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Friday, May 23, 2008

12 Reasons why MLM Companies go bad!

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


NM/MLM Business

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.

12. (NEW) Kingpin agents trying to spin off their own MLM company: Some key distributors/members, who are high up in the chain and have made a fortune in the business realize that they could make much more money if they were the owners of a MLM company than be its members. With the experience gained they feel like spinning off their own company- Some exit silently while few may make an attempt to spoil the name of parent company, so that the downline will be discouraged to do business with parent company and join their newly formed MLM company.

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.

Update: Few former Questnet members have started blogging about their experience. Read it here , here

31 comments:

hari said...

I've already said that I believe MLM to be extremely unethical and you've made some excellent points to prove it.

I hope this concept dies at the altar of the Law. We need strict laws to ban MLM completely in India.

Mohan said...

Hi Shrinidhi,

This article gives a deeper insight into MLM business and their modus operandi.

You have summarized all the flaws in a clear way. Keep up the good work!

Cheers!
Mohan

nataraj said...

eNidhi - gr8 work. hope people get to know all these facts and understand it better before getting trapped into these unethical scams. These fraudsters must be culled in public just like chinese govt to keep them away.

here is another blog that i came across with all the media updates on ongoing chennai questnet/goldquest scam -
http://questscams.blogspot.com/

p. ramakrishna said...

dear mr.hari, mr.mohan,mr.nataraj:

i think you people are affected by YELLOW FEVER. For you all the four legged animals are EQUAL like elephant, dog, donkey, bull, lion. jackal, cat, rat, pig because every one has 4 legs, and tail.!!!

my dear friend,s if you want to know what is MLM, pls refer a book BUSINESS SCHOOL written by Dr. Robert Kiosaki which is available in any book shop or enven on footpath (pirated). after reading this book pls give your comments. you have NO right to comment without studying fully what is MLM business. there is a governing body WFDSA ( world federation of direct selling association)and in india dsa (direct selling assocition) there are only 15-20 companies under dsa which are running their business honestly, ethically, morally regally. there are about 2500 mlms which are fly by night scams. unfortunately since you have no KNOWLEDGE about DSA companies, you have no right to give WRONG notion about the industry. the dsa business itslef in the world is about 100 billion dollars business.

let god give you some kind of wisdon to you people. best of luck
p. ramakrishna

hari said...

Mr. Ramakrishna, I guess you have some reason to be anonymous since you wish to insult others without disclosing your identity.

You're a pathetic moron and a troll.

sai thilak said...
This comment has been removed by the author.
Saithilak said...

Good Analysis Hande. But the analysis is biased over QN. But it gives the overall picture.

@ Nataraj, The custom duties of the coins imported by QN gives a new turn to the scam story! bad days of QN!

p. ramakrishna said...

dear mr.hari, mr.mohan,mr.nataraj:

i think you people are affected by YELLOW FEVER. For you all the four legged animals are EQUAL like elephant, dog, donkey, bull, lion. jackal, cat, rat, pig because every one has 4 legs, and tail.!!!

my dear friend,s if you want to know what is MLM, pls refer a book BUSINESS SCHOOL written by Dr. Robert Kiosaki which is available in any book shop or enven on footpath (pirated). after reading this book pls give your comments. you have NO right to comment without studying fully what is MLM business. there is a governing body WFDSA ( world federation of direct selling association)and in india dsa (direct selling assocition) there are only 15-20 companies under dsa which are running their business honestly, ethically, morally regally. there are about 2500 mlms which are fly by night scams. unfortunately since you have no KNOWLEDGE about DSA companies, you have no right to give WRONG notion about the industry. the dsa business itslef in the world is about 100 billion dollars business.

let god give you some kind of wisdon to you people. best of luck
p. ramakrishna

Shrinidhi Hande said...

@Hari, yes.

I dont think government will ban this business,because promoters of MLM schemes either use the loopholes in legal system or get some powerful person on board to overcome legal hurdles...

Let us hope for the best.

@Mohan,

Thanks

@Nataraj
Thanks.

@ Ramakrishna P:
I only gave the typical symptoms of MLM companies and most of the NM/MLM companies face one of more of these issues. If any specific company has enough foolproof mechanisms to over come them, these observations wont apply to your company. But most of the popular NM/MLM companies are not Insulated against these, hence they land in trouble, sooner or later.

Starting a MLM company will certainly make its promoters and early members wealthy. But our concern is about those millions who are at bottom of the chain, struggling to recover their investment.

Sell a product at a reasonable price through MLM/NM I don't mind-but luring unsuspecting prospects with a promise of wealth creation by indulging in pyramid like schemes is a bad idea. Trouble starts when people buy products not because they need it but they are made to believe that buying products would make them rich soon.

There may be 15-20 legitimate companies as you said, but identifying these 15-20 out of 2500 is a near impossible task for a common man and his best option would be to stay away from this supposed shortcut to wealth altogether.

