An investigation of multi-level marketing businesses
My phone rings, and I see my friend’s name flash on the screen. I take the call, briefly wondering what this could be about. When that friend opens with the lines, “Pare, do you want to make some money?” I naturally have some questions. Upon further inquiry, I hear “network marketing,” and then I begin to have my doubts.
Network marketing is a business model that is an alternative to the more conventional methods of product distribution. It relies on several levels of distributors to effect maximum market penetration by making use of their personal networks to sell the product. It is also known as multi-level marketing (MLM), and it is nothing new.
Many household names, such as Avon, Tupperware and Sara Lee built their foundations on this model and continue to operate this way today. Though it seems harmless enough, MLM is a contentious issue because of its marked similarity to the notorious pyramid scheme.
Hoodwinked
We’ve all heard the cautionary tales about pyramid schemes, perhaps on the news or from relatives. They first entered public consciousness in the 1920s, when a fellow by the name of Charles Ponzi (from whom we have the infamous Ponzi scheme) duped a boatload of people into joining a venture that was doomed to collapse. His promise of incredible returns for no work was met by equally incredible demand, but it was a promise he could not keep.
Pyramid schemes are closely related, except, instead of a single entity in charge of the operation, you have the different members perpetrating the scam. Anyone who wants to join the operation is forced to pay an initial entry fee, which is usually a large one. The members who recruited the newbies take a cut of the entry fee, as do the people further up the pyramid, often called the “upline.” In order for the new recruits to earn, they must bring in other members to be below them, or to be part of their “downline,” so that they can then receive a portion of their entry fee.
This classic setup wherein only the top of the pyramid and a handful of the early birds make any real money off of the poor souls who arrive late to the party is the defining feature of such a racket. Pyramid schemes focus on aggressive recruitment and make little or no effort to sell an actual product, which therefore makes them illegal, and the craftier ones are quasi-legal at best.
Any scheme in which you make majority or all of your money off of recruitment is inherently unsustainable. This is because when the number of people joining inevitably slows, the scheme goes kaput, and most of the later investors lose their capital entirely.
Nowadays, such schemes are considered dull and predictable. They belong to the realm of get-rich-quick schemes that anyone with an ounce of business acumen should be able to spot a mile off. Yet there has been no shortage of con artists, and more than enough unwitting victims for them to scam.
An offer you can’t refuse?
But does network marketing immediately equate to a pyramid scheme? Should the very mention of the words send you running for the hills? The short and simple answer is, no. As in the majority of matters in life, the issue of legitimacy is not nearly as black and white as we would like it to be.
When I received a call from a friend, management senior Vince Barraquias, who gave me a rather vague invitation to a business opportunity with quite lucrative potential, I wasn’t exactly chomping at the bit to accept. And when network marketing came out, warning bells were going off aplenty. However, it is easy to see how someone with less knowledge of the devious workings of the myriad pyramid scheme offshoots might have immediately asked where to sign.
But I have to admit that I was curious. I was invited by several friends to listen to a presentation on the same company, and I didn’t take them for fools. So either that assumption was wrong or this was an aboveboard enterprise. Not to mention that this invitation was fast making the rounds in the Ateneo and a lot of eyebrows were being raised.
To the test
I decided to take Vince up on the offer to find out what exactly was going on. The presentation was held at the rather innocuous location of a function room on the 4th floor of Berkeley Residences, a stone’s throw away from the Ateneo campus. It was not exactly the shady rendezvous you might imagine for a scam. There, all my questions were answered.
The aforementioned company is Nu Skin Enterprises and they check out on just about every level. Based on a brochure given out at their informative and considerably convincing presentation, I gathered the following: It is an American company based in Utah that is publicly listed on the New York Stock Exchange, it is among the Forbes top 10 most trustworthy companies and it was on the Forbes top 10 stocks to watch out for in 2009. The company’s total revenue was in excess of two billion dollars for 2012 and I was told that they gave away about 43% percent of that on commissions.
