Multi-level marketing or MLM is a constant source of debate. MLM companies have their fanatical devotees and often appear to behave in an aggressive manner. Some of them reach dizzying heights, often to fall.
The issue came to the surface again, after Destiny Multipurpose Cooperative Society Ltd, a unit of Destiny Ltd, hit the media spotlight for going into what Bangladesh Bank said was illegal banking.
The Daily Star has pieced together different Web reports into one to make sense of how MLM works.
Multilevel marketing plans, also known as network or matrix marketing, are a way of selling goods or services through distributors. These plans typically promise that if you sign up as a distributor, you will receive commissions, for both your sales of the plan’s goods or services and those of other people you recruit to join the distributors.
Multilevel marketing usually promises to pay commissions through two or more levels of recruits, known as the distributor’s ‘downline.’
In a typical multi-level marketing or network marketing arrangement, individuals associate with a parent company as an independent contractor or franchisee and are compensated based on their sales of products or service, as well as the sales achieved by those they bring into the business.
In a legitimate MLM company, commissions are earned only on sales of the company’s products or services. No money may be earned from recruiting alone (sign-up fees).
If participants are paid primarily from money received from new recruits, then the company is an illegal pyramid or Ponzi scheme.
Some less legitimate companies produce revenues primarily by attracting new participants with the hope of reward and selling them products or services of dubious value at inflated prices.
If the products or services have dubious value or if the participants must purchase excessive quantities without reasonable intent to use or resell said items, then the company is likely a thinly veiled illegal pyramid scheme.
Multi-level marketing has a recognised image problem due to the fact that it is often difficult to distinguish legitimate MLMs from illegal scams.
MLMs are intrinsically unstable, guaranteed by design to oversaturate the market with no one noticing and thus cannot be profitable like other companies. Most of the times, the only money to be made is not from the product or service but from the losses of people lower down in the organisation.
The unfortunate “distributor” at the bottom is the loser.
Money can be made with MLM, but its legitimacy is usually always questionable.
HOW FAR MLM BUSINESS WILL GO?
MLM is set up by design to blindly go past the saturation point and keep on going. It will grow till it collapses under its own weight, without even a government official noticing.
All products and services have partial market penetration. For example, not everyone wants to drink filtered water, or wear a particular style of shoe, or use any product or service. No-one in the real world of business would seriously consider the thin arguments of the MLMers when they flippantly mention the infinite market need for their product or services.
Imagine a neat new product called a widget that will sell for Tk 100. While everyone could use a widget, not everyone will. Some will be afraid of anything new. Some will be loyal to existing brands. Some will want to buy an inferior product for less money. Some will want a more expensive product for prestige, regardless of quality. The reasons go on and on, and the fact is that only “X” Widgets will sell at the given price.
The fact that “X” is hard to pin down does not mean that it does not exist, but, every Widget built beyond “X” will end up producing a problem for the organisation.
The market only wants “X” Widgets at Tk. 100. What are you going to do with your extra inventory of Widgets beyond “X” that no one wants, and the sales people hired to sell those?
MLM VS REAL WORLD
The basic question that needs to be asked is this: If this product or service is so great, then why isn’t it being sold through the customary marketing system that has served human society for thousands of years? Why does it need to resort to a “special marketing” scheme like an MLM? Why does everyone need to be so inexperienced at marketing this! Is the product just a thin cover for what is really a pyramid scheme of exploiting others?
No-one can perfectly predict “X,” and the situation is not nearly as simple as considered here, but the objective for marketers is to forecast “X” as closely as possible in order to provide lasting value to all parties involved: to avoid missed opportunities as well as waste, loss, or failure.
No-one can perfectly predict the saturation point for ant particular product, making the MLM network bound to overtake its demand.
Chillingly, MLMs have no control mechanisms at all. In a normal company a manager says, “We have enough, let’s stop hiring people at this point.” But in an MLM, there is no way to do this.
If a company chooses to market this way, it will eventually “hire” (with no base pay and charging to join) far too many people.
Thus, the only “control system” will be the inevitable losses.
The product is the excuse or cover to attempt to legitimate the real money-making engine.
MATH AND COMMON SENSE
MLM works by geometric expansion, where you get ten to sponsor ten to sponsor ten, and so on. This is usually shown as an expanding matrix, with corresponding kick-backs at various levels.
The problem here is one of common sense. At a mere three levels deep this would be 1,000 people. There goes the neighbourhood! At six levels deep, that would be 1,000,000 people believing they can make money selling. But to whom? There goes the city! And the MLM is just getting its steam going. Think of all the meetings! Think of all the “dreams” being sold! Think of the false hopes being generated. Think of the money being lost.
Fraudulent MLM schemes can usually be identified by high entrance fees or requirements to purchase expensive inventories. They often collapse quickly when the merchandise cannot be resold, leaving all but those at the top of the pyramid with financial losses.
Sources: www.vandruff.com and www.consumerfraudreporting.org, Via: The Daily Star