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Multi-Level Marketing Strategy and Pyramid Scheme

Allegation

Multi-level marketing (MLM) is “a marketing strategy in which the sales force is

compensated not only for sales they personally generate, but also for the sales of the other

salespeople that they recruit. This recruited sales force is referred to as the participant's

"downline", and can provide multiple levels of compensation” (Xardel, 1993)

Under MLM independent non-salaried participants, referred to as distributors (or

associates, independent business owners, dealers, franchise owners, independent agents,

etc.), are authorised to distribute the company's products or services. They are awarded

their own immediate retail profit from customers plus commission from the company (not

downlines) through a multi-level marketing compensation plan, which is based upon the

volume of products sold through their own sales efforts as well as that of their downline

organization.

Independent distributors develop their organizations by either building an active

consumer network, who buy direct from the company, or by recruiting a downline of

independent distributors who also build a consumer network base, thereby expanding the

overall organization. Additionally, distributors can also earn a profit by retailing products

they purchased from the company at wholesale price.

MLM companies aim at bypassing the middleman, by selling directly to the customer. They

use referrals and a word-of-mouth approach to develop their customer base as opposed to

a large advertising budget and as such the money that would normally go to the middleman

and advertising can now be used to reward distributors using a commission for helping the

company to make a sale.

It provides one the chance to get oneself involved in a flexible, independent trade as a side

business, especially if one is trying to recover from a failed (or failing business) or one has

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lost one's job along with helping one enhance their personality as well by continued

experience of Direct Selling.

Back in the 20th century when the isolated towns and rural areas were not easily

accessible to small companies, MLM was a useful way to let people know of and buy

products or services. Some critics say now with information at the click of a button, MLMs

have become obsolete. But with the e-marketing bubble booming it is now more than ever

that MLM is the next big thing!

A pyramid scheme is an unsustainable business model that involves promising

participants payment or services, primarily for enrolling other people into the scheme,

rather than supplying any real investment or sale of products or services to the public. Such

plans that pay commissions for recruiting new distributors inevitably collapse when no

new distributors can be recruited. And when a plan collapses, most people - except perhaps

those at the very top of the pyramid - end up empty-handed

Companies that use MLM models for compensation have been a frequent subject of

criticism and lawsuits. Criticism has focused on their similarity to illegal pyramid schemes,

cult-like behavior, price fixing of products, high initial entry costs (for marketing kit and

first products), emphasis on recruitment of others over actual sales, encouraging if not

requiring members to purchase and use the company's products, exploitation of personal

relationships as both sales and recruiting targets, complex and sometimes exaggerated

compensation schemes, the company making major money off its training events and

materials, and cult-like techniques which some groups use to enhance their members'

enthusiasm and devotion.

Statistically speaking the MLM business structure that force distributors to get new

recruits can support only a small number of financial winners. If a 1,000-person downline

is needed to earn a sustainable income, those 1,000 will need one million more to duplicate

the success. How many people can realistically be enrolled? Much of what appears as

growth is in fact only the continuous churning of new enrollees. The money for the rare

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winners comes from the constant enrollment of armies of losers. With no limits on

numbers of distributors in an area and no evaluation of market potential, the system is also

inherently unstable.

Amway has carefully avoided the abuses of pyramid schemes by:

● Not requiring an entry ("headhunting") fee;

● Making product sales a precondition to receiving the performance bonus;

● Requiring the buying back of excessive inventory;and

● Requiring that products be sold to retail consumers.

The "70 percent rule" provides that every distributor must sell at wholesale and/or retail

at least 70% of the total amount of products he bought during a given month in order to

receive the Performance Bonus due on all products bought. This rule prevents the

accumulation of inventory at any level.

The "10 customer" rule states that in order to obtain the right to earn Performance

Bonuses on the volume of products sold by him to his sponsored distributors during a

given month, a sponsoring distributor must make not less than one sale at retail to each of

ten different customers that month and produce proof of such sales to his sponsor and

Direct Distributor. This rule makes retail selling an essential part of being a distributor. The

An Administrative Law Judge, in the case against Amway USA in 1979 found that the

buyback rule, the 70-percent rule, and the ten-customer rule are enforced, and that they

serve to prevent inventory loading and encourage retailing and ruled that Amway could

continue to operate in the US, based on Amway's claims that its business was primarily

based on retail sales (sales by Amway distributors to actual end-user customers).

But afterwards in some interviews and litigations in 2007, Amway itself has disclosed that

only 18% of its products are ever purchased by anyone other than Amway's own sales

people. More than 80% of all goods are never retailed. This "non-retailing" model is will

result in 99% of all distributors (IBOs) losing money. This is because 99% will always be in

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the losing positions at the lower levels of the Amway hierarchy.

According to these stats, the probability that any new person joining will eventually

become a direct distributor is 0.01.

To the extent that a few people will surely make money, the system works. Alas, that's not

where the story ends. Because for every one who makes money, there will necessarily

many who do not.

With a lawsuit pending against Amway India’s CEO- William Pinckney alongside a series of

legal issues it is facing in various other countries because of Pyramid Scheme allegations as

well, Amway should look at tweaking its business model in an attempt to shift its focus

from recruiting new distributors, to incentivizing direct retail sales more. This could be

done by increasing the commission margin distributors receive on direct retail sales and

giving more training material on how to sell their products rather than memberships. This

would be highly beneficial to Amway in the long run given the change in the marketing

scenario.

Alternatively Amway can look to invest more in its R&D and direct its attempts at providing

its products at a more competitive price, given a large number of people do not buy their

products given the highly inflated retail prices of their products (upto 140-150% of the

market prices of similar products offered by different brands) because the “high-price

implies high-quality” image Amway is trying to bank on is near about impossible to exploit

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forever in today’s times where each and every product is critically ripped apart online by

bloggers and everyone carefully reads such reviews before making purchase decisions,

especially in case of Health and Beauty products.

Everything is going digital! Today, when every person attempts to make a brand out of

themselves specially with the advent of blogging and social media, MLM could very well be

called the future of marketing. Amway could, with minimal efforts, aid shifting the focus

from increasing one’s downline to increasing the volume of direct retail selling. No longer

does direct selling mean that people are limited to the option of door-to-door selling, which

eats up valuable time and effort and is no better than an average salesman job- not really

the white collared job people aspire for! Now the distributors can sit at home, utilize the

countless e-resources available to learn all about MLM marketing, ranging from SEO

(Search Engine Optimization) to Power Blogging to Social Media Marketing and implement

them, allowing them to connect to a huge base of potential customers like never before.

Amway would thoroughly gain by being the first to provide a standardized training to its

distributors in the above fields and subsequently increase its sales volume substantially.