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Multi-Level Marketing

This fact file explains the principles of multi-level marketing and how to evaluate their use in your business.

1. Introduction

Peter Clothier defines Multi-level Marketing (MLM) as follows:

"A method of selling goods directly to consumers through a network developed by independent distributors introducing further distributors, income being generated by retail and wholesale profits supplemented by payments based upon the total sales of the group built by a distributor."

MLM has at times been associated with certain sharp practices such as pyramid selling. It is also know as Network Marketing, Network Selling or Matrix Marketing. Network marketing is suited to particular types of products including cosmetics, security alarms, jewellery, clothing, books, cookware and gift ware. Businesses may choose to market their products in this way themselves or to use a distributor who uses these methods. Another option is to use multi-level marketing as the main selling method for your own distribution business.

2. MLM in Context

Products can reach the public by a number of routes:

  1. Shops. Items are sold to shops by the companies' own sales representatives or wholesalers who sell them on at a profit.

  2. Mail Order. Items are sold through catalogues or advertisements and sent direct to the customer's home.

  3. Salesforce. Sales people visit customers and sell direct. Items may be delivered later or bought on the spot. A company may have its own salesforce, or it may sell its products to a selling company.

  4. Multi-Level Marketing. Self-employed distributors sell the companyís products to customers and also introduce new self-employed distributors to the company. Companies know for their involvement in multi-level marketing are Avon, Tupperware, Wonder Cooker and World Book - Childcraft Int.

3. Multi-Level Marketing

(i) Network selling.

MLM is also know as Network Marketing. Networking is the process whereby individuals make advantageous personal contacts in a social context. Network Marketing is also done very much in a social context. Participants do it to supplement their income on a part-time basis. In many cases network marketing methods can now become a social activity in themselves. Individuals can also loose interest, so recruiting new people becomes a way of maintaining enthusiasm.

(ii) Profits and Bonuses

Items are bought at a discount and sold on at a profit to other distributors or to consumers. Bonuses and royalties encourage further development of the network.

(iii) Applications

A company may run its own MLM operation, or sell its products to an MLM company. The skill of the MLM company is its ability to empower the whole process which will be done through training, incentives and selection of key individuals to recruit others. They company is selling the whole experience of being one of their distributors as well as the product itself. In many ways it is like franchising the sales operation. The company may also invest in sales materials and some advertising.

4. Launching a New Product

Direct selling methods are suited to any high quality household and personal products that can conveniently be distributed by a salesperson. It is particularly suitable for products requiring demonstration or with features that can be explained better verbally. Whilst there is a great deal of skill in developing suitable MLM methods it is essential that the product itself is sufficiently attractive. Products are usually of a distinctive nature, innovative in some way and importantly they must be conductive to the demands of transportation and stocking (in the home). It is important that distributors can sustain an enthusiasm for the product. Water filters are a typical example of a product meeting these requirements.

When a new product is introduced to the marketplace, the MLM company begins by developing a marketing plan and training package for the product. A group of enthusiastic people from different parts of the country are recruited and thoroughly trained. These first distributors are then assisted to recruit further distributors (e.g. by staging seminars, talks etc.). The key things to get rights are sales force structure, incentives and selling methods.

5. Developing the Network

The company sponsors a number of individuals. These in turn sponsor other distributors and so on. The sponsor is either the person who introduced the person to the company or someone nominated by the company if they have been approached directly themselves. Sponsors benefit from the success of the distributors, so they have an incentive to give them as much assistance as possible. New distributors pay an initial fee, receive a pack of information and sign an agreement.

Sponsors normally supply their local distributors with stocks direct. The sponsor/distributor chain becomes the channel for distribution. In other cases, all distributors can order stocks direct from the company. Usual practice is to operate on a cash on deliver basis. Good sponsors will learn how to involve and motivate their distributors. Companies can encourage this through newsletters, awards, features, trips, events etc.

6. Selling Methods

The bulk of MLM sales are made on a one to one basis in the consumer's home. Contacts may be made direct or by referral. The company will provide training and information on how to build up a customer base. There may be extra marketing and training materials on sale to distributors (e.g. videos, brochures etc.).

The product may be demonstrated to a householder in their home, or as a Party Plan where the salesperson demonstrated the product to a group of customers at the home of a host customer.

Extensive materials may need to be produced to support the sales force. These may be provided in a starter pack including brochures, agreements, newsletters, order forms, business advice, selling advice etc.

