. 125 for toothpaste isn’t very financially sound when regular FMCG competitors are at Rs. 50, and I’m not sure how advanced you can get with toothpaste.

Second, the MLM recruits are pushed quite as much to get new people into the organization, because just “selling product” doesn’t do much. An Amway “Sales and Marketing Plan” builds scale primarily from getting more people into your “downline” organization. Additionally, you get a fancier designation as you get more people in. Selling a product is a far easier proposition than trying to get someone else to enroll, and the incentive to enroll ensures most distributors don’t care about selling the product.  Indeed, in their eagerness, the good people who designed the brochure above decided that the average family of four would need protein powder, multi-vitamins and dietary supplements collectively worth Rs. 3,500 a month, which is unfathomable to most of the remaining residents of the country.

Third, people in the organization are encouraged to sell at every opportunity they get; and because they try to enroll people they know well – remember, you can’t put up a shop and sell to total strangers under the MLM model – they end up with relationship pain; from disgust to suspicion of their motives every single time. This causes almost universal hatred of anything MLM, probably from the feeling of being scammed as the MLM’ers start with freedom and end with an entry fee to sell soap.

Lastly, instead of product sales, a new way to make money seems to have become popular: selling “tools”. Once you’re in, you’ll find someone in the hierarchy will have built motivational tapes, or will be charging for his/her seminars. Paying for this adds substantially to your cost, and might make a great return for someone up the line. (how do you know what paid for that fancy car?) A DateLine video reveals how prevalent this was.

Eric Scheibeler wrote a book called “Merchants of Deception” which is available for free on the web, describing his experiences as an “Emerald” distributor in the business. It reveals dark, dirty details of how the product sales concept was twisted into a mentally manipulative system, making people work far more than they expected to (weekends included), earn a lot less money than imagined, buy tapes and seminar and never question the “system”. If that sounds like a cult, it’s what many MLM schemes have been described as.

Many confuse MLM as a Ponzi scheme, which is also inaccurate. Charles Ponzi (and recently, Bernie Madoff) would borrow from investors promising high interest rates, and use subsequent investors’ money to pay off the earlier investors. At some point the scheme blew up as the rate of flow of new investors slowed. In a way this is how a pyramid scheme operates – where you only get paid if you enlist more people, which can get out of hand pretty fast; Where you’re pitched that you can make ridiculous amounts of money by enrolling just 6 more people, understand that if this concept started with you and went to 13 levels deep, you’re now talking more than twice the world population. But all MLM aren’t pyramid schemes; companies like Amway make a lot more money from product sales, versus entry fees.

MLM recruits tend to oversupply themselves with the products, in order to keep their grades. I’ve heard horror stories of people who spent lakhs of rupees buying products so they could keep their “Ruby” status; and now there is way too much toothpaste or detergent to even consider healthy competition. But this is not limited to the MLM industry: I have had mutual fund agents ask me to buy a product just to make a sales number, where they would refund any losses on immediate redemption – they needed the sales to qualify for a company paid trip to Dubai – the idea being that the trip was worth a little money, even if it was just an incentive.

I wouldn’t recommend the business, unless it’s to consume their products. (For the record, I’ve been a user of Amway and Tupperware products) You’re at the mercy of a large organization that pays you based on business from your downlines, and your sense of “freedom” may be immediately shot to pieces if you do something they don’t like, such as not buying their products or violating their changing guidelines – dependence not exactly compatible with retirement. You can’t get more productive, like sell to the mass over the web or at a shop, a strange restriction. People higher up in the hierarchy seem to work even harder than you, inconsistent with the pitch you were given. And finally, the negativity you are likely to generate in your social circle is simply not worth it.

Single level marketing programs – like Affiliate marketing at Amazon or Flipkart – has the MLM benefits and there is no impetus to hire more people into the network.

If you’re not a part of an MLM organization and don’t want to be, remember that the more time someone takes to come to “how much does it cost?”, the more likely it’s going to be an MLM concept. And just like ULIPs, it’s easy to argue that the companies aren’t bad, the salespeople mis-sell – but that doesn’t fly with me, as these companies have ignored such complaints in the past. The unfortunate consequence as they attempt to reform is that they are saddled with the past image of deception and the abuse of persuasion.

 

Comments, thoughts and brickbats, all appreciated.

Now, tell them about it: