Network Marketing - Part I

Network Marketing - Part I

The very title of this article will cause some people to roll their eyes and say it was one of the biggest mistakes they made. Some other people are looking at this business idea to see if it’s really for them.

The information below is to help someone considering network marketing as a business opportunity that they can spend their time and energy (and some money, yes it requires some money) building.

By the time you’re done reading this two part article, you should have a decent idea about the industry and where you stand to gain(or lose) in the whole game.

First things first.....what is network marketing?

Network marketing and Multi level marketing are pretty much the same. They both involve the direct selling of goods to consumers and hiring salespeople in ones team to increase turnover.

What was so novel about this idea back in the 1940s when network marketing really took off was that a distributor could earn residual income from the turnover of their team, and this income would not be taken from the income of the team member.

That idea of passive income seems to be the primary attraction to most people even today along with the potential to have the time to enjoy that income. But now let’s get deeper.

Is it Legal?

Many will swear that network marketing should be banned, is illegal, or at the very least, is unethical. But in most of these cases, the anger is not towards the idea of network marketing but to the practises of the company or persons involved.

In the US the Federal trade commission has ruled (in 93 F.T.C. 618; full name In the Matter of Amway Corporation, Inc., et al.) that network marketing is not by itself illegal.

In India there is the IDSA (Indian Direct Selling Association) that regulates the direct selling industry, network marketing companies forming a part of this industry.

With regulatory authorities endorsing and monitoring these companies and the industry as a whole, we can rest assured that the companies named by them as legitimate are really legitimate.

So whats all this about network marketing being illegal? Enter Pyramid schemes and Ponzi schemes.

Is it a pyramid scheme or a ponzi?

Well let’s see what Wikipedia says about Pyramid schemes:

“A pyramid scheme is a non sustainable business model that involves promising participants payment, services or ideals, primarily for enrolling other people into the scheme or training them to take part, rather than supplying any real investment or sale of products or services to the public. Pyramid schemes are a form of fraud.”

Now let’s see what Wikipedia says about a Ponzi scheme:

“A Ponzi scheme is a fraudulent investment operation that pays returns to separate investors, not from any actual profit earned by the organization, but from their own money or money paid by subsequent investors. The Ponzi scheme usually entices new investors by offering returns other investments cannot guarantee, in the form of short-term returns that are either abnormally high or unusually consistent. The perpetuation of the returns that a Ponzi scheme advertises and pays requires an ever-increasing flow of money from investors to keep the scheme going.”

Pretty self explanatory isn’t it! Now when would a company posing to be a network marketing company actually be a pyramid/ponzi scheme. One way to check is to see if the company and uplines make money from new recruitments. If so, then it’s illegal. If money is made from the sale of actual products/services then the business is legitimate. Without a product or service the business opportunity is not legal.

So it’s important to have a good look at what they are(or are not ;-)) asking you to sell.

It would also make sense to check up regulatory websites such as the IDSA to check if the company you wish to join is regulated or monitored. A look at the background of the founders wouldn’t hurt too. The internet and libraries could help here.

There is no excuse for not doing your bit of due diligence. In part 2 of this article I’ll be listing out a few questions you can ask the person inviting you to join to get some more clarity on the legitimacy of the company.

Well we now know that networking marketing is not illegal. Then why does the industry have such a terrible reputation. Read on...

A terrible reputation:

There isn’t any one reason for network marketing being criticised by so many. But some of the reasons that seem to ring all too loudly are mentioned below:

1. Expensive products – The concept of direct marketing seeks to eliminate the middle man and connect the manufacturer directly to the end consumer. The elimination of fixed wholesale and retail outlets needing expensive showroom and storage, salaried sales staff, etc reduces costs that would normally be factored into the price the end customer pays for a product. Also, marketing is done primarily by word of mouth rather than extensive manufacturer borne expensive advertising.

So it would make sense that these products are priced competitively in the market. Often this isn’t the case. Several networking companies sell products that are quite expensive. So why isn’t the saving in cost due to the elimination of middle men and advertising being passed on to the end customer?

