Understanding MLM schemes
IN recent years, Multi-Level Marketing (MLM) schemes have emerged as a popular avenue for income generation, drawing the attention of consumers in many countries.
However, amidst their proliferation, there exists a pressing need to comprehend the intricacies of these schemes to safeguard consumer interests.
The Consumer Council of Fiji endeavours to elucidate the phenomenon of MLMs, delving into their operational mechanisms, identifying characteristics, and potential implications for consumers.
Consumers must understand how MLM’s operate; drawing upon the lessons of the notorious EbayShop Online Scam in 2023 which resulted in the loss of millions of dollars.
Whilst the EbayShop Online scam was not a MLM scheme, it reiterates the importance of understanding not only how different schemes operate but how to identify them.
What are Multi-Level Marketing Schemes?
Multi-Level Marketing, commonly known as MLM, is a business model that relies on a network of distributors to sell products or services.
Unlike traditional retail models, MLMs incorporate a hierarchical structure wherein distributors are not only compensated for their direct sales but also for the sales generated by distributors they recruit into the network.
MLMs are businesses that rely on independent distributors, not traditional employees, to sell products or services.
Distributors earn income by:Retail Sales: Selling products directly to consumers.-Recruitment Commissions: Earning a percentage of sales made by people they recruit into the MLM (their “downline”).
This structure fosters a “multilevel” approach to marketing and sales, hence the name.
How do they operate?
At the core of MLM operations lies the recruitment of distributors who are tasked with selling the company’s products or services.
These distributors typically purchase products at wholesale prices from the MLM company and then sell them at retail prices to consumers.
Additionally, distributors are encouraged to recruit others into the scheme, building a network or “downline” of distributors beneath them.
As the downline grows, distributors earn commission not only from their own sales but also from the sales made by their recruited distributors.
How MLMs operate is summarised below:
1. Join: You pay a signup fee and purchase starter kits containing products.
2. Sell: You sell products to friends, family, and others. Profit comes from the difference between your purchase price and the retail price.
3. Recruit: You build your “downline” by convincing others to join under you.
4. Earn Commissions: You earn commissions on the sales of your entire downline, not just your direct recruits. This creates a pyramid structure, with those at the top earning the most.
How do you get your earnings?
1. Most distributors make little or no money. Studies show that only a small percentage at the top earn significant income.
2. Commissions are often complex and difficult to understand. They may be based on sales volume, recruitment levels or a combination of both.
3. Upfront costs can be significant. Starter kits, ongoing product purchases, and marketing materials can add up quickly. Identifying MLMs: Their Hallmarks
Identifying MLM schemes amidst the myriad of business opportunities can be challenging.
However, several hallmarks characterise MLMs:
❍ Emphasis on recruitment: MLMs often prioritise recruiting new distributors over selling products or services, with a significant focus on building and expanding the distributor network.
❍ Complex compensation structures: MLMs employ intricate compensation plans that reward distributors for both their own sales and the sales made by their downline, often involving multiple levels of commissions and bonuses.
❍ High initial investment: Joining an MLM scheme typically requires an initial investment in products, starter kits, and/or enrolment fees, with promises of lucrative returns through sales and recruitment efforts.
❍ Lack of retail focus: In many MLMs, the emphasis is placed more on recruiting new distributors rather than selling products to retail customers, leading to concerns about market saturation and sustainability. Pitfalls of MLM Schemes Despite the allure of potential earnings, MLM schemes present several pitfalls for consumers:
❏ High failure rates: The vast majority of participants in MLM schemes fail to earn significant income, with only a small percentage achieving success.
❏ Financial risks: Participants often invest substantial time and money into MLM schemes without guaranteed returns, leading to financial losses.
❏ Ethical concerns: MLMs have faced criticism for their recruitment-focused model, which can resemble pyramid schemes and exploit participants.
❏ Strained relationships: Participants may experience pressure to recruit friends and family members into the scheme, potentially leading to strained relationships and social alienation.
Multi-Level Marketing schemes may present many challenges for consumers. While they promise entrepreneurial freedom and potential financial rewards, consumers must exercise caution and diligence in evaluating the legitimacy and sustainability of such schemes.
For consumer queries, please call the national consumer helpline toll-free 155 or lodge a complaint via email at complaints@ consumersfiji.org