Saturday, November 22, 2008

Multi-level marketing

I've written about pyramid schemes and profit, I thought I'd devote a few bytes of storage to discussing multilevel marketing (MLM). Also called network marketing (my preferred term), this is a group of people, most working only on commission, who sell a product through other people. For example, you may get a call from your friend to sell a product and find out his friend got him involved. Once you start selling, you'll be encouraged to get other friends involved. You'll get a part of the commission on each product your friends sell, and you'll pass some of your profits up the line.

Sound a little like the pyramid scheme? Well, you're not alone in thinking that, but more on that later. Examples of multi-level marketing include some well known companies like Avon and Mary Kay. Amway was probably the biggest named MLM company for a long time, but has since dropped in popularity. Another company that I've heard about is Vector Marketing. Vector sells Cutco knives. Reported to be the best knives in the industry, the most popular knife set sells for about $1200. With "associates" making commissions of 10% to 30%, a person could make a lot of money selling these products.

You can even spot older and more common examples of network marketing. Tupperware, Christmas Around the World, and even lingerie parties (I never get invited).

But network marketing counts on you selling your products to your friends, co-workers, family and those around you. If your selling technique is abrasive, you can start losing your friends. Co-workers and family and people will avoid you. If you're not a strong seller, you might just go hungry. This means that MLM works best with products that, to some degree, sell themselves or are consumable, like Avon and Mary Kay. That way the customer comes back to you. It's hard to use up a knife set (unless you're OJ Simpson), but make-up is used ever day.

So what's the difference between network marketing and a pyramid scheme? Basically, it's the product. In my airplane example of the pyramid scheme, there is no product involved. With Mary Kay, Avon or Vector the purchaser has something they can hold in their hand. The product may be overpriced, there are a lot of people who make a profit on the product, but at least there is a product.

So where is the line between pyramids and networks? 70% according to MLM Legal Attorney Jeffrey Babener. The idea is that 70% of product sales should be to outside consumers, not just to build inventory or for self-use. If an "associate" buys a lot of product for his/her own use, they're not really selling. (Same goes for "selling" to your family). Also, most of the commissions earned by an "associate" should be from product sales, not for signing up other "associates" (sometimes called "suckers").

I should note that Amway was sued for being a pyramid scheme. However, this part of the lawsuit was dropped. They were found guilty of price fixing, but their sales technique was not dismantled. (see here).

MLM is not the same as a pyramid scheme and the profits are (at least somewhat) justified. However, the companies should be evaluated and anyone entering an MLM should make sure he/she knows the costs associated.


DJ Black Adam said...

Very informative post. This is good public service, alot fo people are taken in by this. Side topic, do you feel some of these "prosperity" churches are like pyriamid schemes?

Randy said...

I think the "prosperity" churches are ripe for pyramid schemes. I don't think they are inherently (sp?) pyramid schemes. The problem is when you get people more focused on money than anything else, and then you get leaders focused on money and making other people happy, you open the door to a lot of things.

Didn't someone say that the love of money is the root of all kinds of evil?

DJ Black Adam said...

"Didn't someone say that the love of money is the root of all kinds of evil?"

A very, very wise man said that. Amen.

Sara said...

Vector Marketing is actually not a MLM. I am a senior in college, graduating in Spring '09, and worked for Vector for 2 years. It is a great company to work for and I gained a lot of experience.

Randy said...

Thanks for finding my blog and for your comments.

From what I know of Vector, it falls more into the line of Network Marketing. You (generally) market to your friends and family. I read a lot about the company and the product gets high marks. I read comments (like yours) praising the company and some comments cursing them too.

My take on it is that the company may be good for some people and bad for others. The real key is the individual going in should carefully look at all the information about the product and prospective customers.

If the product is not consumable (like Cutco knives), it may be hard to find new customers. If you could on selling them to all your friends, you may run out of friends quickly.

Glad to know that it works for you.