Friday, January 11, 2013

Here We Go Again with Direct Sales/Network Marketing as a Pyramid Scheme

There's an interesting article on Herbalife (a publicly traded network marketing company) and the network marketing industry in CNN Money. Critics argue that the business model is not sustainable because you're relying on friends to sell and recruit people and Herbalife is a pyramid scheme (which it is not). Here's the full article "The Money Behind Herbalife and Mary Kay"

This isn't the first time that network marketing or "multi level marketing" has been criticized for being a pyramid scheme. On the surface, it can appear that way for people who aren't in the business, and to be fair- there's no doubt there are shady practices by distributors/consultants but you can say that about any industry. There will always be a few bad apples.

But the truth of direct sales/network marketing isn't the business model but the practices from its distributors i.e. recruiting, promises of making big money, etc. The business model is simple: the companies rely on consultants to sell products directly to people they know, bypassing traditional retail, and there's nothing illegal about this "direct selling" method.

What's controversial with direct sales/network marketing is the business opportunity attached to it. In other businesses, you don't find sales rep selling products and recruiting people at the same time but this is common practice in direct sales/network marketing. The idea is leveraging your time and effort.

Essentially, if you're a consultant and if you recruit people doing the same thing you've now doubled your selling efforts. In return, the company pays you a percentage of the sales from the people you sponsored to do the same thing. 

Here are some problems I have with the above mentioned article and critics.

#1 Start up cost

Sure, there's a cost involved because in order to be a consultant for the company, you need to purchase a start up kit. The start up can range from $59, $99, $149 and upward. But you get twice the amount of products for what you're paying into. And even if you decide not to pursue the business, the products are yours to keep. If you're paying $99 and getting over $250 worth of products that you might buy elsewhere- that's a bargain.

#2 Additional costs

It is true that there are additional costs. Some companies offer free replicated websites for consultants to sell products and some charge a monthly fee- anywhere from $9.95 to $14.95, depending on the company. This is the cost of doing business. If you were selling products on Etsy or Ebay, there are fees associated with being a seller. And if you were to open an ecommerce store on your own, you would need to pay for web hosting and other expenses.

As for other fees involved such as mailing samples to customers, postage, catalogs, consultants do need to pay for these, but these are again, basic costs of doing business. For anyone who is in business understands that you can't open a business without incurring zero expenses.

#3 Stocking on inventory

There's no doubt some consultants sponsoring people into the direct sales/network marketing business encourage new consultants to buy products but this is not required from the company. My direct sales company have never trained or encouraged consultants to buy inventory, use monetary incentives to recruit, or use practices that would compromise the integrity of doing business.

Does this mean everybody adheres to these code of ethics? Of course not as it's impossible to streamline practices from thousands of consultants that work their businesses independently. It's not possible to keep track of how people operate their businesses on their own.

#4 Can you make money?

I know people who make six figure income in direct sales and people who don't make anything. There are also people who have fun with the business and only sell whenever they feel like it. And there are people who take this business seriously. Because direct sales is really a volunteer type of business, if you will, because you're not a paid employee- people can do whatever they want once they sign up to be consultants. Whether you can make money or not is only relative to what the consultant personally invests in terms of time in her/his business. It's a commission-based sales job.

#5 Can you lose money?

You can lose money in any business venture. The answer is yes but only if you buy products with little efforts in reselling or was somehow talked into buying products from the person that sponsored you into the business. A legitimate company will buy back a portion of your inventory. Your only obligation as a consultant is to purchase the start up kit, that's it. You're never required to buy additional inventory.

It's always disheartening to read attacks on the direct sales/network marketing industry and as I said, there are shady people in this business, people who are not 100% upfront when they're recruiting people, especially newbies that are green and might not know all there is to know in this business, but most people I know in this business are awesome entrepreneurs that have experienced life changing benefits from this business, and operate their businesses with integrity.

As with anything you do, always do a thorough research, and if you're hesitant about working with someone don't hesitate to find someone else.

Would love to hear your take on the direct sales industry.


Janette Stoll

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