The End of Network Marketing?
A deadly combination of greed, laziness and stupidity amongst distributor networks is slowly – but surely – killing the enlightened concept of Network Marketing. Now even MLM companies are jumping on the bandwagon… and hastening its demise!
by John Counsel
There’s an uncomfortably-perceptive “Peanuts” cartoon in which Linus explains to Charlie Brown his personal philosophy of life.
“I always run away from problems,” he informs Charlie. “In fact, there’s no problem so big that you can’t run away from it!”
The chilling truth is that most MLMers live by that same philosophy. Others adopt the Ostrich Philosophy. (This is just a more stationery approach to the same principle, in which you hide your head in the sand instead of taking to your heels when confronted by any kind of threatening situation.)
In recent years we’ve observed this “philosophy” in action as people in the industry have sought to avoid problems rather than solve them. They’ve busily sought refuges instead of answers.
This accelerating trend toward relieving the pain instead of curing the disease has now entered a whole new phase… and, like the fool who thinks the cure for gangrene is to simply rearrange the bandage (or apply a new one) without addressing the cause of the disease, not only does death become inevitable, but the panic-stricken reactions actually hasten the end.
The end of MLM as we know it is now actually in sight for those willing and able to see the obvious. (As always, there are none so blind as those who will not see. That’s most people in the industry, sadly.)
The rot set in more than a decade ago with the introduction of recruiting for consumption rather than sales. It was easier. It was an “answer” to rejection. (In reality, it wasn’t any kind of answer at all. It was merely a relief.)
It made sponsoring easier, too. “You don’t have to sell, just buy and consume, sponsor others to do the same and then wait for the bonuses!” was the catchcry.
Most are still waiting.
Some people made money with this approach. A vastly bigger number didn’t. (Because these networks were now bigger than ever… which tends to happen when you recruit customers to buy direct at wholesale prices and they only buy for themselves. The total sales don’t grow at anything like the number of distributors in these networks.)
Some companies complained about this trend. Others bowed to the “inevitable” (because they found it easier to avoid the problem than come up with answers, too.)
Other companies did it a little more “creatively”… they simply slanted their reward structures to penalise retailers and reward recruiters. The payouts to mega-recruiters through level after level of override royalties simply forced product prices so high that they became impossible to retail. So network members had little real choice other than to recruit their customers so they could buy at an affordable price — wholesale!
This approach had other “benefits”, too. Retail margins become meaningless when it’s effectively impossible to sell a product at those prices. But, by offering astonishingly high retail mark-ups to prospective recruits, you throw out a huge, juicy, powerful emotional lure. And you draw lots of gullible fish who can’t resist their own greed.
The hidden hook behind that illusory bait is that you will almost never achieve those huge mark-ups. Instead, you’ll end up having to recruit customers to buy wholesale — using those huge, impossible mark-ups as the bait to get them to join!
Then you’ll often find that, because so much of the available money has been allocated to those spurious retail mark-ups, and to reward the mega-recruiters, there’s not too much left for the rank and file by way of bonuses.
Some companies are now offering a new “solution” to overcome the pain this trend is causing them..
Instead of having to provide all those “distributors” who never sell, only consume, with monthly magazines, bonus statements, updated price lists, field support and training, rallies, etc., they decide to “go with the flow” and make it unnecessary for their networks to recruit customers as distributors (because they’re too afraid of rejection — or, perhaps, the idea of reward for effort!).
The “solution”?
Let the customers order direct from the company!
Now the network only has to refer new customers to a toll-free number and a product catalogue — or some similar system — and sit back and wait for the bonuses to roll in. Of course, they don’t make as much as before, because the company has to fund this system of customer service. So margins to distributors are slashed (well, they’re not doing any work to earn them, are they?)
When questioned about why they’ve gone this route, the response is pretty much universal: this “high-tech” approach to “customer service” is the latest thing amongst the major retail chains. If they’re doing it, it must work. So we should do it.
Maybe.
