Multi – Level marketing:
Multi-level marketing, also being run in the name
of network marketing, direct selling, referral marketing, pyramid selling,
etc., is used by many number of companies in order to increase their sales. The
participants/agents would not be paid any salary, instead these organizations provide
the agents with income from two ways; one, as the profit/commission from
selling the products directly to the customers and the other by looping in
other people as agents under the structure which would broaden their income
streams, and multiply their earnings saying that for each addition in the
network, the income would increase exponentially. The agents will also earn
commission from the sales made by the other “down-line” agents.
There are a lot of
controversies on the legitimacy of the MLMs. There are very few companies which
use this model of marketing in a genuine way, whereas, all the other companies
use this to earn illegitimate profits by disguising the money circulation
scheme or pyramid scheme under the mask of trading of any product or service. There
is no proper clarity among the public as to which type of direct selling
schemes are legitimate.
To address the same,
the Ministry of Consumer Affairs has framed Direct Selling Guidelines, which defines
the direct selling schemes and regulates how these companies should operate
their multi-level structures. However most of these companies or agents who
recruit new people are not even aware that such guidelines exist and even those
who are aware grossly violate the provisions of these guidelines without being
concerned of its consequences.
The guidelines can be
found here:
Money Circulation Scheme/Pyramid Scheme:
Money Circulation Scheme is a business model wherein
existing members recruit new members, who encourage others to enroll themselves
into the scheme. The members are asked to pay Joining money or Buy In money to
the people who recruit them. And this money is shared with the persons in all
the levels of their chain. This basically is a scheme where Peter is robbed to
pay Paul. And the benefits can be reaped by the Pauls in the scheme, as long as
there is no scarcity of Peters. Since the chain is formed in a structure of
Pyramid, this is also called as a Pyramid Selling Scheme or simply a Pyramid
Scheme. The Money Circulation Schemes are unethical and illegal, and hence
banned in India vide Money Circulation Schemes (Banning) Act, 1978.
Many multi-level marketing organizations function
as pyramid schemes where they require the members to buy and further sell the
goods or services whose actual price is less than a penny of the price at which
they are being sold. This will be done mainly to circumvent the rules of the
Price Chits and Money Circulation Schemes (Banning) Act. MLMs follow pyramid
schemes, which are often confused for legitimate multi-level marketing by the
consumers, as they are the commission generation systems to its members.
If the profits to the distributors come from
selling products to people outside the Company, then it probably may be a
legitimate business. But, if that income comes from selling products to the
Distributors you recruit below you, and they sell the product to the
distributors they recruit below them, or within the Company, that construes to be
a Pyramid scheme. And any business that is set up that way has a problem that
they never show you. You eventually run
out of people. Let us say you recruit five people under you, and they in
turn recruit another five people under them, in just 14 cycles, the number of
members in this chain exceeds the population of earth.
The Remuneration/Compensation plans of these
organizations don’t incentivize the retail sales, but rather by recruiting
additional participants who will fuel the enterprise by making wholesale
purchases of the products from them.
Pyramid Structure as a ‘Ponzi scheme’
Ponzi scheme which is also known as Ponzi game is
an investment operation that is fraudulent and that has been started by the infamous
Charles Ponzi (After whom such schemes are named) in the year 1919. It is
advertised that the operators in this scheme who can be either corporations or
individuals generate high returns to the old investors through the amount that
has been paid by the new investors. It is an investment fraud where the members
are offered large profits with low risk but when the continuous flow of new
investments and addition of new members stops the scheme falls apart.
- Always focuses on attracting new members.
- Relies on continuous inflow of new resources.
- Requires an initial investment.
- Promises
high rates of short-term returns with little to no risk.
1. Poor quality of products or
services: Fraudulent MLM businesses often focus more on team/ network building rather than product
development. Often it is found that the products being sold by the fraudulent
MLM businesses are of poor quality, describing them to be useful in ways that
are too good to be true, and are always sold at exorbitant prices.
2. Exaggeration in promotion: These
businesses exaggerate promotions by getting celebrity endorsements, bringing in
celebrities to their company events, and involving them in other promotional
activities. This mainly
gets people thinking that the business may be legitimate, whereas in reality
the celebrities themselves can’t understand these business models.
3. Stock inventory and “buy-in”
pressure: Fraudulent Multi-level Marketing companies pressurize the participants i.e., the
non-salaried direct selling agents to buy products before hand and maintain
stock inventory which results in increase in the amount of the investment. The
discounts offered to these agents are higher the more they buy and therefore
these agents tend to buy the products in bulk quantities even when they are not
able to sell the same.
4. Improper Communication: MLMs involving in
scams won’t be transparent to the participants, agents or the distributors. They
do not provide proper information or would not communicate properly with the
members of the company with regard to the business related aspects. The agents
are nowhere in touch with the Company directly. They only communicate with the
persons above and below them in the structure.
5. Expensive training: Fraudulent MLM companies also make
money from providing “training” to the members, often at exorbitant training
fees and also by forcing them to buy other training items/kits like
communication courses, training modules, etc., There are also some companies that
train their participants for free of charge and do not ask them to buy other training
items/kits.
6. Unresponsive: These
businesses/agents pretend to support their members/down-line at initial stages
and at critical stages the members will be left on their own without any clue.
When profits are ascertained the credits will be given to the business and in
case of any loss the members, who think that the loss took place because of
their incapability of not recruiting new members, will take all the blame.
7. Deceptive: MLMs involving
in scams advertise
themselves in deceptive and cunning ways and make people believe that they can
earn huge amounts of profits. Example: a company that promotes itself by saying
that it is going to provide jobs or employment to its members (who are not
going to be the employees in real) so as to attract new individuals to join
them.
8. Cryptic promotion: Some of the MLMs that might involve
in a scam try to persuade the individuals to attend meetings without mentioning
any details of the business, luring them by saying that they have an exciting
business opportunity for them, where they can make use of their time to earn
huge profits. They often give multiple
examples of people who had made it big, by being involved in this scheme. They
ask the members to be ready with buy in money/ initial investment before
revealing any material information of the business.
According to the study, when all the
multi-level marketing companies are put together, there are more than 90 million
participants worldwide and only a few of them earn meaningful/huge income with
their efforts as most of the MLMs involve in scams and are illegitimate.
When things sound too
good to be true- they truly are!
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