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Pyramid scheme or golden opportunity for business?

Pyramid scheme or golden opportunity for business?

Recently a very close Khmer friend of mine was full of excitement over a seminar she attended from a company whose products were vitamins and beauty products.

A friend of hers offered transport to a seminar as an introduction to the company.

The company, in turn, offered the opportunity to direct-sell their products for a commission. And if she recruited other sales people, she would make a small cut on their commissions as well.

Later, over dinner, her friend disclosed that she would receive a commission on the sales my friend generated and on her recruits as well.

Sound too good to be true?

Well, the statistics demonstrate it is for 99 per cent of the people involved in multi-level marketing organisations.

Multi-level marketing (MLM), also known as network marketing, is a direct-selling strategy in which independent agents serve as distributors of goods and services, and receive a commission on their sales.

They are also strongly encouraged to recruit their own sales force, receiving a commission on the sales of those they recruit.

The model primarily relies on geometric expansion, where a salesperson recruits a number of individuals, who in turn recruit a numbers of individuals, and so on.

Those lowest in the matrix receive the least, and those at the very highest, the most.

The business model has been criticised as unsustainable and doomed to fail, a disguised pyramid scheme that depends on sales to an increasing number of recruited distributors rather than consumers who purchase the product outside the plan.

The first multi-level marketing plan was introduced in 1945 by the California Vitamin Company, which subsequently became Nutrilite.

Distributors with 25 regular customers were allowed to recruit new distributors and receive three per cent commission, on an ongoing basis, on recruited distributors’ sales.

The industry is now in more than 80 countries, with sales estimated at US$400 billion-plus. The most prominent companies include Amway, Avon, Herbalife, Mary Kay Cosmetics and Tupperware.

The potential attractions to new recruits are residual income, the freedom of working independently, the potential to earn on downline sales and ease of entry with minimal risk and cost.

Many MLM organisations have been accused of using cult-like tactics to recruit new distributors, with religious-like seminars and rallies, and promoting a way of life that offers happiness and fulfilment.

It is believed that high-level distributors of Amyway earn most of their income from seminars and selling motivational material rather than from product sales.

The MLM model has been cited for a long list of flaws. Some companies have been accused of price-fixing, requiring their distributors to sell at the same fixed price, which is illegal in most jurisdictions.

The model ignores the principles of supply and demand, attempting to hire an unlimited amount of people, saturating the market with supply despite demand dynamics. The network aspect relies on commercialisation of relationships with family and friends, which is a moral and social hazard.  

Finally, there have been charges of exaggerated income claims, preying on the gullible and inexperienced.

Statistics prove that 50 to 70 per cent of recruits quit in their first year, with inventory and recruitment kits in hand.

Anthony Galliano is chief executive of Cambodian Investment Management.  [email protected]

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