With the amount of airtime that was dedicated by news channels over the past couple of months to cover the story about the authenticity of an organization by the name of Speak Asia - a survey based online job provider – it is evident that the number of people affected by it is too big to be ignored. Speak Asia practices multi-level marketing or networked marketing as a strategy to generate revenues for it. Through this blog, we will try and first understand what multi-level marketing is and then try and gauge how ethical or legal an organization utilizing multi-level marketing is.
As per the Wikipedia definition, Multi-Level Marketing is a strategy in which the sales force is compensated not only for the sales they personally generate, but also for the sales of others they recruit, creating a down line of distributors and a hierarchy of multiple levels of compensation.
The setup of a Multi-Level Marketing company ranges from being fairly simple to insanely complex. However, it follows the basic structure of having independent, unsalaried salespeople (distributors, or associates, or sales consultants) who represent the company that produces or provides the services that they sell. They are awarded a commission based upon the volume of product sold through their own sales efforts as well as that of their down-line organization.
According to plenty of surveys conducted in the Western world on the Multi-Level Marketing firms, it has been observed that only 1% to 10% of the agents make any substantial money from the activities. And the rest are the rest 90% to 99% are the people who have paid hard-earned money to enter the scheme (network), and it is their money that is ultimately being transferred to the top-end of the hierarchy.
For any company, the management of supply & demand and a keen insight into realistic market penetration and saturation is crucial to its business, irrespective of the product or service offered by it. A failure to ‘hit the target’ of supply and demand can ruin the company if the market is over-saturated. With Multi-Level Marketing, the basic business model doesn’t pay any attention to this ‘target’ which may or may not be reached and exceeded without anyone noticing or caring. Producing any amount greater than this would be of no use as the market would have reached saturation and all further distributors will lose from here on. And since no one is paying attention, it is not possible to effectively figure out at what position we pass that level of hierarchy in the distribution network. Thus, Multi-Level Marketing is essentially like a train with no brakes and no engineer headed full-throttle towards a terminal.
Another question that strikes the mind is that if the product or service is indeed as great as promised, then what is the need to rely on a special marketing scheme like MLM where you don’t need to be experienced to reap the benefits? If a company chooses to continue this strategy, it will someday hire (with ‘no base pay’ and ‘charging to join’) far too many people which will eventually lead to inevitable losses.
Despite all the flaws in the strategy, every year thousands of people get duped by such companies. When you try and explain the fault to them, they point out the fact that not everyone will succeed in hiring more distributors, and hence, the market will never saturate. So it essentially boils down to the simple question of whether we are hiring winners to build a real business or planning by design to profit off losers who buy into our confidence?
Some of the recent MLM companies attempt to address this problem by limiting the number of people you can sponsor to ‘x’. But the geometric progression and market saturation problem still exists.
The question then arises, that if it is such a fraud then why does it still exist? The answer is simple yet striking. The MLM’s have survived by spending millions of rupees to protect, lobby and insulate themselves. Just like any other form of organized crime. And crime also pays, albeit temporarily. The people at the lower end of the distributorship hierarchy are the ones who defend the very organization that is robbing them, hoping that some day in the future; they would get their chance to make ‘big money’.
MLM has evolved into a "niche": it can be used to sell products that could not be sold any other way. An MLM is a way to get undue credibility by exploiting people's personal friendships and relationships via "networking." More often than not members of such marketing strategies end up being stuck in the relationship, and have to rely on trying to engage more such members to try and recover their money back. Thus, legally, even though it may not be on the wrong, it is ethically almost always unviable to enter into a Multi-Level Marketing dealership. The basic wealth generation for a business should come from business activities and not from perpetual membership enrolment. And history has shown whenever there is an enormous pressure from the subscribers to withdraw from the system, the funds dry out and the system collapses. And besides the fear of a collapse of the system, such a failure has led to many a friendship and relationship break, due to breaking of trust between the dealing parties. Lifelong friends become ‘prospects’ and the neighbourhood becomes the ‘market’. And sooner or later we will need to stop blaming the particular Multi-Level Marketing companies and admit that the Multi-Level Marketing technique itself is fundamentally flawed, even in theory.