A Generic Analysis of Network Marketing/MLM Companies

During past few years, I’ve come across several network marketing companies. I’ve seen Amway, Modicare and recently QuestNet (GoldQuest) from close angles. I’ve also attended presentations by around 6 other network marketing/MLM companies, names of which I do not remember. I never cared to enroll into any of them, but have been following the developments and their business models out of curiosity.

In this post, I am presenting my general observations about MLM companies. These are not targeted to any specific company (not yet) and there can be some exceptions/ differences/ deviations w.r.t. some companies. Expect some more posts of this kind in near future.

General observations about Multi Level/ network marketing companies

1. No MLM/Network marketing company wishes to identify itself as MLM/NM company
There’s a saying- "if it looks like a duck, swims like a duck and quacks like a duck then it IS a duck". But despite having all characters of a MLM/pyramid scheme/binary compensation/chain membership plans, no network marketing company wishes to call itself as such.

2. Products are for namesake. Main job is to enroll more members
Most of these companies use products as a cover for their chain membership scheme. Products are for namesake. Main objective is to find new prospects and make them enroll under you. They don’t care if you’re a PHD, MBA, MBBS or uneducated or whatever- just hunt for new prospects and sign them up-that is the one and only task for everyone involved…

3. Products are always overpriced.
Networking companies claim to save lot of money because of direct selling, otherwise spent on various distribution levels in conventional marketing (wholesaler, distributor etc). However, in all cases their product is priced several times their market value. (An Amway toothpaste costs 10 times Pepsodent or Colgate, a GoldQuest coin is priced 5 times its market value and so on) if only they can sell a conventional product for few rupees less than their market price, they can make regular shop keepers a run for their money. But MLM companies always need to charge huge premium for their products, because that is one of the ways how members will be forced to pump money into the company. But this huge price difference is often covered up with terms like “High Quality of the product”, “Numismatic value of the coin”, “investment towards Business opportunity” etc.

4. Products are manufactured by some other company
Despite being in business for years, most of MLM companies do not make an attempt to set up their own factories and manufacture something. The product they sell are often manufactured by some other company.

5. Products may not sell on their own in open market
Other than being overpriced, most of the products are unconventional/unique that no one would ever buy them in open market, at least not at the price they are sold in MLM.

6. Network Market Companies never make an attempt to get listed in any stock exchanges.
Getting listed would solicit a thorough examination of company fundamentals and operations by Regulators like SEBI and investor community in general, something any network marketing company may not prefer. Also why would they need to lift money from market as members are continuously pumping their money into the company? (Amway is an exception)

7. Network marketing companies do not make any attempt to build physical assets.
Any company usually tries to build some physical assets over a period of time (such as land, buildings etc) For example, if IT boom crashes (god forbid) companies like Infosys can still survive because the value of land and building they own itself is worth several millions which can be leveraged to move on to some other business or compensate the stakeholders to some extent. But most of the network marketing companies keep their physical presence/assets to minimum. Usually one website and few rented offices in some cities. That’s all. You may call it cost cutting but this given them a unique advantage- One fine day if promoters decide to close the business and vanish, it doesn’t take more than 5 minutes for them to shutdown the website, erase all data and escape to some country from where it will be near impossible for police to trace, extradite and trial them. (Live example: QuestNet was banned in Srilanka recently and they silently have opened a new company called Lotus Marketing and started selling same old QN products.-Details)

8. Network marketing companies never spend a single rupee on its members
If you join a software company as a trainee/fresher, company spends a considerable amount on you before you could be effectively used to generate revenue for the company. (trainings, salary during training and bench period etc). Even in other industries there’s the concept of apprentice period. But network marketing companies never invest a single rupee on its members. Right from Day 1 a new member starts pumping money into the company, only a small fraction of which is re distributed as referral commission to people higher up in the chain.

Training if any, is given by senior members on one sole objective- how to find new new prospects and make them enroll for membership.

Expenditure if any will be on promotional activities like arranging a presentation in a posh hotel and in hiring lawyers who can take care of legal formalities.