Hope that clarifies your concerns. I don't question your faith in network marketing, but please be open to the possibility that things can go wrong.

@Hari:
No personal attacks please. kindly use decent language.

@Saithilak- Yes, I have quoted examples from QN, but these can happen anywhere...

@Ramakrishna-No need to submit your comments twice...

hari said...

ramakrishna attacked me first. He was a spammer and I called him on that.

If he was not a spammer, he didn't need to submit his silly promotional message twice.

And the language I was was fairly decent. I just called him a moron, which should be obvious from the way he copies/pastes his message.

Kumar said...

HI All,
I asked Ankur agarwal, who calls himself MLM Guru on Questnet

I asked
"Questnet is facing lot of police issues in Chennai...How can we do business with so much bad publicity?

How to overcome this? you think things will restore to normal?"

He replied
"Time for you to choose a different platform.. No use in beating around the bush when wave is turned against you..."

Myself and many others havent recoverd our money from QN..looks like we may have to bid goodbye

anyoen thinks there is still hope?

Shrinidhi Hande said...

@Hari,

Ok. Let us get over it...

@Kumar:

Thanks for sharing that information... let us see what other QN supporters feel about this...

Jay Leung said...

Most company have very high priced products , so there are no repeat consumption, take a look to this video , there is an analysis for this kind of MLM company

http://ecosway-india.blogspot.com

ajay said...

dear hari natraj mohan ramkrishna pls. do not fight.
"Every one is comfortable on his own principle"
Our country is facing lots of problems n if you want to solve one do only one thing "Be Honest n never get corrupted"
pls. do not waste energy on analysing the things but see the +ve aspects.
MLM is bad O.K. but it gives employment to many n also made many poor people rich which generally is not possible in the country like India which is heading towards capitalism.
There are corrupt dr. n good one. In every profession what we need is honesty. In India more corruption is done by highly educated IAS, IPS, Dr.,Engg. Lawyers, C.A.,MBA people. Which is nearly 6 times more than all the politicians. so why to blame such small n uneducated people who r running MLM companies. If u find out one inform to (honest) police.
but friends pls. do not fight we will fight all the evils in our country. so be happy Ajay

prabhu said...

xocai top distributors Brian and Sarah McCoy offers home based business by selling or marketing xocai products through MLM, multilevel marketing and xoçai online network marketing.

Sarah
xocai marketing

Anonymous said...

Mr Shrinidhi, whatever you have shown diagramatically is totally wrong. Its just your own perception and reflects lack of knowledge. Generally You will get responses in your favour for your blog because, the person who knows the real diagramatic sketch of NON MLM v/s MLM will not waste time in reading such internet blog. I am working at a Key Managerial Post in a NON MLM company having very good name in India and abroad and Also Building Network Markeying Business. If you really want to have knowledge the correct diagramatic sketch, email me your email ID on my email:hansa492@yahoo.com I have answer of your all the questions regarding the ethecally working MLM and a common person can also find the ethinicity. If he has just commom sence. Kalu Chauhan

CHRISTELLE said...

all that chennai police wants is money that's y they're giving so much problem to quest international which a multi billion dollar company which operates very successfully in singapore,a country where nothing can come in easily the strictest in the world.5.5 million people are part of this company in more than 200 countries.thousands have acheived financial freedom thru hard work with the best vehicle QUESTNET.

Anonymous said...

Can anyone post a link to the questnet refund policy ?

Anonymous said...

will filing a case in consumer court help in getting complete refund from questnet ?

Anonymous said...

I feel the bank can help us get back the money we have lost if we raise a chargeback dispute with questnet.

has anyone raised a chargeback dispute with the bank ?

Shrinidhi Hande said...

WEll, charge back dispute needs to be raised within 45-60 days of making payment, not after that...

There is no refund policy on company site. IRs tell you that if you send the product back refund will be sent to you by cheque. Not sure if the cheques will ever come. Thousands of people have registered police complaints in Chennai- not sure what happened to them or the investigations....

mahendra said...

Dear Mr.Hari, I m really feeling very bad to say that u r not a analyst u r just a pesimist trying to create company of failures.With ur kind permition let me come to know u that MLM is one of the Biggest Revenue generating source to every Government as well as best anwer to problems like Recession & Unemployment. MLM is not only a wealth creation systeme but it has a power to transform peoples lives in a dramatic way.Go and check Philip Kotler, world renowened markiting guru or Robert Kiosaki, writer & financial expert and unlimited litraure on MLM which is available in every language. Dont try to judge people by their profile & qualifications go n ask the followers whose life has been really changed through the path leid by comman people like Bhagwan Budhha,Bhagwan Mahavir,Mohammad Pegambar,Jesus Crist, Bhagwan Rama and Lord Shrikrishna, who were not analyst like u but surely they were optimistic people.MLM is also a visionry concept which really change lives of the people who dare to trust its principles & keep o woking hard in a right systeme with right mentors. MLM is so wide that it cant be elaborated on blogs & two lines of comments.I agree that there r some fraudy companies & promoters who has cheated number of people but one cant blame the whole indutry.If u really want to do Analysis on MLM then do it in Holistic way and show a right track to people as society needs teachers like u.YES, U have talent to create wave but make it possitive dont go pessimist BE OPTIMISTIC...With kind regards, Mahendra (Writer,Reporter & Motivational Speaker)

mahendra said...

