Saturday, July 5, 2008

"Network marketing has long suffered from an information vacuum. Trade organizations have not kept reliable statistics. Business schools and mainstream financial publications have failed to acknowledge the industry's existence. Major media outlets have focused on [it] only when there were juicy scandals to report." (From the Foreword, Charles W. King and James W. Robinson, The New Professionals).

In the present economic climate it is worth investigating the features and benefits of network marketing (NM). The term network marketing may or may not be seen as a synonym for multivel marketing (MLM), but this is not the place to go into that question, and I will simply use the term "NM" throughout these notes. What is important is that in essence we're talking about a system of marketing that (i) moves goods, or provides services, not through normal retailing channels, but directly to the consumer and (ii) is characterised by a tiered, or "multilevel", commission structure.

While the industry has many detractors (and while, sadly, some NM companies and practitioners within it have themselves sometimes been the main culprits in bringing it into disrepute) it is a fascinating form of business which can yield very satisfactory results in terms of both income and personal growth. But it has to be properly understood, and approached with the same seriousness and reasoning that one would bring to any conventional business.

NM has a strong ally and advocate in the form of Prof. Charles W. King, a Harvard Ph.D. in business administration and currently professor of marketing in the College of Business Administration at the University of Illinois in Chicago, where he oversees Ph.D. programmes in Marketing, Strategic Positioning in Changing Market Structures, Network & Multilevel Marketing. Together with author James W. Robinson, currently the senior vice-president of the US Chamber of Commerce, King published an instructive book in 2000 titled The New Professionals and subtitled "The Rise of Network Marketing as the Next Major Profession", in which the tenets of NM are explored, along with the opportunities and difficulties associated with it.

Much can be, and has been, written about the benefits of NM, but in these notes I need to be brief.

I'll start from the negative side and address some of the misconceptions commonly associated with the industry.

Some objections to the business model

Multilevel remuneration

Many people regard "multilevel" as something of a swear word. But multilevel compensation is not, in principle, limited to NM. In conventional business – let's say a car dealership – it is not uncommon for a sales manager to earn an overriding commission on sales made by commission-earning salespeople on the floor, and for area managers to earn overrides (and/or bonuses) on sales in their area. The concept may well be applied somewhat differently in NM (and even within NM itself companies differ in respect of their marketing and compensation plans), but the idea is the same: you earn some income from your own efforts and some income from the efforts of the group you lead. Once one accepts the concept as legitimate in principle, the idea of multilevel (or "tiered") compensation in NM cannot, in any fairness, be criticised.

Pyramids and networks
"This is just another one of those pyramid schemes" is probably the most commonly heard objection when you try and explain your NM business to someone. But NM businesses are emphatically not the same pyramid schemes. Pyramid schemes are strictly outlawed in this country (as they are in all countries with decent business legislation) and NM companies have to comply with very strict legal requirements in order to be allowed to operate.

Having said that, the "pyramid" (or more accurately, triangular) structure is, of course, common to most hierarchies – visualise the structure of any conventional business with a CEO at the apex, some directors on the next "level", national managers on the next, and area managers, branch mangers, floor managers and workers on ever widening levels "downwards", and you have a pyramid or triangle – it's a shape you can't get away from where any kind of hierarchy is involved.

So the real problem is not the shape as such; rather, it is the picture most people have in their minds of "the guy at the top making all the money and the people at the bottom losing out". That may well be true for pyramid scams, but in a properly set up, legally constituted and registered NM company anyone who joins long after the company was launched is still potentially able to earn far more than someone who joined earlier (and, importantly, even more than the person who introduced him/her to the company) – it all depends on how hard you work, at whatever "level" you may be in the network.

This brings us to another question: that of so-called saturation. "Do the maths," the detractors say; "if every person gets 3 people 'under them' who each get 6, who each get 6 … etc., the market will soon saturate."

However, market saturation simply never occurs – not in NM (and especially not in NM!), and not in the more conventional business sector either. Take the insurance industry, for example: if you're an insurance consultant phoning prospective clients you will inevitably find that a few of the prospects you contact already have insurance and aren't interested in speaking to you, yet no one would tar that market with the "saturated" brush.

Every type of industry you can think of – motor vehicles, refrigerators, stationery, computers, restaurants, coffee shops, supermarkets, pharmacies … and on and on – regularly has new competitors entering the market, despite these industries having been around for decades – the market will never saturate.

In NM the likelihood of saturation is even smaller, because building an NM business is much, much harder work than opening a shop of bricks and mortar on a street front and having people walk across your threshold to buy. (I've had two of those businesses and been a partner in a third, and I know!) It's almost similar to the difference between studying part-time, where all the onus is on you to make something of it, and studying full-time, where classes are laid on which you just have to attend.

Distributor turnover/dropout rate
One of the other criticisms often levelled at NM is the rate at which people join and then drop out. But one shouldn't be surprised – many people come into NM thinking they can make a quick buck, and then quit when they don't. And while the impression may well sometimes be created by some presenters or members of NM companies that this is quick and easy money, reputable presenters and companies will always emphasise that if you don't work at it consistently and view it as a medium- to long-term endeavour, you will not meet with success. It's hard work. Should I say it again? It's hard work! Yet people join and then give up after a short time, which would be much like registering for a three-year degree and then quitting after three months because you haven't yet got your degree. The analogy is not far-fetched.