9. No territorial protection
Conventionally, when you take a dealership or distributorship (let us say of Bajaj Bikes or Maruthi Cars) the parent company agrees with a contractual obligation that they will not appoint any other dealer in your territory. In other words, you’re protected against loss of business that can happen if another dealer opens branch in your territory and takes away your customers. But no such protections (restricting member count etc) in network marketing. No cap, no limitations-there can be two dozen members in your street alone-you may not be able to expand your business under such circumstances as saturation is reached very soon (if there’re already 20 Hero Honda showrooms in your locality does it make sense to open one more?)

10. You never get loan to join a MLM company.
If you want to buy anything- say a motorbike for 40k, a mobile for 20k or anything- or if you want to start any business (say a factory) you can avail loan from banks (I am referring to Vehicle loans and Consume loans, not personal loans) and finance corporations by giving that product as collateral. In fact many popular industrial houses come up with their own finance arms in long run (Bajaj has Bajaj Auto Finance, Mahindra has Mahindra Finance and so on). But no financier will fund you if you want to join a MLM business (you can of course take a personal loan during which purpose of taking loan is not asked). If MLM companies are so confident about their business model why can’t they launch their own finance arm? Or at least have a tie up with some banks who would loan the prospects keeping their membership as security? Give people loan to join the business, let them repay when they make money from the business, charge high interest if you wish. (If a member doesn’t make enough money to repay the loan confiscate his membership and release him from the chain) Trust me- No MLM company will ever do that.

12. New members are discouraged to speak about company in front of prospects
Anyone who is promoting a MLM (You can randomly call few numbers listed in classified section of a newspaper under work from home/part time job/business opportunity section), will never reveal the name of the company or initial investment needed etc in first discussion. All they’ll say is “come to the presentation”. Topliners instruct new recruits not to do the canvassing themselves and just bring them to presentations. This is because of following reasons-First, If the name is revealed, chances are that prospect will do some googling and find out lots of negative reviews and may never turn up for presentation. Second, a new joinee will never be able to effectively brainwash a prospect over phone. That needs to be done in a closed room, in a systematic way by a trained person. The basis statement “I’ve signed up for this membership by paying 35k, now I need to enroll more and more people under me to get my money back, I am looking for people who can cough 35k and sign up and keep bringing more and more people” is conveyed in a totally different manner so as to give prospect an impression that it is a lifetime opportunity for him to join and make a fortune.

13. The Pepsi example-
Most of them say “See you pay 10 rs for a pepsi whose manufacturing cost is Rs 1”. What’s wrong in our company collecting more money? (i.e. "Pepsi is looting you to the tune of 9 Rs every time you buy a bottle, why don't you give us a chance of looting you to the tune of 25k?") Here’s a major difference- If I drink pepsi or watch a movie that is one time purchase- if I don’t like it without any hesitation I can tell my friends not to go for it, because I have no monetary interest in it. But once you join a MLM you always have to fake things. If you say “I couldn’t enroll a single member in past 2 months and struggling to get my money back” no one will sign up under you. You’ll have to fake it “I am making lot of money in this business, why don’t you also join and get benefited”. Because there’s no exit option, only way you can make money is by bringing in more members, which is not possible to achieve if you’re honest. Deception starts the moment you join. All their training materials are geared up to induce a false confidence in people that they are doing some great service. Those who do not believe in the scheme and refuse to sign up are branded as loosers. I’ve seen people claim in public that the potential for this business is unlimited, while in front of their mentor they cry that they are not finding any new prospects. The idea given by the mentor was this- “log in into your company’s employee database, find people sharing your surname or hailing from your state, send some mails to them and make friends with them and then bring them to my presentation” Deception starts with self and spreads to friends and relatives and eventually to society and nation.

People involved in MLM are often encouraged to use the resources (like phone and internet) as well as contacts (colleagues, business contacts etc) available at their work place to grow the MLM chain.