7. Incentives

(i) Profits

Signed up distributors buy goods at the wholesale price. They must buy a minimum amount. It their usage is sufficient, some individuals may sign up to receive goods for their own use, but they will have to buy a minimum amount in a given time. Distributors can earn income by selling the companyís products and making a profit o the wholesale price. The retail price is fixed. Profits can be made on sales to consumers or sales to their distributors.

(ii) Discounts

Distributors become eligible for greater discounts as their monthly sales increase. The more you buy, the greater the discount - and the greater the incentive to find more distributors to sell on to. There will be a sliding scale with discounts reaching as much as 50% for the highest volumes. These discount structures are key to motivating distributors to sell and to introduce further distributors.

(iii) Bonuses

Bonuses can be available (in the form of a commission on sales) when the maximum discount level has been reached. Additionally if a recruit of the distributor reaches the maximum discount rate, the manufacturer can pay to the distributor a bonus on the recruitís sales. When a distributor reaches the maximum discount level they can stop working through a sponsor and deal direct with the company. This prevents them suffering when their first level distributors can claim maximum discount on them. The bonus is an incentive to break away from a full developed network and set up a new one.

These systems are complex. Each needs to be planned according to the circumstances. Other bonuses are available to encourage development of the network in other different ways. It is important that margins are build into the retail price that can sustain those marketing activities.

6. Applying MLM methods in Your Business

You may decide to use an MLM company to market your goods for you. Some will develop a sales network for the product, other will include it as part of a group of products which they market this way, possibly in a catalogue. The Direct Sales Association and the Network Marketing Association both have a code of goods practice. Ensure any company you choose is a member of one of these bodies.

Many companies operate in this field and they will be constantly testing products only a few of which will become established. All the same, they will look to recoup their development costs, so it pays to be very cautious, especially if the MLM company is making tempting offers and asking for money up front. Look out for companies who provide training to their distributors free of charge. Check out the quality of any promotional material the company provides. Pay special attention to any cost involved. If possible try to obtain details of agents to ask them about the company.

If you wish to set up your own operation, it is best to develop it gradually in conjunction with other marketing activities. A small scale selling operation will produce experience of how best to sell the product. An MLM ìpackageî can then be developed and tested with various distributors. if the results are good you may decide to invest in a fuller MLM operation.

9. Abuses and Regulation

(i) Pyramid selling

In a system that relies heavily upon motivating private individuals to sell there was a lot of abuse in the early days. When abuse occurs, it is popularly know as pyramid selling. This can take many different forms. The fact that it is difficult to understand is part of the deception. In most cases the problem is that the development of the network has become the main source of income, and the product itself is just a pretext to do this. Other sharp practices can include:

(a) Excessive entry fees charged

(b) Distributors pressured to buy large quantities of stocks before they know whether or not they can sell them

(c) No real concern with the sales of the product to the consumer

(d) No written agreements

(e) No training

(f) High pressure sales methods encouraged

(g) False impression of the benefits given.

(ii) Legislation

Multi-Level Marketing is now governed by legislation. There is a 14 day cooling off period for new recruits. If distributors wish to opt out they are entitled to their money back. The maximum initial registration cost that can be asked is £75. The company is obliged to buy back undamaged stock at 90% of the price it a distributor decides to stop distributing. Additionally other acts to be considered are the Consumer Protection Act and the Sales of Goods Act.

(iii) Regulators

The Department of Trade and Industry has responsibility for monitoring and enforcing the legislation for pyramid selling and similar trading schemes contained in the Fair Trading Act and Pyramid Selling regulations. the Direct Mail Services Standard Board has a set of regulations which relate to any poster advertising carried out in respect of this type of business.

10. Useful Tips

(i) There are many different MLM methods and types of company. Ensure you fully understand the systems you propose to use and ensure you can afford the development and running costs.

(ii) Get legal advice on distributor agreements, and any contract you make with MLM companies.

(iii) Some people object to MLM on principle. Ensure you are happy that the methods you employ can be applied ethically before you embark on a project.

11. Useful Addresses

Direct Selling Association
29 Floral Street
London
WC2E 9OP
Tel: (0171) 497 1234

Direct Mail Services Standards Board
26 Eccleston Street
London
SW1W 9PY
Tel: (0171) 624 8651

The Direct Marketing Association Ltd
Haymarket House
1 Oxendon Street
London
SW1Y 4EE
Tel: (0171) 321 2525

Department of Trade and Industry
Consumer Affairs Division

10-18 Victoria Street
London
SW1H 0NN
Tel: (0171) 215 3302

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