Some say the prices are inflated to pay high returns to the sales teams. But can anyone who says that prove it? We all know there are premium brands in every market that command a higher price than the regular product. To really know if the products cost the price they are sold at and the price inflation is not merely for profit, we would need to look at the costing records of the company; not exactly something someone on the street can walk up to a company and expect to be served.

This brings us to the question of perception. Do you perceive value in paying a hefty sum for a new BMW or would you consider it a waste of money and move in for a Ford Pinto? It’s the same for the network marketing products too. If you use them, pay a bomb for them, but feel the product really did you good...well then....for you it’s worth it. If you felt it was a waste of money then there you have it....it’s expensive. Consumer is king ;-).

2. Sale of motivational material and meetings – There have been lawsuits on the matter. For the uninitiated let me explain. In many network marketing companies there are motivational books and seminars that are made available on a regular basis...well “made available” as in you have to pay for them ;-). This material is meant to help you build your sales and recruitment performance.

In my opinion it’s perfectly fine to get motivational material and attend seminars from qualified experts. And I really don’t know many places where you can get that free of cost either. So what’s the problem with the whole idea of paying for such material?

Well for starters, the person in whose team you are (your upline) would provide you with these materials which you would need to buy. In some cases they don’t tell you that they are making a profit off of the material when they sell it to you. They also do not encourage you to buy the same books from external sources(books stores or Amazon.com) since if you do, well the profit goes to the book shop and not them. From an ethical point of view I’m sure we all would like to know up front that our upline is making money from us through these materials and also if he were to offer the option to buy it from other sources. By the time you come to know about it...you probably put a few bucks in your upline’s pocket.

Similarly when you go to seminars, you’re told that the ticket charge for attending the seminar is just for the rent of the hall. But gradually you will come to know that the speaker is paid a decent fee. I for one cannot confirm that the ticket charges are used to pay the speaker and I think it’s totally acceptable that the speaker is paid for his services. What is unsettling is that your upline tells you that the ticket charge is merely for the hall’s rent and nothing else.

Again whats important here is that the network marketing industry is not in itself unethical. It’s about a few people who successfully tarnish the reputation of a whole industry with greed. If you genuinely feel that this business is for you all you need to do is avoid any of these practises and run the business ethically. There will be all kinds of people who will work to put you down but be persistent in doing it right and honestly and you can’t fail.

3. Exaggerated income claims and success rates – How many people make big money in this industry? How many succeed?

The Times reported in a 2007 article that “just 10% of Amway's agents in Britain make any profit”(http://business.timesonline.co.uk/tol/business/industry_sectors/media/article2951266.ece). Those statistics aren’t very pretty. But let me put that in perspective now. Here are some other numbers for you for small businesses in general from the US Small Business Administration (http://www.sba.gov/advocacy/7495/8430) “51 percent new small businesses survived five or more years”.

Although the above statistics aren’t directly comparable it generally tells you there is a higher survival rate in small businesses in general (assuming that businesses surviving for 5 or more years are actually making a profit). But let me put down some important facts here:

- It costs very little to retain agency with a network marketing company even if you make no profit. Overheads are low or nonexistent.

- Other small business owners usually have a “all bridges burnt” situation. They have taken the leap and now there is no turning back, they HAVE to make it work since they have committed a great deal financially and in lifestyle changes. Network marketers continue to have the luxury of leisure since the costs for entry and maintenance are negligible...also one of the causes for the low profit rates.

- There are network marketers who make really really big bucks and you can meet them in the flesh.

I know you’ve heard this a million times but it really is true, “you can make as much as you work to make”. My personal suggestion would be talk to someone extremely successful in the field and understand how he did it and develop reasonable goals....this includes an indication of how much he makes and also exactly from what all sources (i.e personal retailing of products, residual income from team members, sale of motivational products, seminars etc).

4. Cult status - have you been to some of the seminars? You’d think you were in some religious ceremony at times, at other times it’s a surge of enthusiastic energy.

