Sunday, August 17, 2014

MLM Basics: Why are there so many names for MLM?

Have you ever wondered why are there so many different names for multi-level marketing? Here are most of them:

There are probably a few more I missed. If you spot some new ones not on this list, as a something-marketing, feel free to let me know via the comments.

Any way, why are there so many fancy names for the same thing?  Fraud experts, such as Tracy Coenen say this is an attempt to obfuscate and distract from the bad reputation multi-level marketing had picked up over the decades it had been in existence. However, I think this is also a symptom of how the decentralized nature of MLM became a sin, not a virtue. People are just appropriating terms that sounds SOMEWHAT similar to multi-level marketing, and in some cases, inventing them out of thin air.

First, let us define multi-level marketing... a marketing strategy where the sales force is compensated on multiple levels... direct sales profit, and portion of sales profit achieved by other salespeople they recruited (downlines). Remember, MLM = direct sales + commission based on downline sales.

But first, we have to clear up a few myths...




Network Marketing is NOT Franchising

A lot of MLM Noobs (or bad coaches) claim that joining a network marketing company is like owning a franchise. It's NOT the same. There is a LEGAL DEFINITION of franchising as per "FTC Franchising Rules" (in the US). A franchise has three parts:

  • (1) Franchisor Trademark -- the franchisee got a license to use the franchisor's trademark. You see that like McDonalds, Snap-on Tools, Subway Sandwiches, and so on, 
  • (2) Franchise Fee Payment -- the fee paid by franchisee to franchisor,  can be called franchise fee, consulting fee, royalty payment, training fee, etc. Goods purchase are usually exempt if company did provide a bonafide wholesale price and minimum qty is not excessive
  • (3) Franchise Business System -- in general, franchisor have a carefully laid out marketing plan / business system on how the franchise should be run that limits how the franchise and trademark can be presented and how the business should be run. 
So why is MLM NOT franchising? Because MLMs don't charge distributors large free payments for signup or continue to charge maintenance fee, or ongoing training fee or such, thus does not fit #2 above. Typical franchises starts at 20000 (twenty thousand) dollars and for something significant like a McDonalds can go up to millions of dollars. 

Bad MLM coaches and recruiters are known to make this sort of fraudulent misrepresentation to make what they are doing sound LESS like recruiting. They will talk about "income", "own your destiny", "be a business owner", and so on. They may be trying to channel Robert "Rich Dad" Kiyosaki and his Amway-derived lessons... and they may be misrepresenting the opportunity. 


Network Marketing is NOT the Same as Direct Sales (merely related to it)

A lot of bad MLM coaches and recruiters will claim that direct sales and MLM are synonyms and thus interchangeable. They are NOT. MLM is ONE SUBTYPE of Direct-Sales, where the participants are paid two ways: by direct retail profit, and by commission generated by sales generated by his/her "downlines". Pure direct sales means direct retail profit only. 

It's worth nothing that MLM industry organization is "Direct Selling Association" (DSA), which predates MLM by about 70 years. DSA was originally founded as "Agents Credit Association" (for door-to-door salesmen) back in 1910. MLM did not exist formally until the FTC. vs. Amway decision in 1979. (Though it may have been around informally for a decade before that). 

It's also worth noting that most modern MLMs have lost the direct sales component, due to advent of drop-shipping. Customers order through the agent, or through agent's website, and the orders are then fulfilled directly by the company and shipped directly to the customer. The agents are no longer expected to carry inventory (except what's needed to conduct demonstrations or samples to hand out). 


Network Marketing is NOT the same as Referral Marketing (merely related to it)

Some MLM noobs, or bad MLM coaches, often refer to network marketing as referral marketing or referral sales. This is a very dangerous mistake and represents a fundamental lack of understanding of both the actual meaning of the term, and the legal issues.

Referral marketing is usually done by individuals who simply want to share a great product with friends and family, and NOT after financial gain. Primary motive is altruism, not profit. The referrer have a personal relationship with the new customers.  Some bad MLM coaches advocate this aspect by encouraging you to make a list of everyone you know, friends, family, etc., and go after them first, but if you are doing it for profit, then it's NOT referral marketing.

What most MLM noobs call referral marketing is actually AFFILIATE MARKETING, where affiliates and new customers do NOT know each other, and the affiliate's primary motive is financial gain. He is referring products to people who need it because he gets paid doing so.

If you still don't get it, here's an infographic from ReferralCandy.com that explained it very clearly.

Furthermore, there's a specific version of referral marketing called "referral sales", which is illegal. Don't EVER refer to network marketing as referral sales. 

If a company offers you a discount to a product you purchased, contingent on you referring other people who also purchase the product, that's a referral sales and that's ILLEGAL, because you basically paid a fee to "join", then was promised payment (discount) for every person you recruit (who also paid a fee to "join"), making it a pyramid scheme.

EX: You bought a furnace, and the seller tells you that the price is $1000, but if you can find more people who like the furnace, for each one he sold a furnace to he'll knock $100 off the price. (I.e. find 10 people and your furnace is free).

