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SIT Journal of Management Vol: 5; Issue: 1, pp-1-11

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A Study on Reasons for Development of Network Marketing In India and Utilization

of Relationship Platform

Dr. Mrinal Kanti Das*

Abstract

The concept of network marketing was originated in 1940’s when a company trading under the name

of ‘California Vitamins’ discovered that they could make more sales with a lot of sales representatives

selling a small amount of product each (Waitley, 2007). The industry itself is now currently being

endorsed by many business leaders as a proven system for anyone who wishes to achieve financial

success. According to data released by Network Marketing Business School, network marketing is now

one of the fastest growing industries of all time with an estimated 1,50,000 people joining the industry

every single week. The present study is an endeavor to summarize the reasons for development of this

business in India and also to examine whether relationship is the foundation of network business. An

attempt is also made to provide current trend of network marketing in India and West Bengal.

Key Words: network marketing, relationship exploitation, reasons for development

*Corresponding Author: Dr. Mrinal Kanti Das

* Dr. Mrinal Kanti Das, Assistant Professor, JIS College of Engineering, Kalyani, West

Bengal, M:+91-9433710231; email:[email protected]


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Introduction

Network marketing, also known as Multi-level marketing (MLM), is a marketing activity

that compensates promoters of direct selling companies not only for product sales they

personally generate, but also for the sales of others they introduced to the company

(Cardon, 2011). The products and company are usually marketed directly to consumers

and potential business partners by means of relationship referrals and word-of-mouth

marketing. Network marketing is a marketing where marketing activities are carried out

through direct selling and referrals by making intermediaries absolutely unwanted in

distribution channel. After going through existing literatures on network marketing the

Figure 1.1 has been developed.

Figure 1: Network Marketing and Traditional Marketing

Producer

International Distributors

Regional Distributors

Local Distributors

Retail Outlets

Consumer

Advertising and

Marketing

Network Marketing

Model

Bypass the

Middlemen

Traditional Marketing

Model


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(Source: Self Generated)

The above diagram (Figure 1) distinguishes between Network Marketing Model and

Traditional Marketing Model. Network marketing primarily relies on word-of-mouth

communication, personal selling, and motivating the distributors, whereas Traditional

Marketing relies on mass media advertisement. Distributors of network marketing get only

performance based reward, on the other hand, in traditional marketing, distributors

receive fixed salary with less incentive based reward. A distributor of network marketing

invests low operating capital, but more operating capital is required for traditional

marketing.

Objectives of the study

The specific objectives of this study are:

i) to understand current trends of network marketing in India

ii) to find out the reasons for development of this business in India

iii) to examine whether network business exploits relationship platform

Literature Review

Bhattacharya and Mehta (2000) demonstrated in their study that there exist more rational

explanations which could potentially explain the behaviour of Network Marketing

Organization (NMO) distributors. They studied that 70% of direct-sales revenues in the

world are generated by NMOs.

Laudon (2004) highlighted that network companies are able to cut down expenditure

associated with advertising and other overheads. The costs of distribution and retailing


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often run at 70% or more of the gross turnover of conventional business operations. So

MLM Companies can allocate these savings to the distributor of network for marketing and

servicing the customers on behalf of the network company.

Subramanian (2007) focused on current trends and future challenges of network

marketing in India. He appeared with the observation that India is a safe abode promising

tremendous opportunity in the network marketing business as only a few companies in the

country do this business in a professional way. According to him money and business

opportunity are the two main reasons the network marketing attracts people for joining.

According to him the mindset of the people should be changed by educating them with

required knowledge to make the functioning of MLM successful in India.

Chaudhari and Mistry (2010) are of the opinion that there is exploitation of relationships in

network marketing where people join mainly because of persuasion by friends and

relatives. They conducted their study at Surat district of Gujrat.

Lahiri and Das (2010) have developed a theoretical framework of network marketing in

their study. They have evaluated and analyzed the performance of some successful

network marketing companies to assess the market opportunity not only in the developed

countries but also in the developing countries with facts and figures. Their study shows

positive growth of network marketing in Asia, but not at par with other countries of the

world. They concluded that in India network marketing companies can also exploit

opportunities by educating prospect through proper communication.

