“Direct selling- MLM is as good for a country as Red wine is for health”
Direct selling – MLM consulting requires us to answer many queries from various people wanting to really understand this method of retail.
There are some good and some not very good practices by well-known brands which get challenged by law enforcement agencies and the FTC and cause disrepute to the entire industry. Not to mention the unsustainable business models (known as pyramids, Ponzi’s, money circulation companies, etc.), the ones which compensate their agents using the MLM compensation plan.
Here are some of the commonly asked questions during our direct selling -MLM consulting meetings.
Q: How do the “Real” Direct selling businesses work?
A: The working of a direct selling company is very simple. The company sells you a product, and offers you a chance to join its marketing structure/distribution network.
However, you do not need to buy the products to join the network unless of course it is for personal use.
Consider this example. Say you (direct seller) have joined the marketing organization and sold a product to person “A” who likes it and wants to start selling it; person “A” can get enrolled at a Zero or a minimal cost (with 30 days’ money back guarantee) which actually covers the cost of the business information kit materials.
When he starts purchasing (for retailing or self-consumption), then the company, the direct seller (you) and person “A” all get payouts which are calculated on a fixed percentage of the purchase price of the product/s.
If subsequent direct sellers have been well-trained and inspired enough to get out there and consume product/s, generate sales, everyone (customer and the direct seller) stands a chance to earn an income.
And when you earn, you are motivated to put in more efforts in retailing thus increasing the chances of sale, in the end all stand to benefit!
Direct selling is transparent, sustainable (if managed carefully) and ethical (where the user is the brand ambassador) with little scope for malpractices (if monitored and policies enforced by the direct selling companies).
It can be compared to your normal 9-5 job too in many respects too. At your workplace, no matter which department you work for, the work you do adds to the value of the company.
Your efforts are either equal or more than the salary you earn. So basically your boss makes money using your earned money.
Another good example is the sales force in Fast Moving Consumer Goods (FMCG), Insurance or Direct Marketing.
The salesmen are normally paid a commission (apart from a fixed salary) of 12% (example), and on achieving all targets are rewarded with a bonus.
The sales manager, who has to motivate and supervise his sales team, earns (apart from a fixed salary) his own bonus and incentives.
But guess what! He also earns 3% (example)of all sales made from each of his salesmen.
And then there is the Branch Manager who reaps the highest profits for motivating his Sales Managers.
What if any of the levels (Salesmen, Sales manager and Branch manager) do not perform?
Obviously, they won’t make any commissions, bonuses or incentives but also would be fired. Since a percentage of turnover from product sales is reserved for paying salaries and they cannot be paid till sales happen as intended.
Doesn’t this sound familiar to the direct selling concept discussed earlier?
The truth is that the concept of direct selling applies in almost every business sphere but we just fail to recognize it. However, the difference is that with direct selling companies, you do not need to be at the top of the management to take home the fattest pay check. What you earn completely depends upon you; there is no cap or limit (exception being the compensation plans which have ceilings/capping on pay outs).
Q: How does a Viable direct selling company differ from a pyramid scheme (Ponzi Scheme or Money Circulation plan)?
Some people often confuse the two, but it’s necessary to differentiate. In a Pyramid Scheme (People based), a large number of people at the bottom of the pyramid pay the few at the top.
Basically every participant pays money to rise up the pyramid, and in turn makes money from new joiners who start off at the lower levels. You receive no products or services of any real value for your participation + there are compulsory unreasonable purchases one needs to make to stay qualified to earn an income.
The result of is rather predictable where the entire pyramid collapses with only the few at the top making money out of it.
Somewhat similar is the Pyramid scheme (Product based) where the participant who joined earlier earns money on sales done by the people below him without putting any effort.
This is where people need to know the difference between direct selling and Pyramid schemes which are very different although their marketing structure/network structure maybe similar.
The main aim of an ethical and legal direct selling company is to enlarge its distribution network by engaging as many people as possible; as direct sellers who can consume and promote the products.
Every company representative - direct seller makes money either through commissions on products he sells, or on what he earns as bonus when the person he enrolls starts selling. Earning money is as simple as selling products yourself or encouraging those you recruited to do the same.
In fact, unlike conventional jobs, here you can earn more money that the ones above you.
Q: Why do majority of direct selling companies from India close in 3-36 months?