Dear Mr.Hari, I m really feeling very bad to say that u r not a analyst u r just a pesimist trying to create company of failures.With ur kind permition let me come to know u that MLM is one of the Biggest Revenue generating source to every Government as well as best anwer to problems like Recession & Unemployment. MLM is not only a wealth creation systeme but it has a power to transform peoples lives in a dramatic way.Go and check Philip Kotler, world renowened markiting guru or Robert Kiosaki, writer & financial expert and unlimited litraure on MLM which is available in every language. Dont try to judge people by their profile & qualifications go n ask the followers whose life has been really changed through the path leid by comman people like Bhagwan Budhha,Bhagwan Mahavir,Mohammad Pegambar,Jesus Crist, Bhagwan Rama and Lord Shrikrishna, who were not analyst like u but surely they were optimistic people.MLM is also a visionry concept which really change lives of the people who dare to trust its principles & keep o woking hard in a right systeme with right mentors. MLM is so wide that it cant be elaborated on blogs & two lines of comments.I agree that there r some fraudy companies & promoters who has cheated number of people but one cant blame the whole indutry.If u really want to do Analysis on MLM then do it in Holistic way and show a right track to people as society needs teachers like u.YES, U have talent to create wave but make it possitive dont go pessimist BE OPTIMISTIC...With kind regards, Mahendra (Writer,Reporter & Motivational Speaker)

Anonymous said...

dear all,
is it legal for anil ambani to screw peoples money, they come out with mutual funds shares etc and cheat people with hundreds of crores of rupees, people like them... when a normal person with a vision creates a product and sells it to masses enabling the masses to earn people like you feel jealous and you donot have time to ponder into the facts of the marketing companies... now can you tell me how can a insurance company give more than 30% as commission to any one, has the person got the calibre or had he invested that much time to sell those product which the companies claim to give enormous return.// why donot you people look into the anomalities created by BIG Business houses of India and Abroad than blaming the small time companies which want to cdreate wealth for the masses by just eradicating the huge chain of C&F, Wholesale, retail.... these companies are able to pay such commission just because they either manuyfacture them or they tie up with the manufacturer and directly sell them to the end user........ AND for Frauds they are everywhere your Kirana merchant in your neighbourhood may be hoarding stocks and selling at huge profit, or mey be he is selling duplicate...... THERE ARE MORE FRAUDS in TRADITIONAL Business than in MLM or Network Marketing see UTI Scam... SATYAM Scam..... Harshad Mehta.... Ketan Parekh...... etc ... Political scams .... if you want to do some thing good CHASSE THE ELITE WHITE COLLARS and TAKE A GOOD LESSON in METWORK MARKETING, MLM this is a NEW AGE BUSINESS MODEL...... BY THE PEOPLE FOR THE PEOPLE.........

MLM New Method said...

I have experienced attending an mlm business seminar. But i got discourage in joining because the product was so expensive and it require i lot of money for me to produce the product.
I hope there will be an alternative in purchasing those very expensive product to start the business.

nitesh said...

hi friend,thankyou to showing the draw backs of mlm because i m starting a new mlm.considering all the points

hemang said...

Your Study is really very appreciable, society needs some aroused person such as you. If you know, I want ask a question, do you know the names & web-addresses of concerning departments & ministries also who is responsible to watch & control on this NMCs or MLMs and also CCoSs {Credit Co-operative societies}and the laws & acts also? pls. give us this knowledge. Thanks

hemang said...

Dear All,
I read all's comments, so you all followers & against please reply me one thing In Indian constituency, against chit fund companies, make any law, if yes, then circulates it all over India & followers should take action against these kind of companies & try to win confidence to people in their true MLMs, undoubtedly economy growths but when a layman, who is in search of more money and he swindled then he definitely against you

Kumar S said...

1. MLM is bad if done in a wrong way.
2. It has helped many middle class people to become rich.
3. People make mistakes because they get aggressive and want to make quick money. They'll find all the shortcuts to do so.
4. Take for example Insurance and Mutual funds. Don't you think they cheat people? Even then we invest. Even if we loose we don't make hungama.
5. What is wrong with a MLM if done Legal and ethical way. You can't compare the potential of MLM to any other earning opportunity in the world with a small investment.

Infraweb Technologies said...

It is silly to think that the MLM business model is different from a business model that sells a product. If you find an MLM company more interested in showing what a great compensation plan is an excellent product, but you should know that there is something fundamentally wrong.

Anonymous said...

Hi Guys,
Qnet is not associated with Indian Direct selling Association and is operating illegally in india

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