Network marketing: Scam or straight business? [Nation (Kenya)]
(Nation (Kenya) Via Acquire Media NewsEdge) Two years ago in November 2012, Wangui* was seated in a conference room waiting to listen to a presentation that her friend had invited her to. But her friend had not revealed the nature of the business. "Just come and listen," she'd begged.
Looking around, Wangui spotted at least 30 others in the room, most of them women. At 6pm, one of them took to the front. After a round of introductions, she turned to the projected PowerPoint slides to take them through a presentation she promised would 'change their lives'.
"It wasn't until 15 minutes into the presentation that I realised what this meeting was all about: network marketing. I was offended that my friend thought I would want to sell products to make some extra money. If I had known what she was really inviting me for, I would not have come," says the 38-year-old travel consultant and mother of two boys.
What she heard in this presentation was no different from the clichés she'd heard in others: financial freedom, dreaming big, a viable Plan B, running your own business, taking control of your future, earnings that triple in the space of a few months.
This is sort of social event has become the new norm for many Kenyans. Every day, little groups gather in hotels, offices, houses and conference centres in similar manner. Network marketing in itself is not a new phenomenon for the women of Kenya. It is touted as a business model that provides an alternative to the traditional retail model that involves wholesaling and advertising.
With network marketing, investors use their friends, family acquaintances and colleagues to sell their products and recruit new members to the company. In the early 1990s, the first such companies, pushing mostly beauty products, came to light.
By the late 2000s, there were at least 10 active companies that were building network marketing businesses in Kenya. Now there are hundreds of companies and sub-companies pushing anything from jewellery and watches to personal care products, nutrition supplements and even travel plans.
Network marketing has been rejected as a business model by many Kenyans because of its association to pyramid schemes – and it is admittedly quite easy to get the two confused.
So how do you separate the two?
A pyramid scheme is the classic case of robbing Peter to pay Paul: The hallmark of this scheme is the promise of handsome returns in a short period of time for doing nothing other than handing your money over to someone, and recruiting others to do the same. The money you hand over pays the layer of 'investors' higher up the pyramid that were recruited earlier than you were. In turn, the members you recruit – and the ones they recruit – will be the source of your income. And so the larger the network branch you started grows, the richer you presumably become. Pyramid schemes collapse when there isn't enough money coming from the bottom of the pyramid to continue paying those higher up.
However, with a multilevel marketing business, there is a product to be sold, and your money will come from product sales. And therein lies the distinction between the two: A legitimate network marketing business makes money from product sales. A pyramid scheme makes money from recruiting people.
But beware: just because there is a product doesn't mean it is not a pyramid scheme.
Wangui eventually signed up to the network she had been invited to, selling home- and personal-care products. "What I liked about this network marketing was their tailored strategy in making money. It focused on a faster growth in the company through your network, not just on products."To start your business, you sign up to an existing network and buy products," she continues. "These products are either for resale or for personal use. But you are advised to use the products so that you can sell them more easily. You earn your money from the activity of the people in your network – when they purchase products for resale, and when they recruit someone to join their own network as a distributor."
The companies that sell these products each have a commissions and bonuses package to recognise and reward this activity. These cash payments are subject to the withholding tax laws of the land.There are also other goodies aside from this. New cars, all-expenses-paid trips to fantasy destinations, international training and leadership courses are granted to sterling recruiters. There is even a retirement plan component for some.
Wangui says she has nothing to regret. "The business has since changed my life – I have signed up over 400 distributors to my network, and I raking in over a million shillings a month from their activity. I make more money from my network marketing business than I do from my nine-to-five," she says.
Helen* does not consider herself as lucky. She fell prey to a pyramid scheme disguised as an MLM company. In the last five years, she has tried her hand at three companies but none of her businesses have been successful. What drew her to join her last network marketing business, was that it had done away with selling products altogether as a way to earn money. It had taken a shortcut, and focused on building a network only. "The company's approach made it seem like selling products could only get me so far, and could sustain my business for so long. I gathered that the products would yield a small profit, but the big monies come from a growing network."But it collapsed. "I was unable to recruit people into my network, so it eventually flat-lined," says the 36-year-old single mother. She has since washed her hands off network marketing for good.
Elsie*, 28, has been running her network marketing business since June 2013. The company sells travel-related packages. Her network has 10 people to date. "You build your network from the people you know – your family, your social circles, your professional acquaintances," she says. "You invite them to listen to the presentations and to connect them to the products. Then you follow them up for a response. If they say yes, you train them on the products and how to build their own network. If they say no, you swallow the rejection and try again with someone else."
Building this network that will distribute the products for you is the real challenge in network marketing. Because admittedly, some people do not have the social skills to make this happen. But does that make MLM businesses a dud?
Odhiambo Ramogi, a financial and business consultant with Elim Consulting, says that there are a number of factors that impact on this sort of business, and they are not unusual to MLMs. "Like any other business model, network marketing is susceptible to competition, lack of creativity and poor management.
Most of the products sold by network marketers are luxury goods. The target market of these products is high-income earners.
And the problem is, they may be selective in the brands they use. This means that the model will crumble in areas where there is no large or strong middle class. "In some cases, the agents are poorly trained and become a bother rather than solution providers."
In some instances, though, and especially where the MLM is more network- than product-based, pyramid scheme problems become a factor. "The market … gets concentrated too early so that no new entrants become possible," says Ramogi.
But it's not all bad, according to Ramogi. There are many instances where network marketing agents go beyond these challenges to deliver sales. "They get creative by focusing on the products being sold as an investment where both parties benefit."
Recent network marketing schemes are making the business even more attractive to the masses. What they do is to tweak some aspects of this business model: A majority have done away with the need to buy and stock products at home, they focus on building the network that will distribute these products.
Others are web-based, allowing you to move your products online. Others are riding on the already-existing networks of social media to build their own distribution networks.
Even if there are products involved, be wary about what you are being invited for. Use our sidebar to guide you to the nature of the business your network marketer friend is involved in.
So what does one need to look out for when considering a network marketing business? "What you need to be careful about," says Frank Sabwa, a personal finance expert with Achievers Limited, "is that you understand the compensation structure, and you understand the products.
You as the network marketer are endorsing the products so ascertain they are, indeed, what you say they are. Also, conduct an independent background check to ensure that the company whose products you are backing is a legal one."
Is your network marketing company posing as a pyramid scheme?
Network marketing companies offer promises of riches to those who sign up. But keep these six questions in mind before you do:Can you make a sustainable profit from just selling the product, without having to recruit a single person?How long does it take to for you to make money, and how many distributors do you have to recruit to make money?How much of the product is sold to retail customers, that is, customers who aren't also distributors in the network?Does the company's compensation plan incentivise you to buy large amounts of products to qualify for a more senior position in the network and bonus cheques?Are the expenses for running the business higher than for the average distributor?What's the failure rate and average compensation per distributor?
*Names have been changed.
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