Lahiri and Das (2011) studied brand loyalty of MLM and Non-MLM brands in Kolkata and

its outskirts. They appeared with the observation that customers are more loyal for their

MLM brands than that of Non-MLM brands. Their study also revealed that availability,

quality, price and promotion are the factors that customers seek for purchasing MLM

brands.


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Lahiri and Das (2012) examined consumers’ attitude in choosing different shampoo brands

on one hand and developed a perceptual map based on consumer ratings on the other

using convenience sampling technique. The results indicate that attitude of the customers

buying shampoo is more favourable towards Non-MLM brands than MLM brands

Network Marketing in India

In India, the network marketing is still at a nascent stage. But, it is expanding at a

phenomenal growth rate. This practice took roots in India around 25 years back due to its

population and largest independent consumer market in the world. This practice is the

most attractive proposition for network marketing, provided that it is customized to suit

Indian culture as well as requirement. Reputed MNCs have entered the Indian market since

1998 to grab a bigger pie of this lucrative market. Now-a-days more than 50 lakh

consumers are involved in the industry locally, and the number is getting multiplied at the

rate of 5000 people a day (Shah, 2012). There is a growing acceptance of network

marketing as a mainstream profession in West Bengal, with a wider outreach in the rural

areas. Excellent quality products coupled with friendly and interpersonal services account

for the success of network marketing. What makes the network marketing approach

interesting for the people of West Bengal are factors like lower initial cost of setting up

business, financial independence, development of personal and business skills, flexible

timings, an improved ability to take care of families and convenience of retiring whenever

distributors want.

Reasons for the development of network marketing in India

The survival of companies in the competitive market by simply producing goods and

services has taken an assured place in the history. Now the only alternative remains before

business organizations to reach at pinnacle is the effective marketing as the companies are

falling prey to fierce competition and changing technology both at home and abroad. In


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marketing, promotion and distribution of products play a vital role and both promotion

and distribution account for large investment of company’s fund to inform the benefits of

the products of the company. Thus one of the reasons for the development of network

marketing is low promotional and distribution expenses and thereby network marketing

companies can save a major chunk of its own fund. The companies practicing network

marketing takes unconventional way of promotion like word-of-mouth communication,

rather than taking conventional way of promotion through mass media advertisements

by making intermediaries absolutely unwanted.

The network marketing industry is experiencing phenomenal growth in India. India is

faced with massive problem of unemployment. The incidence of unemployment is much

higher in urban areas than in rural areas. The problem of unemployment has becoming a

colossal. There are a large number of educated unemployed persons in India. With the

decreasing employment opportunity among graduates, network marketing offers greater

incentive to the individual distributors that may supplement their income for maintaining

their desired modern lifestyle. Lower initial cost of setting up a business is another

important reason behind the development of network marketing. So anyone can join as a

distributor of this business with a very little amount of capital.

Network marketing provides an opportunity to earn additional/residual income. Network

marketing companies focus more on recruiting downlines than selling products to

customers. Individuals, involved in distribution channels, represent the company as the

employee of the company with no fixed salary and are awarded commission in return.

They develop their organization in two ways – (i) building an active customer base who

purchase directly from the company, and (ii) recruiting a downline of independent

distributors who also build a customer base. Thus, there is a scope of higher earning on the

part of distributors and motivated them to join network marketing business.

Exploitation of relationship in soliciting business


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Relationship is the foundation on which the network marketing stands. Relationship not

only helps expanding the operation of network marketing company, but it also boosts the

market with low promotional expenses. Given the existing marketing environment number

of network marketing companies exploited relationship, a firm way their success is brought

through (Lahiri and Das, 2010).

Table 1: Observed Frequency (fo)

Experience

Whom contacted

Total

Relatives Friends Colleagues Others

Below 2 years 35 17 6 2 60

2-5 years 23 27 16 8 74

Above 5 years 23 30 21 12 86

Total 81 74 43 22 220

(Source: Primary data)

The null hypothesis (H0) is that there is no relationship between experience of distributor

and person to whom they contacted. From the observed frequencies (table 1), expected

frequencies have been calculated.

