Straits Times Singapore: Rules to limit number of levels in MLM needed

From Straits Times, Tuesday July 16, 2002.

MULTI-LEVEL MARKETING
Rules to limit number of levels in MLM needed

By Andy Ho
SENIOR CORRESPONDENT

LOCAL university and polytechnic students have been bitten by the multi-level marketing (MLM) bug since January.

Afflicted tertiary students are trying to push loony products such as a 'biomagnetic mattress that improves nerve function', and recruiting classmates, friends and family to do the same.

They seem not to realise that if the product is indeed such a boon to mankind, it would be sold through everyday marketing channels. There would be little need for some special marketing scheme and certainly none for inexperienced distributors to market it.

Not that these activities on campus are illegal: The MLM & Pyramid Selling (Excluded Schemes and Arrangements) Amendment Order 2001 provides that MLM arrangements which satisfy certain conditions are permissible here.

But legal or not, what is undeniable is that nearly everyone loses money in an MLM even as so many keep trying.

Superficially, MLM looks like a form of direct sales where independent distributors sell products, usually in the customer's home, or by phone.

Initially, you buy the products at a discount - 'wholesale' - and sell them 'retail.'

Many 'pay to play', stocking up on products to meet sales goals.

This 'front-end loading' supposedly pushes the new distributor to higher bonus-levels quickly, but you may get stuck with unsold products that cost you thousands of dollars.

Meanwhile, you must recruit other distributors to do the same to become eligible to collect a percentage of their sales.

Yes, money can be made from such sales - but even more from those of other distributors you recruit, provided you can recruit them.

This could all work out if MLMs were immune to forces of supply and demand - but, alas, they are not.

In any real business, if you plan to make and distribute, say, a million widgets, you have to gear up factories, set up dealer networks and manage inventories at each level.

If you underestimate demand and run out of widgets, you would miss out on profits that could have been made. But if you overestimate demand, your company goes belly-up.

Then, there are territorial considerations too.

Imagine a Burger King (BK) opening four franchises at the Orchard-Scotts intersection. But not everyone wants a BK burger for lunch every day, so the outlets are sure to die a slow death.

Even the best products have only partial market penetration, and that is why, in the real world, BK does not have four outlets sitting squat opposite each other.

Yet, in the MLMer's fantasy world, he can tell the recruit: 'Everyone will want this product!'

That is, its demand and market share are infinite.

So, the MLMer says, all you have to do is convince 10 people in your location that everyone needs this product, and get them to also convince 10 others in the same location. And so on.

This geometric expansion is usually portrayed as an expanding matrix, with kickbacks at certain levels.

The word 'pyramid' is studiously avoided: Yet, at a mere three levels deep, it is already 1,000 people, while at six levels deep, a million people will be selling to yet others.

If the model really worked, MLM company Amway would be larger than even the United States economy in just 18 months.

The rebuttal: 'Only some succeed, so the market will never be saturated.'

This despite them saying during the sales pitch that anyone can make it with this opportunity of a lifetime.

Yet, mention saturation and you'll be told: 'Most will fail, but not you, because you are a winner.'

Actually, the gullible recruit won't get this far: Queries are quickly defused with a joke or a personal story, and the MLMer quickly returns to the main point: 'Now is the time to join up.'

Even if you don't know how many 'distributors' are already above you.

Ominously, Amway's 'Business Review, 1998' of its distributor data from April 1994 through March 1995 showed an average 'gross income' of only US$88 (S$154) per month per distributor.

No rational person would try selling something knowing full well the company openly over-hires 'sales reps' - without pay - for the same products in the same prospective territory.

So, the MLMer's main thing is not selling the product, but selling others on selling others who sell yet others a fantasy.

Which is why every MLM brochure appeals blatantly to unbridled materialism - a mood shot of a bungalow, a BMW in the driveway, a beautiful couple on some exotic vacation, and so on.

The egregious appeal to greed should make you sit up and think if a legitimate business opportunity might not, instead, focus on the product and the market instead.

But greed suspends good judgment and common sense flies out of the window.

Not being professional salesmen, MLMers may not be very obnoxious when pushing their products. But when it comes to signing you up as a 'distributor', they go over the edge because an MLM rewards people to recruit others.

They will resort to every trick in the book to get you to their 'meetings' where a slick presenter, presented as a successful distributor, gets everyone worked up into a frenzy of greed.

Before you can say abracadabra, you are signed up, then let loose on gullible, expendable friends, and even close family.

MLMs grow by exploiting relationships, which is rationalised away as 'building your business' or 'networking'.

MLMers can't see how they appear to their lifelong friends and family members, who try desperately to avoid them.

But the pyramid is unsustainable.

Sooner or later, you realise you have been had. Yet people do not easily admit defeat but go into denial and depression.

When you do eventually give up, you are too embarrassed about having participated to file a complain with the authorities.

So, the MLM continues to exploit the most vulnerable, the desperate, the retrenched, the ignorant, and the gullible.

Short of banning them, as China did in April 1988, enforcement authorities should limit the number of hierarchical levels allowed, prohibit distributors several levels above the seller from profiting more per sale than the actual seller, and require all MLM schemes to make public a complete breakdown of their payouts for all levels of distributors. And this would not be over-regulation.

After all, a sucker is born every minute. With some apparently even ending up in our institutions of higher learning, they all must be better protected.

Andy Ho is a senior writer with The Straits Times.