It is first essential to understand what direct selling is.
To put it simply, it is when a company uses a common person to sell its products directly to consumers, rather than selling its goods at retail shops or other fixed retail locations.
Back to the question, majority of direct selling companies from India shut shop in 3-36 months because they jump in without doing intensive research in this field or even knowing why they chose this method to promote their products.
Blaming the government’s inefficiency regarding framing regulations or loopholes and grey areas in guidelines simply won’t do because there have been instances of some companies doing well despite no regulations.
“Direct selling is just as easy or as difficult as any other businesses”.
Like other businesses, direct selling too requires patience and a clear cut business plan in place, along with an understanding of the investments that go into it.
Also it is essential to note that the quality of the goods/services being promoted will determine the fate of the direct selling company. Promoting inferior products while trying to rope in direct sellers to avail of the business opportunity will not work in the long run.
Q: What role can direct selling play in development of our country?
Imagine an uneducated housewife in Sircilla (a small town in Andhra Pradesh with a population of a little more than 65000) selling beauty products and home ware to relatives and friends, or a retired bank employee selling TV connections to acquaintances for some income. And all of this with no investment or an investment (with a 30 days’ money back guarantee) as low as Rs 1500!
This is what direct selling can do for India’s masses even in remote areas and smaller towns. No wonder the idea is catching on; it is lucrative, ethical and one has little to lose.
Those involved in direct selling are not just involved in product training and sales, but they also get a chance to better their people-related skills and personality.
Many join for the added bonus of socializing and making new friends.
Q: Can an individual earn if he does not get in new people in his network?
The answer is “YES”.
Most people wrongly believe that one cannot make money without recruiting more people.
The basic premise of direct selling is to ‘directly sell’ the products and get a commission. However, if the buyers like the products so much that they themselves wish to start getting discounts/offers on the product or they want to sell the products to earn money and therefore join the team as direct sellers, this gives the entire team a chance to get compensated as per what they sell.
Q: How can you tell if the direct selling company is a good and honest one?
A: We suggest that you consider these three questions in order to take the right decision to avoid feeling ripped off-
1) How much are you required to pay to become a direct seller?
An honest direct selling company will ask you to pay a small amount as the start-up fee for the business information kit, and that too with a money back guarantee. But a Pyramid Scheme (people based) usually charges exorbitant amounts of money while signing up because their profits come from the fees earned by new users joining. A product based pyramid may have a free enrollment but would require the newbie to purchase unreasonable amount of inventory (without real market value) to qualify to earn commissions.
Do not be fooled by the fancy names given to the start-up fee charged which will apparently cover training costs and computer fees.
2) Will the company buy back unsold inventory?
A genuine direct selling company will buy back unsold (marketable) inventory or have a refund policy on the business information kit while a bogus company will leave you stranded with unsold stock, most of which will be low quality and high cost.
3) Are the company’s products sold to customers?
Direct selling companies usually sell a product to a consumer however, there is less percentage or no sale of a product in a Pyramid Scheme which works on the concept that older investors at the top of the pyramid should be paid.
By recruiting newer investors/buyers who are required to pay huge amounts as start-up fees or qualification fees (to qualify to earn commissions).
In the pyramid schemes the people also are offered a commission on getting new recruits which is either in a percentage of the investment done by the new recruit or a fixed commission.
One must additionally check, If the consumers who are not direct sellers find the retail price acceptable.
Make sure that the direct selling company (thru its existing direct sellers) is not pressurizing you to buy unnecessarily large quantities of the product.
Honest companies focus more on selling quality products at acceptable prices.
Q: What are the ethics of a direct selling company?
Most people think that direct selling companies bring profits only to those at the top who reap at the expense of those below who do the hard work but earn negligible profits.
This is not true at all!
As mentioned earlier, direct selling companies sell quality products while also offering consumers financial incentives to join and start selling the products themselves. Everyone is benefitted in the end.
It is important to note that the direct seller earns as much as the effort he puts in, and never less than that. So, while the company and the person who enrolled you get a percentage of what you sell, the lion’s share remains yours.
Also, when a direct seller first contacts a potential user, he first seeks to sell the product and then try to enroll the user only if he has liked the product/s and feels convinced enough to recommend it to other people.
