With Chennai Police opening investigations on QuestNet/Goldquest MLM company, operations of such companies which promise an easy wealth creation for everyone involved, are again under scanner. Hundreds of network marketing companies are operating in India, each calling itself unique, genuine and best. Each of them may have their pros and cons and while we may not have specific legal backing to term their operations illegal, caution is advised before getting associated with these companies. In this post, let us see the key differences between a traditional company and network marketing company and some typical reasons why most of the MLM/NM companies face trouble over a period of time.
A traditional business
1.Investors pump money, employees put effort, management uses investor's money, convert's employee skill into product/service, sells it to customer who pays. This money is used to pay salary and dividend.
2.Investor's interest is protected by market regulators like SEBI, employee interests are protected by labour laws, consumer's interest is protected by consumer laws. Each of these stake holder have an option and flexibility of exiting any time.
3.Good management skills are required to maintain a sustainable balance between investors, employees and customers
4.After sometime system becomes self sustainable, without needing additional investment/workforce
5.Usually addresses an existing market demand
1.Members pump in money, promote the business, buy the products, only to get a small fraction of money he and his down liners pump in
2.While member does all work as investor, employee and customer, his interests are protected by none and has no exit option (without losing money)
3.Only motivational skills are required to ensure that new and new members continue to get recruited
4.Continuous enrollment of new members is required to keep the system running. There is no recycling of money-Only collecting it from new recruits and distributing a fraction among up-liners
5.Demand is often created forcefully
Having noted the key differences, here are some typical developments which lead MLM companies to trouble..
During early stages, all goes well and it will be difficult to sense the trouble ahead. Because most of the companies will have some products to cover their money schemes, because there’re no laws which declare this kind of operations illegal, because MLM promoters manage to get some high profile persons on board to show their credibility all goes well during early years. As the idea is new it spreads like wildfire and thousands of people would sign up every day. Obviously few early joiners make huge money in this process and seeing them buying luxury homes and cars only propels the greed of new joiners who start promoting the scheme with all new energy and aggression. But then, market reaches a kind of saturation and it won’t be possible to enroll new people, at the rate it was possible in the early years.
This is when the trouble begins. The concept of MLM survives on the belief that the chain continues to grow sine die in a never ending fashion and existing people do not leave. But unfortunately this won’t happen. As the saturation is neared, desperate members start resorting to unethical practices with a sheer greed of making quick money. Some examples of unethical practices are as below:
1 Telling prospects “You just invest the money, I will bring more people and enroll them under you-you don’t have to do anything”-Someone who invested because of assuring words like above of their friends would feel cheated if their friend fails to recruit people under him, resulting in loss of his investment
2 Telling “Use your credit card 1 to make payment now-after 50 days use balance transfer facility and transfer the balance to second credit card-you’ll get 3 months time this way by which you can get your money back” But in most cases the member won’t be earning his investment back within first few months. Besides losing money he’ll also end up paying hefty credit card interest and this results in direct rage against the company and his up line who suggested such an approach.
3 Members investing their own money on behalf of others-Sometime, for specific reasons, members pay on behalf of their down line (Because both legs need to be balanced or because a person thinks his friend is very much capable of signing up people or other reasons) and sign-up people for free. This kind of approaches may not give expected results adding to frustration.
4 Hiding facts: Many people hide several disturbing facts while giving presentation, because their sole objective is to sign you on the spot. Some facts which are never disclosed: Both side needs to be balanced, maximum payable amount, annual charges, cancellation/refund policies, ongoing legal cases and other negative news, minimum amount of money you’re expected to bring in (by referring people under you) to get back your money, what rights you have/do not have as a member etc. Some of these facts people will discover, sooner or later and that will give a sense of betrayal.
5 Forcing people- Ideally you should tell both positive and negative aspects of the business and let the person take his own time to decide. But more often than not, prospects are given only the positive side and are often forced to sign up on the spot. Hypnotic environment conducted by the up-line and faith in their friends may make people sign up on the spot but they may repent later for that.
6 Company not taking action against members involving in unethical practices- Ideally, a company is expected to terminate membership of those who use unethical business to promote the business. But we seldom hear such news. As long as money flows in, company doesn’t really bother about the approach used. (they will have a well crafted fine print to protect themselves in case something goes wrong). Only when things go out of control (like when someone files police complaint), they look for some scapegoats.
7 Drop in company’s efficiency-Most of the companies operate promptly during initial years, by sending out checks and products in time. As members get their check and product on time they build a trust and advocate on behalf of the company to their friends. But after few years, when member base grows beyond control, some companies fail to maintain the same efficiency- Products do not reach in time and checks take forever to come. If this happens, credibility starts falling and bad words spread real fast.
8 Inducing cultism: Gradually, up line try to exercise an influence on their down line even in areas not related to business. Some examples: Encouraging down-line to quit his main job and take MLM full time, setting targets and pressurizing them to meet the same, discouraging members from using competitor products (even when they are cheaper and better than MLM one),forcing down-line to attend meetings and seminars, humiliating those who do not show enough commitment or question things and so on
9 Bad policies-Most of the companies do not offer any of the following- a proper refund policy (If only they can provide a simple option where unhappy people can surrender their membership/product and get their money back, most of the problem would have been avoided), a vigilance team to ensure its members don’t promote the idea in unethical ways by making false promises, an active customer support cell to address member grievances. Add to these, some network marketing cos have rules that stipulate that you need to keep spending a certain minimum amount every year (in the name of membership fee, product purchases etc,) even when you are not earning a penny out of the scheme.
10. Ignoring early warning signs-Because of the unquestionable faith (shall I say Cultism) members develop towards their company, up-line and its business model, early signs of warning, even if detected by few in time, are often suppressed and ignored. Beliefs that “That can’t happen to me” or “he failed because he didn’t work hard” or “there must have been some misunderstanding-everything is fine” or “this is a small issue-we’ll get over it” etc keep members hooked to their dream. Only when things go totally out of control they wake up to the reality. Lot of trouble can be saved if members maintain an open mind to question and verify any negative news that they come across, without any prejudice.
11 Management: When something goes wrong on a big scale, promoters of network marketing companies often prefer to close their business and after sometime open shop under a new identity. They got their money, so it won’t be in their interest to stand up and support its people. When Questnet was banned in SriLanka, company should have offered to refund money to those who joined recently,(instead they silently left and after sometime opened a new shop-Lotus marketing) when Chennai Police are investigating QN, Datuk Vijay Eswaran could have flown in and explain the police and public why his company is legitimate and be allowed to operate. Instead, promoters often chose to stay away, letting some agents become scapegoats sinking huge money of thousands of people.
Note: All companies may not face all the above issues, must most of them do at some time or the other. These are general observations-some companies may take exception w.r.t. certain points.