After the financial fraud in West Bengal came to light last month, multi-level marketing (MLM), Ponzi schemes and chit funds have often been lumped together. They aren’t the same, though. Mint Money highlighted the characteristics of chit funds and Ponzi schemes earlier this week. Here we dissect MLM.
What is this?
Not strictly financial products, these are basically selling structures where sales agents are not only paid for products they sell, but are also paid for products sold by other agents who they have recruited. The company could be selling anything from household items to cosmetics.
In some places these are referred to as pyramid schemes or network marketing. Once it starts, the bottom can go on expanding as newer agents get recruited. Many international companies have popularized their products through this method. Success stories include cosmetics retailer Oriflame, household goods company Amway and nutrition products company Herbalife International.
However, a majority of MLM schemes are a form of Ponzi investment where the originator is simply interested in rotating money given by individuals.
Why the criticism?
Many MLM-based companies have come under fire because of their business model. The basic structure is such that it may encourage an increase in the number of recruits without higher product sales. What this means is that many a times the attraction is simply to earn out of recruiting more people rather than earning from selling products. Unfortunately, many MLM schemes are even marketed to people as a scheme to earn money simply by recruiting other people and the emphasis on selling the underlying product is less.
Agents have to deliver on product sales targets and on recruitment targets, which is where the disconnect happens. In some cases, the earnings from increasing recruitment may supersede the product sales income. The schemes lose their viability when the bottom of the pyramid stops growing and the number of new agents joining slows down, making it hard to pay the older ones.
When this happens the people at the top of the pyramid are not so badly hit as they already have an established network, but the people at the bottom, who have just started out, lose out. Usually at the start, an agent has to buy the product and marketing kit, so there is a personal expense which needs to be recovered. If enough recruitment is not done, that money is lost.
What should you do?
The attraction to join such a scheme is understandable; the marketing pitch says you can work sitting at home, no qualifications are required and the process is rather simple. However, the opportunity for fraud is high. Be very sceptical of schemes in which your initial expense is high and which are promoted by emphasising recruitment of agents rather than sale of products. It’s wise to simply stay away.
What is this?
Not strictly financial products, these are basically selling structures where sales agents are not only paid for products they sell, but are also paid for products sold by other agents who they have recruited. The company could be selling anything from household items to cosmetics.
In some places these are referred to as pyramid schemes or network marketing. Once it starts, the bottom can go on expanding as newer agents get recruited. Many international companies have popularized their products through this method. Success stories include cosmetics retailer Oriflame, household goods company Amway and nutrition products company Herbalife International.
However, a majority of MLM schemes are a form of Ponzi investment where the originator is simply interested in rotating money given by individuals.
Why the criticism?
Many MLM-based companies have come under fire because of their business model. The basic structure is such that it may encourage an increase in the number of recruits without higher product sales. What this means is that many a times the attraction is simply to earn out of recruiting more people rather than earning from selling products. Unfortunately, many MLM schemes are even marketed to people as a scheme to earn money simply by recruiting other people and the emphasis on selling the underlying product is less.
Agents have to deliver on product sales targets and on recruitment targets, which is where the disconnect happens. In some cases, the earnings from increasing recruitment may supersede the product sales income. The schemes lose their viability when the bottom of the pyramid stops growing and the number of new agents joining slows down, making it hard to pay the older ones.
When this happens the people at the top of the pyramid are not so badly hit as they already have an established network, but the people at the bottom, who have just started out, lose out. Usually at the start, an agent has to buy the product and marketing kit, so there is a personal expense which needs to be recovered. If enough recruitment is not done, that money is lost.
What should you do?
The attraction to join such a scheme is understandable; the marketing pitch says you can work sitting at home, no qualifications are required and the process is rather simple. However, the opportunity for fraud is high. Be very sceptical of schemes in which your initial expense is high and which are promoted by emphasising recruitment of agents rather than sale of products. It’s wise to simply stay away.