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Slippery networks

Strangers may smile at you, friends may get cosier, and a relative or neighbour may be extra warm. That’s what multi-level marketing (MLM) does to relationships. Sandeep Singh & Rachit Vats report. A pyramid at the bottom

business Updated: May 20, 2011 23:09 IST
Sandeep Singh & Rachit Vats

Strangers may smile at you, friends may get cosier, and a relative or neighbour may be extra warm. That’s what multi-level marketing (MLM) does to relationships.

But experts advise you to look before you leap into the MLM game. In the hazy networks that are supposed to bring you products and possibly, easy money, there is a maze that needs to be negotiated — with the possibility of being short-changed or cheated.

Many such schemes could end up making a fortune for those at the top of the pyramid but may end up making fools of others in a “Ponzi Scheme.” Named after Charles Ponzi, such a scheme is one offers returns to separate investors, not from any real profit earned by a company but from their own funds or money paid by subsequent investors.

MLM, sometimes called “network marketing” for its use of human relationships to sell products, is an offshoot of direct selling. It might involve risks as people try to find more like themselves to earn commissions.

It is risky when huge amounts of money is collected upfront or when the company’s products, services or revenue structure is not clear or transparent.

Earlier this week, government authorities initiated investigations into an MLM scheme floated by Singapore-based Speak Asia Online (SAOL) which has made 1.9 million members within one year. SAOL says it makes money from selling information to databases and wants members to fill consumer survey forms.

This is fine, but for the fact that they must pay up Rs11,000 as annual fee to be able to fill one form per week to earn Rs1,000 per survey and then look for others to do the same in order to earn more commissions.

The catch is that no company says it has commissioned any such survey, though SAOL says it sells information to data exchanges.

Such a company is quite a contrast from one like Eureka Forbes, which has a straightforward direct selling model involving its own agents.

In the middle are firms such as Amway, Oriflame, Tupperware, Modicare and Avon that set up MLM networks but offer clear products and revenue models. These firms bet on individual networks eliminating shops and middlemen and sharing saved commissions.

SAOL, which is being probed by police, income-tax and company law authorities, says it will earn money from ad revenues brought in by its online magazine “Service Today” in return for its annual membership fees, while it already gets money from data exchanges.

However, there is no revenue source other than that earned as commission on the magazine subscription — which amounted to 75% of its last annual revenue of $80 million.

“Going forward we will have revenue from product sales through Gen X Bazaar and advertisement on our website,” said Manoj Kumar, CEO, SAOL.

“For a consumer, any legitimate direct selling firm will provide genuine opportunities at a reasonable price entry and a legitimate channel of distribution.,” said Achinta Banerjie, vice-president, Amway India.

But an MLM company may prosper at your cost because you pay an upfront amount but are not offered any guarantee.

KA Abir, working with a financial services company in Delhi, joined Amway a year ago by paying a membership fee of R995 but has not earned a single penny from a revenue model that showed him R100,000 if he could only work part-time at it.

“I tried a couple of times to convince people but then lost patience,” he said.

Also, contrary to claims, products offered by MLM companies need not be cheaper than conventional alternatives. For example Amway sells a 250-ml shampoo bottle at Rs379, while a comparable HUL brand sells at Rs134 for 200 ml.

Anisha Motwani, chief marketing officer at Max New York Life Insurance, said good MLM firms offer a low start-up cost and provide training and advertising support. “Like they say, everything comes for a price and nothing for free,” Motwani said. “One needs to be cautious about any company making unrealistic claims."

First Published: May 20, 2011 22:32 IST