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Concepts & Tutorials

On Yahoo: Multi-Level Marketing

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 goin
g 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.

  • chin512 says:

    >Brilliant article, although i feel you needed to emphasise more on the social aspect, a person once a part of MLM becomes a social failure as well, every time a friend sees him would think that he would try to 'sell' something even when that person is not trying to, we start suspecting such persons the moment they speak.

  • 2min breather says:

    >hi, read ur article,tell me one thing dont u sell us services to get paid salary….so at the end of the day ur a salesman selling ur service to get paid left over part of profit thats called salary.Bet this……

  • Deepak Shenoy says:

    >chin: I think socially people do redeem themselves when they get out of the program (or confine sales to people interested)

    2min: So how do you go from MLM being bad to "selling is bad"?

  • Anonymous says:

    >mr.shenoy (i hope you are GSB guy),

    you are writing some informations without knowing the true facts about the DIRECT MARKETING INDUSTRY in the world as well as in india. if you want know about this industry you should meet and discuss with your own caste fellow ganesh shenoy who is very successful. after than you should comment your feeling.

    with best wishes,

    p.r. krishna

  • Anonymous says:

    >Dear Deepak,

    I think, you have mis-informed about the concept of MLM. Practically speaking there are 10% bad people in any industry and this 10% of the crowd makes the water dirtier. if you really wish to know, What MLM is and specifically AMWAY is, leave a message on my email ID crown_hetal@yahoo.com.

  • Siddharth says:

    >what the heck. I get annoyed by those mlm types approaching.
    I remember one of my friend got involved in the Japan Life mattress and his very first customer was his father-in-law. surprisingly how in the world he could deny in son-in-law? Good selling strategy huh?
    2 months back one of the nigerian friends of my wife told that her friend wants to conduct a seminar, and we presumed that he is doing some distance education course and for that he needs to deliver a seminar, so does she reciprocated. and we agreed.
    On the day the lady with that guy comes with a big suitcase and slowly we realised that this was nothing about education but MLM, selling stainless steel cookware. and my wife's friend she was goign to get some free gifts if we enrolled same day. what a way to lose friendship here. lying and then trying to fool you into some mlm network to get financial benefits?
    Without a single doubt I politely refused, even though the MLM seller tried to emotionally blackmail saying its for my kid's health and future, do I think this investment is not worth his life? What a fucker.
    Be it Amway or any MLM i have same reaction. Some time back my friend in Pune tried to sell me health insurance through a MLM, made me sit through the seminar when I went to see him at his MLM office.
    Another friend from Kolhapur tried selling ICICI life insurance. What the heck, are friends supposed to be your customers? I just plainly avoid those people once realised.

    regards

  • Raja says:

    >Deepak,

    You are spot on! I know you will get some (sort of hate) messages telling you don't know this you don't know that, blah blah.. But from my point of view you couldn't have been more right.
    I hope at least few youngsters realize the truth and get away from this MLM stuff before it has killed too much of their valuable time.

    Regards
    Raja

  • Gagrin says:

    >I think Amway is more of enrolling people rather than selling products – one has to recruit few ppl & then it goes on – cumulative effect like cumulative interest no one knows when & how much it will be paid 🙂

  • chin512 says:

    >thanks for the reply – however redeeming oneself from curse of MLM is not easy, once a seller always a seller..very difficult to come out once u are trapped..usually the guys who come out find sumthing else similar and the cycle repeats..
    MLM is a friendship killer

  • Anonymous says:

    >Dear Deepak, Totally agree with you in this regard, and forget the hate messages and people pointing out to caste. How should caste matter here. By the way, there are exceptions everywhere. If some Mr. Ganesh Shenoy has done good, then so be it. Only Mr.Ganesh's circle of friends or whom he sells his products can justify that and not Mr. Ganesh Shenoy.

    Good work Deepak.

  • Anonymous says:

    >Great article. I am sure you are going to get some hate mails but be assured that MLM's are evil. They destroy money, friendship, relations and whatnot.

    I have experienced about this AmWay. It is like in the mafia movies…the one who gets you finally is somebody you trust very well 🙁

  • rajamani says:

    >india- a poverty prone country with 2/3 of the population dependent on agriculture and 1/3 of the family striving to earn a dollar(ie near about rs.50) per day MLM`S are for rich people only

    MLM`S contribute a negligible growth to our GDP AND in many cases MLM companies act like private finance to push their products

    regards
    rajamani

  • Anonymous says:

    >Many people are addicted to MLM. They are allured by all the people who claims they got rich by doing MLM. Then they are desperate to get rich. Those people who beleive in MLM don't have basic sense on economics or marketing. It is just a ponzi scheme.
    The smart people who start these ponzi come up with new ideas everytime. Some schemes attract more victims than others. Just like chit companies, Mr.Madoff etc…
    What good is your product if it can't compete in free market in quality and price? How many will buy Amway of it is sold in a supermarket?

  • Anonymous says:

    >Very nice article. May be you might get some court notice that you are trying to defame etc..and some hard-line beneficiaries or victim might try to write bad words ( some examples are already there). Better if someone posts the list of con companies of others to get aware of. Here is my list. I am not sure if all are working or not.
    1. FIC ( Free India Concept)
    2. Uni2Pay ( Similar to Gold scam that you blogged about america)
    3 Avon or modylife ( Some cosmetics firm)
    ..list is really big.
    Now they are applying this to real estate in small towns and telling that they are buy plots and you will get some land etc..

  • Vinaya H S says:

    >A couple of years back, my gym instructor made the same "FREE" pitch. A friend in the United States was also prospected by an NRI Amway Distributor — http://www.vinayahs.com/?s=amway

    Shows how deep their network has penetrated. 🙂

  • Anonymous says:

    >Mr Deepak,

    MLM is not for all the people, as Mercedez is not for all of them. If you look at you any business it requires big network, be it Mobile Company, FMCG company or be if finance company. Regarding the price , have you done analysis about pricing about Corporates, if you look at the balance sheets they have huge profit. Who is paying for it. At the end the customer pays for it.

  • Siddharth says:

    >one more thing, so your so called friend mis used alumni assiciation contact details to approach you for his personal business!!!!!!!!!!!!!

  • Indian Thoughts says:

    >I know ppl are writing bad words.. i think this is ur blog and these are ur thoughts. Though I compeltely agree with what u say, what i am shocked at how ppl gave u caste related comments on such a trivial topic.