Here's the Iowa version of the law prohibiting referral sales: Iowa Code 714.16(2)(b)
      The advertisement for sale, lease or rent, or the actual
      sale, lease, or rental of any merchandise at a price or with a rebate
      or payment or other consideration to the purchaser which is
      contingent upon the procurement of prospective customers provided by
      the purchaser, or the procurement of sales, leases, or rentals to
      persons suggested by the purchaser, is declared to be an unlawful
      practice rendering any obligation incurred by the buyer in connection
      therewith, completely void and a nullity. 
Yes, this is ILLEGAL, in ALL FIFTY US STATES. I'll let MLM lawyer Jeff Babener explain why MLM is NOT referral sales.

Now, you're probably asking, wait, don't companies pay referral fees all the time? Like banks offering "refer a friend to open an account here and both you and him gets $10"? Ah, but you don't purchase an account from a bank. So it doesn't count. And you can't get rich from these tiny little referral fees, as there are limits on them, like max 5 per month or something.


Network Marketing is NOT the same as Affiliate Marketing (merely related to it)

As mentioned before in referral marketing, affiliate marketing is NOT referral marketing. In affiliate marketing, each affiliate is rewarded for each customer (or prospective customer) brought to the merchant. It is a type of performance-based marketing, and network marketing (or MLM, if you will) is like that as you are compensated by sales done by your downlines (i.e. customers brought in by your downlines), not the same, as in affiliate marketing, you are compensated by sales done BY YOU (not your downlines).

There are many ways to abuse affiliate marketing, esp. those merchants who pay small fees for referrals on the Internet. eBay, back in mid 2000's, was paying a lot of referral fees without auditing much, leading to many schemes to cheat eBay that only recently lead to convictions.

Most modern network marketing companies do NOT have their members sell directly any more (i.e. they no longer have a 'direct sales' component) when companies dropship stuff straight from warehouse, so many of them have adopted the "affiliate marketing" moniker, most notably, Vemma, which does NOT expect its members to retail their Vemma and Verve drinks. Instead, Vemma expects its "affiliates" to let "customers" order more drinks through the affiliate's online storefront, and the orders will be fulfilled directly by Vemma. However, each affiliate is expected to order drinks for themselves every month, both for self consumption and for "sharing" (i.e. demos, giveaways). This has lead to charges of potential pyramid scheme, since their purchases are counted for commission by their uplines, and they are also encouraged to recruit others who do the same so they can earn commissions.


Network Marketing by any other name is still Network Marketing

Network marketing companies, attempting to distance itself from the negative connotation of network marketing, or as some form of new marketing campaign, often resort to inventing new terms such as "dual marketing" (Mary Kay), "concentric marketing" (Burnlounge), and "inline marketing" (Nutraceuticals Inc.) but when you examine their comp plan they are still network marketing / multi-level marketing. The alleged differences the company claimed, if any, from "normal" network marketing, are non-existent, or are so trivial it is not worth noting.


Network Marketing and Pyramid Scheme: the good and evil twins

Network Marketing's evil twin is the infamous pyramid scheme. The problem is how to tell them apart, as they are twins... and they look virtually identical, and they often act the same. So how do you tell them apart? By their "intentions" as inferred from their actions.

According to the court that ruled on FTC vs Burnlounge, the difference between network marketing, and a well-disguised pyramid scheme (i.e. product-based pyramid scheme) is one of intent. Are the rewards paid out "primarily" for recruitment, or sales? Are (distributors) motivated by opportunity to earn rewards from recruitment, or sales of items? The following 5 factors were discussed:
  • Purchasing patterns -- when distributors bought premium products while non-distributors don't, AND the rewards for premium products are greater, there's likely "pay to play" involved 
  • Lack of value -- product value is not commensurate with rewards paid, thus motivation for purchase is to maximize rewards, thus "pay to play"
  • Requirements to buy premium products to increase earning potential -- instead of paying reward strictly on sales amount, high reward levels are only unlocked through purchase of premium products, would indicate people would not have bought premium products except to unlock higher rewards, thus, "pay to play"
  • Lack of consumer safeguards -- lack of refund mechanism or rules, lack of protecting against inventory loading, etc. would indicate possible pyramid scheme
  • Emphasis of the Marketing -- if the marketing effort is mostly on recruitment, rather than on the products offered, it is likely a pyramid scheme. 
Conclusion

Network Marketing, i.e. multi-level marketing can be extremely dangerous to the unwary due to its evil twin, the pyramid scheme, that are very difficult to tell apart. As one financial writer wrote: "what is not clear is the point at which legitimacy disappears and scumbaggery takes over". The different alternate names surely does not help, when they are often completely different marketing strategies that are barely related to network marketing, or are just new words made up to sound different, but is still the same (old wine, new bottle). Add badly trained or unscrupulous members and coaches out to score a quick buck through recruitment (which is often illegal) and you can wander into a minefield without realizing it.

Educate yourself, and don't be distracted by fancy names.


References

http://www.sequenceinc.com/fraudfiles/2012/01/inline-marketing-scam-same-mlm-scam-different-mlm-name/
http://seekingalpha.com/article/2270643-battle-over-burnlounge-both-sides-claiming-victory

1 comment:

  1. this blog gives so much insight on the different mlm businesses out there... this was a great read

    ReplyDelete