You’re likely to see a group meeting like none other. The general idea is that for you to succeed you need to block out other distractions as far as possible and you need to focus on achieving what you set out to achieve. We have all heard about focusing on our goals, well that’s taken very seriously at these functions the way you’re encouraged to mend your lifestyle.

Some of these seminars (at times a little weird) can really carry a message to you that touches you. They rarely fail to motivate. But for some people it’s just not their cup of tea. I guess it comes down to personal taste and interest. Although I personally don’t mind sitting through almost any seminar on most subjects as long as the speaker is reasonably entertaining and well informed, I know many people who hated the 2 hours they needed to spend for the network marketing seminars.

5. Unscrupulous selling practises – Just as in any field network marketing has its own share of sales people who have little or no regard for other people. For whom making a quick buck is ultimate and the means do not matter. If you decide to go for a network marketing business, and you feel something isn’t right....it probably isn’t. Don’t do it until you honestly feel it’s the right thing to do.

6. Excess supply of salespeople – Market saturation. What if the market for a company’s product is already saturated with all the people who would buy the product already buying the product? Just because your upline says everyone needs health supplements, it doesn’t mean everyone will want to buy them. What if the market is already saturated with all the people who would like to buy those products already buying them? What makes it even more scary is that unlike traditional sales techniques where each sales person is given an exclusive area in a city to cover, in network marketing there is no control on how many salespeople are being hired. There could be an unlimited number of salespeople in a small locality.

Now to answer the above question is extremely difficult. It is extremely difficult to calculate if the market has reached a saturation point for a particular product. One way to help ensure you don’t end up with a dead end saturated market is to make sure you look out for a network marketing company that has an expanding range of products to retail. The more the better.

The worry that there could be an excessive number of salespeople at any given time is also valid, but we all know that most people who sign up for an agency don’t actually fold up their sleeves and start working as master salesmen, unlike the salespeople of traditional companies. It may take quite a bit of time before every locality has too many active motivated network marketing professionals.

7. Low entry barrier – If it were really easy for you to get a job at a company or admission at a college, you probably wouldn’t value it as much as if you had to go through several rounds of written tests and gruelling interviews. In the same way big business needs a heavy investment or considerable expertise on a subject attained through hard work. There is a level of exclusivity that we all desire to achieve. Entry to network marketing on the other hand is anything but exclusive and requires you to pay a very small amount of money for entry.

Getting in isn’t something much to brag about!

8. Only the early birds make the money – well that depends on how good you are at having people join your sales team and become good sales people.

Although big gains have been made by the early birds, we have to remember that when they got in, this whole network marketing thing was a new idea....not something small risk takers would be interested in getting involved in because it had not proved itself as a valid business model. Getting new people to join their sales teams was tough. There was little proof of success. So you see the early birds had their challenges as well. I guess the people who join later have their own set of challenges. But I personally believe that no matter how or when you join you’re bound to have your set of challenges in every field....might as well buckle up and face them. If there were no challenges you wouldn’t enjoy achieving it anyway.

9. The general stigma of network marketing – More than any of the points mentioned above, network marketing seems to have a blanket reputation stink. Many people don’t even know why network marketing has such a bad name but believe that it does. It has become almost embarrassing to admit to your friends and family that you’re into network marketing.

But if you feel that this is the right business for you and you feel you have what it takes to succeed, there is no doubt you can make good money and that too as passive income. If you’re willing to work at it ethically nothing should stand in your way...least of all what other people think.

One book that can help you learn a lot more about network marketing is The Business School for People who like helping People by Robert Kiyosaki (author of the famous Rich Dad Poor Dad series).

The information above is for a basic look at what network marketing is and the major red lights to look out for. Part 2 of the article will have information on the benefits of network marketing followed by Part 3 about what the mechanics of the business are and what your daily tasks as a network marketer would be. Hope all of this will help you analyse what you’re getting into and if network marketing really is for you.

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