14. No exit option
Few companies give an one time cancellation option (say 30 days from sign up ) After that there’s no exit option. No Plan B what so ever. GoldQuest was banned in Srilanka recently- did the new joinees got any compensation? No. Because of this, the same people who are loosing their money to make the MLM company rich stand up in support of their company. Their only hope of making some money is by bringing in more people who can pour even greater money into the company. naturally they resist any attempt to shut down the company, even if they know what they are earning is a negligible fraction of the amount flowing into company account.

15. The experience doesn’t count
If you work in any other job- as a mechanic, engineer, lawyer, accountant etc, every year you spend working adds to your experience and increases your market value. If you spend couple of years working full time for a network marketing company and then try to join some other company, those few years are not considered as experience by any company.

16. One task- So many names.
The one and only job for you once you join a MLM is to hunt for new prospect and make them enroll as recruits (or business partner or member or distributor or whatever term used in specific to company) Each and every initiative/program/effort is focused on this one task. The term Hard work, be your own boss, part time effort, belief in yourself, helping others, everything boils down to one thing- find a new person and sign him up. Your skills, experience nothing counts. All that count is how good you are in expanding the chain. All training is concentrated in brainwashing you to make you believe that the business is legitimate and you’re actually helping others by enrolling them into the scheme

17. The employer example:
Some give the following example to give an impression that your employer is cheating you by paying you only a fraction of what you earned for him: They say “you work 9 hours for your company wherein you’re paid a small salary but your CEO earns several times that from your effort- Don’t you think our MLM business is better”

But here is the difference in working for an employer for a salary and working under a MLM business:

When a company hires you, you’re hired for a specific skillset (say .Net programming), after thoroughly evaluating you against several other job aspirants with similar skills. You’re not required to pay anything to join and in many cases company spends some money in training you etc. After that, your task is to focus on your work (programming in .Net) and converting that work into real money is your employer’s headache (finding a customer who is willing to buy that code etc). Even when your employer is unable to encash your skills (say you’re on bench) you are paid a salary and several other benefits. Everyday you spend in office adds to your experience, increases your market value and enhances your skillset. You don’t have to hunt for new people and enroll them under you to get your salary. If you have a job, however small or big it is, you get some basic recognition/respect in society.

Now compare that with a MLM Chain membership scheme-Any tom Dick and Harry who can pay the registration fee can join the MLM scheme. No limit on number of sign ups, no selection criteria. Right from Day one, you start pumping money into the company and company doesn’t spend a single rupee on you. If you have to earn you have to pump more money into the system, by signing up more people under you. The MLM company’s only job is this- for every 100 Rupee you give them, they keep 60 Rs and re distribute 40 Rs to you and your upliners. Your work doesn’t command any recognition outside. You earn only when your chain keeps growing and cash inflow is sustained.

To sum up, when you work for your employer, you invest you time and effort/skill, which your employer converts into real money and gives you a salary. In MLM, you invest time, effort and money (of yours and your downliners), MLM company simply collects the cash and gives back a small part of it as commission.

18. Some people do make money
Some people indeed make money through this. Especially who joined the chain early or those who could canvass a huge number of people to enroll under them. It is the success stories of these people that is shown to new comers to motivate them. Those who join late often never manage to recover their money. No cash flows into MLM from outside. Even when you earn money, it is only a small fraction of the amount you and your subordinates pumped into the system. Assume there are 20 people under you- now calculate total money pumped into the company by all of you and net value of goods/commissions received. Since it is your money, no company will have any problem giving back a small fraction of it to you…

19. Poverty should have been eliminated by now
If the earning potential of millions of rupees had been realised we should be seeing hundreds of millionaires around us by now. Still we hardly see people who made it big through MLM.

Personal analysis and observations only. Statements are generic to MLM business in general-some companies might take some exception w.r.t. certain observations. Correct me if I am wrong. Feel free to comment and criticize me- but use decent language and support your statement with appropriate reasoning or evidence.

MLM Must reads: What's wrong with MLM ?* 10 Big lies of MLM * Amway Inside story- Merchants of Deception * Questnet reopens as Lotus Marketing in Srilanka | 12 Reasons why MLM companies go bad

P.S. I am thankful to my room mates Sid and Saurabh who are heavily into this but have not forced me to join the same.

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