Table 2: Expected Frequency (fe)

Experience

Whom contacted

Total Relative

s

Friends Colleague

s

Others


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Below 2

years 22.0909

1 20.18182 11.72727 6 60

2-5 years 27.2454

5 24.89091 14.46364 7.4 74

Above 5

years 31.6636

4 28.92727 16.80909 8.6 86

Total 81 74 43 22 220

Table 3: Data

Level of Significance 0.05

Number of Rows 3

Number of Columns 4

Degrees of Freedom 6

Table 4: Test Results

Critical Value 12.59159

Chi-Square Test Statistic 19.36038

p-Value 0.003596


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Reject the null hypothesis

The table value of χ2 for 6 degree of freedom at 5 percent level of significance is 12.592.

The calculated value of χ2 (19.360) is higher than that of table value (12.592) and hence

the null hypothesis is rejected. So Chi-square test indicates that experience and person to

whom they approached are related. Those who are having less than two years of

experience approached mainly relatives, those who have 2-5 years experience

approached friends, relatives and colleagues, and those who have more than 5 years of

experience approached mainly friends and colleagues more than relatives.

Conclusion

Now-a-days companies are striving hard to earn profit tracking down the needs of

prospect. Marketers are always in search of ground-breaking way of delivering value to get

to the final customer. Direct selling is one of the ways to reach buyer to be acquainted with

the requirement the customers exactly posses in mind as distributors cease to exist in the

distribution process. But this brings an unbearable cost burden to the company that

requires personnel to be recruited with fixed salary for selling and distribution of product.

Network marketing, being recognized as cost effective, is gaining importance in recent

marketing scenario to reach customers conveniently.

This study explained the main reasons for the development of network business in India.

The reasons are low promotional and distribution expenses, problem of unemployment,

lower initial cost of setting up a business and opportunity to earn additional/residual

income.

This study also concluded that relationship performs a key role in influencing people to

join network marketing business. Another implication of this study is that experience of


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distributors in terms of the time period engaged in the business emphasizing nature of

relationship exploitation and the experience may enhance the likelihood of approaching

friends and colleagues than relatives.

References:

Bhattacharya, P. and Mehta, K. K. (2000), ‘Socialization in Network Marketing

Organizations: Is It Cult Behavior?’, Journal of Socio-Economics, Vol. 29, pp. 361-374.

Cardon, G. (2011), The 10X Rule: The Only Difference Between Success and Failure, John Will

& Sons, Inc., Hoboken, New Jersey, pp. 217 -218.

Chaudhari, J. and Mistry, S. H. (2010), ‘Multi Level Marketing: Does it lead to

Exploitation of Relationships?’, Quest, Vol. 1, No. 2, pp. 3-8.

Lahiri, I. and Das, M. K., (2010) ‘Network Marketing: Looking through a new window’,

Review of Professional Management, A Journal of New Delhi Institute of Management, Vol.

8, Issue-1, January-June,2010, pp 90-99.

Lahiri, I. and Das, M. K., (2011) ‘A Study on Brand Loyalty of MLM Brands’, International

Journal of Marketing and Management Research (IJMMR), Vol. 2, Issue 4, pp. 88-102, April

2011.

Lahiri, I. and Das, M. K., (2012) ‘MLM Vs NON-MLM Brands: Attitudinal Evaluation through

Customers’ Eye’, International Journal of Business Insights and Transformation (IJBIT),

Vol.5, Issue 2 (April 2012 - September 12), pp. 69-75.

Laudon, K. C. and Laudon, J. P. (2004), Management Information System: Managing the Digital

Firm, 8th Ed., Prentice Hall of India Pvt. Ltd., New Delhi.


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Shah, P.K. (2012), “Network Marketing in India”, New Winners Express Magazine.

(available at: http://networkingeye.com/2012/02/network-marketing-in-india/-

accessed on 07-10-2012).

Subramanian, R. (2007), ‘Network Marketing in India: A Study on its Current Trends and

Future Challenges’, The Icfai Journal of Brand Management, Vol. 4, No. 3, pp. 44-66.

Waitley, D. (2007), History of Network Marketing, Network Marketing Business School,

Australia. (also available at: http://www.network-marketing-business-school.com/history-

of-network-marketing.html)

Website references:

http://www.network-marketing-business-school.com/history-of-network-marketing.html

- accessed on 03-09-2012.

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