Multi-level marketing is also known as network marketing or pyramid selling, is a contentious marketing strategy in which the MLM company’s revenue is generated by a non-salaried workforce selling the company’s products or services, while the participants’ earnings are generated by a pyramid-shaped or binary compensation commission system.
The compensation scheme in multi-level marketing pays money to members only from two possible revenue streams. The first is funded by commissions on sales made directly to participants’ retail customers. The second is paid out of commissions based on wholesale purchases made by other distributors below the participant who recruited those other participants into the MLM.
WHAT IS A MULTI-LEVEL MARKETING
Some direct sales businesses utilise multi-level marketing (MLM) to encourage existing distributors to recruit new distributors in exchange for a portion of their recruits’ sales. The recruits are the “down line” of the distributor. Distributors also profit from direct product sales to clients. Amway, a well-known multi-level marketing firm that distributes health, beauty, and home care goods, is an example of a well-known direct sales company.
Some direct sales businesses employ multi-level marketing (MLM) as a technique to motivate existing distributors to recruit new ones. Hundreds of thousands of people can join MLM programmes all over the world, but only a small percentage of them earn enough money to make it worthwhile, suggesting a pyramid scam. While many MLM tactics are lawful, the Federal Trade Commission has been examining multi-level marketing businesses for decades and has discovered several that engage in dubious legitimate methods such as pyramid schemes.
Multi-level marketing, in general, is a sales system in which business members are incentivized to acquire new members. This salesperson will get a share of their recruiter’s sale once they recruit a new member.
PYRAMID SCHEME AND MULTI-LEVEL MARKETING
Regrettably, not all multi level marketing opportunities are genuine business opportunities. Many pyramid scams, which are meant to defraud the unsuspecting, are camouflaged.
The primary distinction between multi level marketing and pyramid schemes is that MLM is allowed in Canada (and much of the United States), but pyramid schemes are not. Participating in a pyramid scheme is a criminal crime punishable by up to five years in jail under the Criminal Code of Canada under section 55.1
However, a person seeking for a business opportunity may find it difficult to discern the difference between a legitimate MLM offer and a pyramid scam at first glance..
The main distinction between MLM and a pyramid scam is how the business is run. Pyramid scheme sole goal is to take your money and then use you to recruit other distributors. Obtain written copies of the company’s sales brochure, business strategy, and/or marketing plan (and read them). Contact others with multi-level marketing companies and the items to see whether the products are truly sold and whether they are of excellent quality. See whether complaints about the firm exist with the Better Business Office. And at the MLM recruitment meeting listen closely. Inflationary promises for the incredible money that you’ll make should sound your warning bells.
IS MULTILEVEL MARKETING LEGAL OR ILLEGAL IN INDA
In India, Multi-Level Marketing, or MLM, is a legitimate business model. However, in India, there are several illegal and fraudulent MLM businesses that use a pyramid system to get more people to buy their products and then defraud them of their money. A legal Multi-Level Marketing firm is one that follows the legal procedures set forth by the government.
However, in a big nation like India, distinguishing between legitimate and unlawful MLMs is impossible. As a result, it’s critical to recognise a legitimate Multi-Level Marketing firm based on its characteristics and ways of operation. The following are some of the important characteristics of a legitimate Multi-Level Marketing firm in India:
- A legal MLM firm gives its members a set amount of time to earn money. Illegal MLM companies often promise fast, simple, and amazing money.
- A legitimate Multi-Level Marketing firm provides high-quality items to its clients that are supported by a certificate of quality, but an unlawful organisation gives no guarantee of product quality.
- A legitimate MLM firm pays its members a predetermined commission or incentive depending on their sales success. An illegal MLM, on the other hand, has no bonus rules and offers attractive and immediate incentives to recruit additional individuals.
- A legitimate Multi-Level Marketing company offers its members with a well-defined plan for selling their product, but an illegal MLM company does not provide such a plan or strategy.
Prior to the Prize Chits and Money Circulation Schemes (Banning) Act 1978, MLM firms in India were governed by the Prize Chits and Money Circulation Schemes (Banning) Act 1978. However, in response to an increase in MLM fraud in India, the government issued Model Guidelines for Multi-Level Marketing/Direct Selling on September 12, 2016
From September 12, 2016, all direct selling businesses in India must file an undertaking to the Department of Consumer Affairs within 90 days.The business cannot compel customers to buy more goods and services than they can afford to sell or consume.The involvement must be completely unrestricted. The firm is not allowed to charge any type of participation cost, such as an admission fee or a registration fee.Every company participant must get a written contract “containing the material terms” of their involvement, drawn in line with section 10 of the Indian Contract Act, 1872.The firm must have a return policy as well as the ability to terminate membership.
Direct sellers must be given comprehensive information about an MLM company’s direct selling processes and policies .For its activities, the firm needs a physical office.The mechanism of calculating remunerations must be fully disclosed by the Multi-Level Marketing firm.The MLM firm must have a CIN with a PAN and give the participant an identity card.
ILLEGAL MULTILEVEL MARKETING
The Prize Chits and Money Circulation Schemes (Banning) Act of 1978 makes prize chits and money circulation schemes unlawful. According to the Act, any scheme that guarantees quick and easy money through a money chain or if someone demands money from another in order to invest it in a “money circulation scheme” means any scheme for making quick or easy money or receiving any money or valuable thing in exchange for a promise to pay money is illegal in India.
Pyramid schemes entail enlisting the help of a new member at the bottom of the pyramid to invest money in the first recruiter. New members are expected to recruit additional investors under them in order to get returns on their investment, establishing a pyramid. The Reserve Bank of India has declared pyramid schemes to be unlawful.
A Ponzi scheme is a deceptive investment plan that promises large returns with minimal risk to investors. By attracting new investors, the Ponzi scheme produces profits for early investors. This is comparable to a pyramid scam in that both rely on new investors’ cash to pay off previous investors.
Although controversial, multilevel marketing is a valid business technique. Pyramid schemes, for example, are a concern because they take money from new members to compensate individuals at the top rather than those who do the job.
Individuals in multi-level marketing (MLM) or network marketing sell items to the general public, usually through word of mouth and direct sales. The difference between a pyramid scam and a legal MLM programme is that in a pyramid scheme, no genuine product is offered.
The Federal Trade Commission discovered that 99 percent of consumers who join multi-level marketing businesses lose money after examining 350 MLMs. You have a one percent chance of not losing money if you join an MLM scam. There’s a 0% probability of being wealthy. There’s a 1% chance you won’t lose money.
MLMs, according to the Direct Selling Association, are legal enterprises with around 200 members who have been rigorously checked to guarantee they are not pyramid schemes and do not engage in misleading activities. There are genuine MLMs, according to the Federal Trade Commission.
Author’s Name: Aksha Ali (Guru Gobind Singh Indraprastha University, Delhi)