This article is written by Somya Mishra
Let me tell you a real life story about multi-level marketing. There is a very well-known company called the Hindustan Unilever Ltd. which followed multi-level marketing system for selling its products in the beginning. It offered people to become its members, buy their products and recruit as many members as they could to the scheme. They were promised commissions on the number of members they could add on to the group and were also offered a part of the payments of their subsequent members on whatever sale they made. They had to buy a certain amount of products every month in order to continue their membership. My father was very fascinated with the idea of making easy money in addition to his regular job. He actively participated in this scheme and was able to add on a number of members to his chain through his friends and colleagues in the locality. The plan was running smoothly, only after 2-3 months when my father stopped getting payments/commissions from the company. When asked they promised to pay the amount along with the bonus the next month altogether. However, at last it was found that the branch of this company in our area closed down without paying the investors their payment and my father too suffered a great loss.
I had a negative experience which doesn’t mean that everyone will suffer the same. So I won’t be deciding on the pros and cons of this system and will rest it on the readers to decide for their own.
Now I will be dealing with what does a multi-level marketing system mean, its advantages, disadvantages and how does it become a means for various financial scams in India.
Multi-level marketing is a type of direct-selling method. In this, a person gets a part of the profits from their immediate retail customers and also a considerable part from the company according to the amount of sales they bring for the company. They achieve these sales mainly through word of mouth, their personal relationships with their families and acquaintances and their referrals. This system is mainly based on getting more & more distributors for the product rather than selling the product to the customers. The people who are recruited by the person are called that person’s ‘downline’.
ADVANTAGES OF MLM
MLM is a very popular system followed for businesses in India. There are many advantages that follow:
- It is not necessary to hire a full-time employee for this kind of marketing. A person can continue with his job and only work for the other company as a part-time employee.
- It adds to the income of a person who does this kind of marketing only as an additional job for him. He can work according to his comfort and earn money.
- The affiliate doesn’t have to keep the stocks with him always. He can first take the order from all his members and then combine it into a single large order from the company and distribute it finally.
- The person is not restricted to market for a particular company. He may choose to market any product he is interested in.
- The start-up cost of this business is very low or almost negligible.
- It is very easy to create downlines and increase the business revenue for oneself because as the amount of downline increase, the main person doesn’t need to work more but can still earn good remuneration through it.
- The work load shifts from a single person to a number of distributors which increases the business efficiency.
- There is already a pre-existing business and marketing plan in this system. The investors don’t have to put their efforts into making new plans as to how to carry on with the structure and functioning of the business.
DISADVANTAGES OF MLM
Following are some of the disadvantages of MLM system:
- The system of MLM mainly deals with how a person communicates and advertises the products and so everyone can’t be expected to have expertise in communication skills.
- This system is not a long-term business. It has a saturation point beyond which a person gets mere marginal profits. This system can’t be expected to continue for a long term because as the number of downlines increase, the number of people to be added upon as their downline reduces. Thus, the system reaches its saturation point.
- One of the disadvantages of this kind of business is ‘downlines’ because as the number of downlines increase, the affiliate gets a lesser profit from his business. So what the downline earns, the affiliate earns a lot less than it.
- Niche products and services are usually promoted through multi-level marketing which fails to attract buyers often.
- This system requires more expenses but yields less results. The members are required to buy a certain amount of products every month in order to continue their membership. It puts a burden on them to add on members to their chain, or else they would face a loss.
- The sole aim of these members is to add as many members as they can to their chain so as to increase their income. In order to attain this, they market the products without enough information about it and without having the personal satisfaction of that product.
- The MLM system requires a financial commitment to the company. More likely than not, the members will have to commit to purchasing a certain volume of product each month to remain eligible to participate in the scheme.
- This MLM system is generally misused by the companies in cheating people and has added to the number of financial scams.
RECENT DEVELOPMENTS IN MLM SYSTEM IN INDIA
The MLM sector is one of the fastest growing non-store retail formats in India. It has provided with a large number of employment opportunities for various people in India and has also added to the self-employment opportunities to many of them. In the recent years, an Inter Ministerial Committee was set up under the supervision of Ministry of Consumer Affairs to discuss and formulate the requisite legislation and guidelines governing the Multi-Level Marketing companies in India.
There were certain parameters identified by this Committee for governing the MLM system in India:
- All the companies engaged in Multi-Level Marketing/direct selling business must be registered under the Companies Act;
- Proper licenses and authorization are necessary for every company registered under this scheme;
- Payments must not be misappropriated and be tied directly to product sales;
- Under MLM new recruits must have the ability to move up in the sales system;
- Companies must not waste the unsold stocks and repurchase any unsold inventory; and
- The customer should be given opportunity to return the products unsold at the end because the supply and demand cannot be predicted beforehand.
Clause 2(c) of The Prize Chits and Money Circulations (Banning) Act 1978 has always been a concern for the industry. Thus, Ministry of Corporate Affairs and Ministry of Finance, Department of Financial Services are observing the sector from a close and working towards bringing clarity in the legislation available.
MLM SCAMS IN INDIA
- Amway scam
This case was an allegation against Amway India in 2002 which attempted to collect money from the people with the intention to deceive them by involving them in a money-chain scheme. The accused- Pinckney, a US citizen, and the directors — Sanjay Malhotra and Anshu Budhraja have been charged under section 420 of Indian Penal Code (cheating) along with sections dealing with chit funds and the Prize Chits and Money Circulation Schemes (Banning) Act, 1978.
- Speakasia scam
The company in dispute was a Singapore based marketing company that lured a huge population of people to enrol in a quick rich scheme and collected a sum of Rs 2,200 crores from 2 lakh people.
The investors were asked to invest Rs 11000 on an annual basis and were promised that their investment would be recovered within three months. Investors were required to open an account on the company’s website and fill two survey forms. By filling these forms, participants were said to receive Rs 4000 per month and Rs 1000 was fixed per person for referring the same scheme to others. They were assured of an annual payment of Rs 52,000. The whole operation and survey was ultimately found to be false.
- Stock Guru India
This scam was a mastermind of a couple- Ulhas Prabhakar and his wife Raksha, who tempted investors by promising 20% of interest per month on their investment and also refunding the primary investment in seven months. A senior income tax official was also removed from the finance ministry for accepting bribes to cover the scam. Since then, the couple has been serving their term behind bars, and the IT-official of Stock Guru has also been arrested.
- QNet scam
QNet was a Hong kong based multi-level company which was alleged to have duped thousands of investors by selling them plastic and glass products that were termed as miraculous for treating diseases like cancer. The case was investigated by the Mumbai Police Economic Offence Wing (EOW) which asked the Computer emergency response team (CERT) to block certain websites but there was no positive response from them. Thus, the police approached the court for the enforcement of the same and finally the court accepted the plea.
I have spoken to many of my friends and acquaintances in my vicinity who are into this Multi-level marketing, and they find this business to be unique and attractive. The companies make tons of money by selling outrageously overpriced products every month to their captive audience buyers. Though MLM Scams have been on the rise in India, still people fail to protect their hard earned money from these scams, which is a sad truth.