It's worth doing the homework
Many people dismiss out of hand the idea of participating in a NM business, but a dispassionate consideration of this option, including talking to people who understand the industry (both its wonders and its warts) rather than people who don't, could yield fruitful results.

To have a personal NM business costs a fraction of a fraction of what it costs to set up and maintain a conventional business with its attendant high overheads, and so the risks are negligible. What is needed initially is simply a sincere willingness to understand NM, to learn the ropes and to work hard – for as long as it takes to achieve what you want to achieve in financial terms, whether it's a R1 000 or R100 000 a month.

The considerable benefits of network marketing

Up to this point my main focus has been on trying to respond to some of the objections commonly brought against NM. I now want to focus on a few of the benefits, because although some NM companies, and/or individual participants within them, have sometimes been the industry's own worst enemies, one has to look beyond the bad eggs and see the whole for what it is, because twenty rotten eggs don't make a poultry farm.

In NM the poor can get richer
"The rich get richer and the poor get poorer" is a lament often heard, particularly when someone is criticising free market capitalism.

To a great extent that is true, because if "the poor" (however one may choose to define that term) have any source of income, it will usually be in the form of wages or salaries, which seldom keep up with inflation and seldom enable the recipients to become financially significantly better off. If a poor person doesn't earn a wage or salary, he/she may own a smallish business which, similarly, does not usually produce wealth.

It's often said that you need money to make money, and the truth of that can be seen, for example, in the fact that only those with large sums of money (or access to such funds) can afford to buy or set up businesses that are big enough or viable enough to produce a substantial income and possibly expand to produce increasingly more. In the category of big or viable businesses one could also include franchises, which, by their very nature, almost guarantee success. And not too many of us can afford one of those – even the "cheaper" ones are not exactly cheap!

Enter NM which, in essence, is minifranchising. The NM company has a range of products and/or services available, a ready-made marketing plan, and a manufacturing, supply and financial infrastructure. All it needs is to get those products and services out into the field, and it does so through "small" people, typically at a start-up cost of a few hundred rand, which is within reach of a far greater proportion of the population than the thousands or even millions required for conventional businesses and franchises. The secret is to apply the principles and methods of the company to the T (as is done in normal franchising) and to teach others to do the same. One writer has even referred to NM as "copycat marketing" and written a book with that phrase as its title) – the better you can replicate the company's tried and tested methods, the more successful you will be.

Tiers – a stroke of genius
Even those who know little about NM usually know enough to know that it is a system where people "sign up under" an introducer who is an existing member of the network, and that the introducer is then in a position to earn some income on work done by those on the "lower levels". The latter are linked in perpetuity to their introducers through their respective membership numbers, which is why one can build an NM business countrywide, or even worldwide in the case of an international NM company – the software programs keep track of who is linked to whom in the network, so that commissions and bonuses can be paid out accordingly, no matter where the business is carried out.

The way NM structures have been set up to enable you to earn in perpetuity from your group is actually very clever. In normal business it happens all too often that some of your best and best-trained employees, brokers or agents, once having learned the ropes from you, go off and start exactly the same kind of business as yours, sometimes literally up the road from you. Now not only do you lose them – those people in whom you've invested so much of your time and expertise – and the income you were receiving from their efforts, they are also going into direct competition with you. The genius in the NM model is that that kind of breaking away to your detriment after you've put all the effort into training and supporting your people does not happen (or happens only by rare exception and is not part of the way things are set up).

I want to return to the concept of leveraging, which, although I didn't mention it by name, came up a few paragraphs ago when I said an introducer can earn income on work done by those below him/her. What surprises me is the number of people who object so strongly to the idea as soon as the subject of NM comes up. Yet leveraging is everywhere. When you employ a domestic so that you can go out and work at a higher income than you're paying her, you're leveraging off her time. When you invest your money at a certain interest rate, you're leveraging off the ability of the institution concerned to generate an income for you that you could not generate by leaving your money in your wallet or under your mattress. If you're the employer in any business, you're in the business of leveraging. If you're a sales manager earning overrides from the sales of your sales staff, you're benefiting by leveraging. So one either accepts leveraging as legitimate (and ethical) in life and business generally, or one doesn't – one cannot say it's OK in some spheres, but not in NM.


Much more could be written about NM. Leading on from the previous paragraph I'll close with the observation that I'm astounded by the double standards people apply when judging NM as a business endeavour. Criteria that they would never dream of applying to more conventional business are the order of the day when it comes to NM – from the concept of leveraging through to the amount of time, effort and money one should expect to expend in order to ensure success in your business.

I'm not trying to paint an idyllic picture of NM – not at all. It's hard work, it has its difficulties – and it even has its crooks, sad to say. But an NM business is excellent as a home-based business, for you to build as small or as big as you like. If you like the idea of a business that requires integrity, a genuine concern for others, and a willingness to invest time and effort in other people if you hope to be successful, then NM is definitely the way to go.

Back to "The business model"