Getting other people recruited will work in your favor because even if you may not be actively selling products for a period, you can still earn a bonus from the products sold by the people you enrolled provided the products are being consumed by them and their customers (who are not related to the opportunity as direct sellers).
Some benefits of honest direct selling include availing products at discounted rates or incentives on self-purchase or resale.
Merely recruiting people won’t suffice. The recruiter must train, assist and consistently lead by example (by doing personal sales) motivate his team to retail in order get a share of the sales done by his team /marketing organization
Q: What are the legal aspects of a direct selling company?
Before you have been recruited by the direct selling company, and before you have been appointed to recruit others, the question will arise as to whether this is a Pyramid Scheme or a legitimate business opportunity. This is a complex matter but the simple example below will help you differentiate.
Before you join you should be looking at parameters which will help you to avoid “Unsustainable business models which use the MLM compensation plans” also known as Ponzi’s (though business models which use a direct compensation plan or a single level compensation plan can also be a Ponzi), Pyramids, Money circulation, Money rotation, etc.
If you notice that as a direct seller, you are buying a product just to join the company or qualify for an income and not for personal usage or to create new markets, then you are most likely part of a Pyramid Scheme.
When you invite friends and relatives to join a direct selling company, your reputation is at stake especially if things don’t go as promised.
Here is a checklist that will help you ensure that you invest in a legitimate company and avoid being conned into joining a Pyramid Scheme.
Product and Price
- The company should sell high quality products that have an actual demand in the real-world marketplace. “If people don’t require a product, they will not buy it”.
- The product needs to be competitively priced with respect to similar products available in the market. Without this, no one would choose to buy something more expensive and which may not have the reliable brand value as market- sold products.
- The product should be ideally different from the other options currently available which would make it easy to sell.
- Post-sales service and customer assistance should be available to build a degree of trust and confidence.
- The product should be one that is enthusiastically bought even by people who do not become recruiters or participate in earning via the compensation program of the direct selling company.
- You should be able to participate in the company’s program with a very small (with a cooling off period clause) or without having to make any monetary investment in the business.
Purchase and Inventory Requirements
- The company’s compensation program should not require direct sellers to purchase large amounts of the product and hoard it.
- You should be allowed to buy or sell a product only when you or your customer needs it. This way you can be assured that you’ve not unnecessarily bought products which may not be sold, and moreover which the company will not buy back.
- Compulsory high monthly purchase should not be a prerequisite for you to get your incentive. The premise of direct selling is that you earn based on what you sell, no matter what the amount.
Sales and Commission Sources
- Sales commissions should be paid based on actual products or services sold by direct sellers to the end-user.
- The products should be of actual use to the consumer and not locked away in the basement or garage.
- The company’s compensation plan should not pay commissions or bonuses for just sponsoring or recruiting others.
- The emphasis should be on the actual sales made because this is what commissions and profits ultimately depend on.
- The company should ideally be able to prove what efforts it has undertaken to successfully market its products and ensure that it reaches the end users.
- The company’s direct sellers should not be pressurized to have ongoing retail requirements to qualify for commissions or rewards.
- Date of joining should not give an unfair advantage to the direct sellers who had joined initially.
Though some regulatory groups do not consider purchasing for personal use as a legitimate retail sale, the industry and many direct selling laws acknowledge the legitimacy of selling to non-participants as well as purchase in reasonable amounts for personal use.
Role of Direct sellers
- The direct sellers of the company should be required to actively participate in the development, motivation and management of their teams.
- Direct sellers should proactively perform genuine supervisory and distributing functions in selling the product /service to the ultimate consumer.
- The company’s promotional literature and training kit material should not contain exaggerated claims of income potential just to entice newer direct sellers to join.
- There should be no promises of specific income earning potential unless it can be verified and proved.
- The company should take the initiative to train its independent direct sellers in how to generate sales and increase their network by recruiting newer people. Especially the “Dos and Don’ts s”.
- There should be advanced levels of training offered to match direct sellers with more experience.
What if the individual does not know how to sell or help other people join the business?
- This is a common question posed by potential direct sellers and it is certainly a valid one. However, the good news is that companies offer orientation training to their new direct sellers.
Do email us for more information regarding direct selling – MLM, Pyramids, Ponzi’s, Money circulation, Network marketing and consultancy regarding direct selling- MLM.
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