And maybe not.
What we really need to examine are the reasons why the major retailers are using this type of system to build closer customer relationships.
The bottom line in any retail sales transaction these days is this:
A one-off sale to a customer is usually made at a loss to the retailer.
A new customer only becomes profitable after months of buying, because of the huge infrastructure and marketing costs involved in traditional retailing.
So the purpose of the exercise is to establish and foster closer relationships with their customers. Staff training, database marketing, direct response marketing … these are all being applied to build customer loyalty and trust.
The problem for the big retail chains is simple: they’re impersonal. Their staff members are employees. Customers do not have real relationships with major retail chains!
What this new wave of relational marketing techniques hopes to achieve is to create the illusion of a relationship by computer technology. Personalised letters. Telemarketing. Special, personalised invitations and offers — that everyone knows is generated by a computer!
It has been predicted that retailing will branch into three areas in the next decade and beyond:
- Huge, robot-controlled warehouses that you access via your interactive television set or the Internet. You pay by credit card, EFTPOS or E-cash and the goods are delivered to your door.
- Franchising — the area where most small retailers will be forced to go in order to survive.
- Direct selling (MLM, party plan, etc.) — which will be the boom area because, in an increasingly isolated, hostile, neurotic world, this will be the one retail area where personal relationships are the greatest asset!
So, in an attempt to “keep up” with the major retail chains, more and more MLM companies are preparing to abandon their greatest advantage — their strongest asset! — in favour of the ILLUSION of computer-managed, synthesized pseudo-relationships with their customers!
There are only two explanations which could justify this decision.
- They simply don’t have the solutions that allow them to build proper customer relationships through their networks — so those relationships don’t really exist anyway.
- Distributor networks will eventually become superfluous. In which case, why bother continuing to pay them?
MLM… RIP!
If MLM companies are serious about this industry and its future, and the future of their distributor networks, instead of digging a grave for multi-level marketing, they’ll begin researching ways to make their distributors more productive, more knowledgeable, more willing and more skilled at establishing, building and enhancing long-lasting, loyal, profitable customer relationships and teaching and supporting them in doing so. They’ll focus their attention and resources on enhancing their strongest asset, not undermining it!
They certainly won’t throw themselves headlong into any kind of foolish, no-win race to sacrifice the one h-u-g-e advantage they now enjoy over traditional retailers.
If they do, the explanation is simple: they’re not enjoying that huge advantage because their distributor networks are barking up the wrong tree!
All this is bad enough. But there’s another deadly threat looming in the wings.
For years now, too many MLMers have been telling the world how much money the industry supposedly turns over, how so many people are earning fabulous incomes and living like kings.
The facts are otherwise, of course, but for the Australian Tax Office, “where there’s smoke there’s fire!”
So where are all these fabulous incomes being hidden? (Because they’re certainly not showing up on the tax returns of the vast majority of people in the industry.)
It’s no secret that the government wants to get its grasping, wasteful hands on as much money as possible, and the Tax Office is charged with finding ways to do it. If it could extract Pay-As-You-Earn instalments, Medicare levies, Superannuation and other on-costs to employment from the bonus earnings of distributors (through the MLM companies), it would be like heaven on earth for the Tax Office.
It has tried before to prove in court that distributors are really employees of MLM companies, not independent business operators. Fortunately, common sense (and a lot of money in legal fees) won the day and the Tax Office retreated to lick its wounds… and plan its next attack!
“Once bitten, twice shy” applies here. The next attack will not be on some big, rich, multi-national organisation with lots of resources (especially money and political clout overseas). It will more likely be some small, Australian outfit with limited resources, who can’t afford to fund a protracted legal battle.
Despite grandstanding in the past by some MLM and direct selling companies about their commitment to the industry and their fellow companies, history has shown otherwise. When one company was targeted in the early 1980s, it was quite astounding to see how pre-occupied these “champions” of free enterprise became, and how much distance they managed to put between themselves and the hapless target of the Tax Office, who was left to fight alone – and at its own expense.
