Are multi-level marketing (MLM) firms good or bad? This is the subject of a raging debate on the Internet, after the arrest and release of the Amway India Chairman by the Kerala police last week.
Defenders of Amway, mostly its distributors, railed against the police for being ‘short sighted’ in arresting an honest businessman who had ‘transformed thousands of lives’.
Vocal MLM critics asked what Amway was, if it was not a pyramid scheme.
The Corporate Affairs Minister muddied the waters by saying that while the government would soon come up with regulations for fraudulent firms running such schemes, the atmosphere should not be vitiated for ‘genuine, law abiding’ firms.
But the crux of the matter is: When it comes to multi-level marketing, what is ‘genuine’ and what is fraudulent?
Fortunately, there are clear answers to this question, thanks to the numerous run-ins with regulators that global MLM firms have had over the years. The US Federal Trade Commission (FTC) investigated Amway way back in 1975 to determine if it was a pyramid scheme (it ruled otherwise). Very recently, Herbalife, a direct seller of weight-loss supplements in the US, fought off public allegations from hedge fund manager Bill Ackman that it was operating an illegal pyramid scheme.
Revenue model
These debates have generated plenty of research on the MLM model, its benefits and flaws. Based on this, Indian regulators may need to address just three issues, to adequately regulate multi-level marketers.
The first is determining how exactly the direct selling firm earns its revenues. Is it prospering because its products are flying off the shelves or because it is fleecing its unsuspecting distributors? Consider how a typical MLM firm operates. It manufactures a range of consumer products, usually priced at a hefty premium to comparable products in the market, citing some unique attributes.
It then recruits a large army of direct selling agents, not marketing executives, but laymen householders, primed for a ‘work-from-home’ opportunity. These recruits may pay upfront for a ‘starter kit’ of products which they must sell to their circle of friends, relatives and acquaintances.
In addition, they are encouraged to sign up as many newcomers as possible as agents (or as MLM firms put it ‘business owners’) and earn a share of commission out of sales made by them. This works in a sort of geometric progression, until the person at the top of the pyramid gets to amass substantial riches from all the people who now work ‘downline’ for his or her team.
Now, the problem with this business model is that, given that most new recruits are completely new to any kind of entrepreneurship and have no experience in marketing, many may fail or drop out. Then, how can the company succeed? Critics claim that it is by signing up new recruits at express speed and getting them to pay up for high-cost inventory (this where it resembles a Ponzi scheme). This is clearly unethical as the company then makes much of its moolah by forcing its own ‘business partners’ to buy its expensive products, rather than selling them to third-party consumers.
Disclosures to agents
Regulators looking to curb such unethical practices can apply just one simple test to every direct selling firm. How much of the company’s revenue comes from non-agents? Herbalife didn’t have a direct answer to that, but hopefully Indian direct marketers will.
Then there are the high-decibel tactics that such firms use to sign up new recruits. All of us are familiar with the modus operandi . You get an innocuous invite from a friend to attend a ‘party’. Landing up there, you are hit by a blitzkrieg about a direct selling company’s global credentials, its explosive growth, its absolutely unique products, how they are essential to humanity, and so on and so forth. For good measure, there are personal testimonies from star distributors who have amassed wealth by pursuing the ‘Tupperware’ or ‘Amway’ dream.
For people really keen to succeed in the venture though, all this slick campaigning should matter much less than the actual financial contours of this new business. How much do you need to invest to start up? At what volumes can you break even? What is the pricing and commission structure? What realistically, is the monthly income for the average ‘silver’, ‘gold’ or ‘platinum’ distributor? What is the company’s policy on return of unsold stock?
Making it mandatory for all direct selling firms to have such details in writing may help ensure that new recruits walk in with their eyes open. It would also help if these new entrants are trained, not just in social selling, but also in the basics of finance and accounting, so that they can accurately assess the results of their venture.
The third problem with MLMs is that, by focussing so whole-heartedly on their distributors, they seem to give consumers the short shrift. For one, despite the claim that direct selling improves ‘efficiencies’ by cutting out middlemen and advertisements, MLM products seldom come at a bargain.
Don’t forget consumers
More often than not, their prices are two-three times those for comparable brands you can pick up at the local supermarket. Firms justify this sky-high premium by pointing to unique ingredients or product quality, which helps you use very little of it. Yet, with multiple distributors peddling the same product within a small locality, price discounting and under-cutting are rampant. This makes you wonder if it wouldn’t help to regulate the commission structure on MLMs to a reasonable percentage on MRP.
Then, as MLM agents rely entirely on informal ‘social selling’ to push products, buyers have to rely mainly on vague verbal assurances on the product’s features, pricing and warranties. Many products are also marketed without the mandatory labelling on their maximum retail price (MRP) or ingredients. Apart from mandatory MRP stickers, detailed product labelling should surely be a basic requirement for nutritional supplements, vitamins, weight-loss products and food products which are marketed through this route.
Not all of these suggested regulations may be in place overseas. But they are necessary to regulate MLM schemes in India. Direct selling firms such as Tupperware, Amway, Oriflame, Avon and Herbalife are all publicly listed companies
in the US and thus invite public scrutiny. Their Indian arms, in contrast, are all unlisted and thus not subject to scrutiny of suspicious financial regulators or nosy analysts. India’s consumer protection laws are also notoriously weak.
It seems best, therefore, to regulate all direct-selling companies on stringent lines, so that they can do well only by doing good.