As for their products, they more than stood up to the test. They had undergone research and testing by big shot PhDs, partnered with such institutions as Harvard Medical School, Stanford and Purdue, and they had been featured on the Discovery Channel. Just to be safe, I also verified all these claims on the Web right after.
So then where was the catch? Try as I might, I couldn’t see one. And believe me, it wasn’t for lack of trying. Take a gander around the Internet and you’ll see a lot of criticism of the MLM business model, with some writers going so far as to say that all MLM operations are just pyramid schemes in disguise. But this seemed to me to be a gross oversimplification of the matter. And so I asked questions—a lot of them.
I ran through the entire gamut of criticism I had encountered in my research in an effort to do my due diligence. Jake Ledesma, a management engineering senior, and Justin Tee, an executive of the company and a graduate of De La Salle University, were most accommodating in a lengthy question-and-answer session. Among other things, I asked them about market saturation, which is the concern that a large number of distributors will end up competing against one another. I also clarified the rather complicated compensation scheme and even asked point blank what differentiated them from a pyramid scheme. I found their defense to be nearly impregnable.
Seeking wisdom
I left the presentation with my head reeling and finding it hard to fault their logic, was even tempted to take the offer. But I still didn’t feel completely at ease, so I decided to consult a learned source, the Dean of the John Gokongwei School of Management, Dr. Darwin Yu.
His advice is pragmatic and can be summed up in, “You have to go into these schemes with your eyes wide open.”
He stresses the importance of determining the financial strength of the system, which is based primarily on whether the company provides quality products. “We have to be careful that it’s not a pyramid scheme or a Ponzi scheme. So you need to have real products being sold.”
How you make money within the system is a determining test of legitimacy. “The payout should not be dependent on getting new members but on actual products being sold,” he says. It is the product that makes or breaks the company. So when recruitment is prioritized over the actual selling of the product, that should be a major red flag.
He adds, “If the company has been around for some time—in other words it’s not a fly-by-night company, it’s reputable, it’s registered and so forth—then the multi-level system is a legitimate business model. So to me it’s buyer beware. If you don’t do your homework, you get burnt, like in any business.”
He adds, “If the multi-level marketing scheme has a good product that can be sold on its own merits and the returns to the different levels of sellers are reasonable, then I think it’s okay.”
In fact, he praised the business model, saying that those can do more than just sell and can convince others to sell for them can end up running their own operation, which is a great entrepreneurial opportunity.
However, I still had certain misgivings about the entire enterprise and a friend of mine, management engineering senior Robert Abaño, felt similarly. “The whole MLM business is a very lucrative opportunity but my only concern is I cannot be certain whether my family or relatives are buying the products because they actually like it or they’re just buying it because of my relationship with them,” he says.
Dean Yu agreed, saying, “It can be exploitative of personal relationships.”
Keep your friends close
The hold that personal relationships have over us is a truly interesting thing. The collectivist culture of Asia and the especially tight familial and social bonds of the Philippines conspire to create a strong sense of indebtedness that exerts a powerful pull on our decisions—a pull that is, in many cases, undeniable.
The particular nature of the Filipino’s relationships is of enormous import to an area of business that makes or breaks its value on the strength of your network. To choose to exploit the bonds of family and friendship that we Filipinos cherish so dearly in the pursuit of monetary gain is no easy decision. But if you believe the business can be done without taking advantage of this condition, then by all means feel free.
“The problem is not with the system itself. It depends on your sales approach; these could be great products that your friends and family members are not aware of. But if that’s the only way you define your relationship with your friend, you turn your friend into a customer and that’s it. Then, that’s your call and you face the risk of losing a friend. You gain a customer but you lose a friend,” Yu warns.
In summary, he says, “[Multi-level marketing] is legal and it works. And it’s not just in the Philippines. There are many large, listed companies that use this form of direct selling. But don’t go into it naively. Don’t go into it blindly.”