There’s little reason to believe that things will be any different next time around. The victim will almost certainly be left to fend for itself. But the damage will be terminal for the industry as we know it. The victim will not be able to afford to win the fight any more than it can afford to lose it. The jackals will target what they see as the smallest, weakest, most vulnerable and unprotected member of the herd. Then they’ll move in for the kill.
They’ll use recruiting for consumption as their major weapon to prove that those who use this system do not create profit… they only earn income. Therefore, they are not in business and are not eligible to claim business-type tax deductions. These people are, in fact, employees of the MLM companies to all intents and purposes.
The precedent will then be used against the rest of the industry, and MLM will no longer exist as we now know it in this country.
Can you imagine how much will be paid in taxes, fines and penalties when the ATO audits distributor networks for illegitimate tax deductions claimed over the years? Not to mention the outcomes – and costs – of legal action taken by distributors against people who sponsored them on the understanding that these tax deductions were quite legitimate, even in a wholesale-consumption system.
Once again, the government and its bureaucrats will have got it wrong, and will have killed off yet another productive, profitable sector of the economy through a combination of its own greed and stupidity – and the greed, laziness, fear and stupidity of the industry itself.
It doesn’t have to be this way.
What’s the solution?
Don’t fall for the kind of nonsense being constantly peddled around the industry. If what you’re being offered appeals to greed, laziness, selfishness or fear, give it a miss!
Embrace it and all you’ll demonstrate is your own greed, laziness, selfishness, incompetence – and stupidity! (Especially now that you know better.)
Look for a MLM business opportunity that provides reward for effort. One that provides answers that work… that overcome the problems, not merely avoid them!
Our extensive research into the Australian MLM industry indicates that they’re few and far between. Many MLM companies have the potential to be like this, but lack the understanding or insight needed to turn that potential into reality. Don’t be fooled. Judge them by what the people and the company DO, not just by what they say or publish! Too often the reality is far removed from the initial promise.
It’s not all doom and gloom!
Some companies are now getting it right. They’re focusing on developing solutions for their distributor networks that enable them to become effective retailers and sponsors for all the right reasons.
They see the kinds of “solutions” in use in so many networks and companies for what they really are… ways to avoid the issue, not confront and overcome it.
They’re creative, productive, profitable and dynamic. They are true entrepreneurs.
NOT a dirty word!
“Entrepreneur” has become a bit of a dirty word in recent years, simply because it’s been applied wrongly (by the media and politicians, mostly). An entrepreneur is someone who is willing to take a calculated risk — and to accept the consequences of their choices.
Most of those to whom the term was applied in the high-flying 1980a were not true entrepreneurs. They never took risks. Their shareholders, bankers, advisers, employees, suppliers and the public did, while they stashed away millions of dollars – then claimed illness in order to avoid the consequences!
Most MLMers are no different in their motives, attitudes and behaviour. (They just don’t make the same kind of money.!)
They avoid risk, decisions, work, effort, and consequences. They are not true entrepreneurs! Yet MLM is the most entrepreneurial of all business systems. Is it any wonder we’re in such a sorry state? Or that we have such a poor public perception?
Until this industry can clean up its act, and rid itself of the greed, selfishness, fear, laziness and stupidity that permeate it at every level, there’s little hope for the future. And, whatever happens, we’ll have well and truly earned it.
It’s not too late
Look around. Find companies that don’t make these potentially-fatal errors in judgement. Companies that don’t confuse reward and recognition, activity and results. They exist. You just have to evaluate every opportunity offered to you with utmost care.
I'm always happy to talk to people (in Australia) about their concerns regarding MLM and MLM programs. Send me an e-mail. Or call me on 03 9841 4600 between 8 am and 8 pm Melbourne time.
© 1995 John Counsel. All rights reserved. No reproduction by any means permitted without prior written consent of the copyright owner.
This article appeared originally in Australian Business & Money-Making Opportunities magazine.
