Tuesday, March 10, 2009

A must read on MLM/Network Marketing versus pyramid scams

Hi folks,

I'm actually writing this blog that is a must read for anyone who is either part of a MLM/Network Marketing company or has been introduced to the concept. My blog below is not to advise one to join or not to join a Network Marketing/MLM company. My blog below is simply to educate people on what to look out for, and what one needs to understand before making a decision. I've been seeing a lot of recent discussions on the news and I wanted to educate the public to have more tools in their pockets to make safe and sound judgements. The reason this is a must read is because MLM/Network Marketing is actually a viable business and just like any business out there, one must become knowledgeable in the business they are operating and ensure that it is not illegal or a pyramid scam/scheme to save loss of money. Please note that there are over 58 million people worldwide who are currently in MLM/Network Marketing.

It was my last year at the University of Toronto, just after my internship I completed for 16 months at IBM (International Business Machines), when I was first introduced to the concept of Network Marketing/MLM. It was actually my sister and her boyfriend at the time, now happily married and a baby due next month, who introduced me to a Network Marketing company in the nutrition industry. I went to go see a presentation and to be absolutely honest, the idea of Network Marketing/MLM made sense to me. It was my first time and I didn't have any previous knowledge or notion at all towards MLM/Network Marketing.

One aspect of business that everyone should understand is how MLM/Network Marketing is 'supposed' to work. The idea of you purchasing products or a service directly from the manufacturing plant was an obvious no brainer for me. Why would I buy something from the public when I can buy it direct from the manufacturing company at a lesser price? Also, the idea of the company paying its distributors to do 'word of mouth' marketing also made sense to me. Instead of a company having so much costs in doing advertising, marketing, television commercials, magazines, and more, why not pay the distributors for doing all that work and have a win-win situation?

So I joined the company and started going to the trainings and when I started talking about the business with friends and family, I started getting comments or questions about whether or not this was a pyramid scheme or a scam? Again, this was my first time in this industry and so I was a bit taken back and decided to start doing a lot more research before I continued with the business. I started to become very familiar with the industry and what distinguished an MLM/Network Marketing company from a pyramid scheme. The definition also found on Wikipedia is that a pyramid scheme basically involves the exchange of money to the top where no product or service is being sold. With MLM/Network Marketing, there is a product or service being sold.

Rule #1 - Is what you are buying of any value?
This is where it's time for you to do your own research and due diligence. In the DSA (Direct Selling Association), www.dsa.org, there are over 10,000 companies there. Of this 10,000 companies, about 1,700 are in MLM/Network Marketing. Companies range from nutrition, telecommunications, household products, weight-loss programs, financial services, water-filtration, jewelry, travel and much much more. The first thing I would do is to check if whether or not the product or service being offered is of any value. Compare prices with outside sources. If for the 'exact' same product or service is found cheaper in the public, than this would raise a big red flag for me. A lot of nutrition companies have to justify their prices for their products because of extensive Research and Development for their special formulations, and patents, and scientific research, etc... Telecommunication companies are in a very competitive industry and in my previous experience, it's tough to beat big telecommunicaiton companies such as TELUS, Rogers, and Bell especially when they have bundling. I should know because I used to work at TELUS for 4.5 years. So again, check whether or not the product or service being sold is of any real value. Don't get sold by someone telling you that even though the price is the same or worse, that you should at least join and make money by referring other people and achieving financial freedom because that kind of model just does not sustain.

Rule #2 - What is the compensation plan structure used?
In MLM/Network Marketing, there are 5 regulated types of compensation plan types out there.

In short, they are Unilevel, Stairstep-breakaway, Matrix, Binary, and Hybrid. This is where you want to be able to figure out if the company you are looking at is one of these plans. If the person who sponsored you doesn't know, keep asking up the chain until you find someone that does.

Rule #3 - Is their a monthly consumption of a product or a service?
Most MLM/Network Marketing companies will have a product or service that you will need to purchase on a monthly basis to take part of the passive/residual income earning potentials. If a company requires you to spend a lot of money up front, and has no requirement for a monthly passive/residual income, than be very careful. If people are paid just for enrolling other people and you somehow move up in the structure, than be very careful that this may be pyramid scheme where the money from a new enrollment just flows up the structure and has no passive/residual income.

If you've completed Step 1, Step 2, and Step 3, so the prices you get are well worth while, the compensation plan type is one of the above, and their is a monthly contribution towards a product or service, than you should start feeling better about the company.

Rule #4 - Is the commissions earned heavier on sign-ups, or from monthly residuals?
The fact of the matter is that most companies have two choices to make when creating their compensation plan. A company can create a plan that pays heavy on new sign-ups and very little in residual/passive income, or the opposite where there is no commissions for new sign-ups and more on residual/passive income.
Most companies that have "Fast Start" programs typically do the first where they pay a lot on people signing up. The reason being is most likely because the product or service they are selling, has such a low mark-up that they can't afford to pay people a high residual income. Take for example a telecommunications company. If company ABC is offering you a long distance service or wireless phone plan that you can get for the exact same same price or almost the same price in the public, than how can that company possibly pay you a high residual/passive income? They can't. So what they do is that they will place a heavier cost on the sign-up, and distribute that sign-up costs to other members going up the chain. Which then means that people see quick up front money being made and feel good about themselves. However, after a period of time, the income becomes unstable, it's hard to advance 'ranks' to make it to the top rank, and most people end up dying out, lose their qualifications, lose their ranks and quit the business. So this ties into the next question which.

Rule #5 - Are you here to build it once and last for life or are you here to work forever?
The most amazing feature of MLM/Network Marketing when you first see a presentation is that you can work hard for 5 years, and take the next 50 off. This is ONLY true if the residual/passive income is high, and has longevitiy. The average in this industry is that 1 person in your team will pay you $1.00 of residual/passive income. So 1000 people in your team, will pay you $1000.00. With telecommunications, if you're lucky, 1 person will pay you 1/3 of that, so about 30 cents if you're lucky. One step that I always do is I calculate how much does one person in my team pay out in regards to residual/passive income. If you need to have an army of people in your team to make some decent residual income, than this is another big red flag for me. The reason is because you want to have a compensation plan where it's easier for everyone to earn residual income together. If everyone is actually getting great value for their money in the product or service, or is making money through commissions, than the passive income will most likely last for life.

Rule #6 - Don't get sold on having passion for the product.
When most people look at a MLM/Network Marketing company, they tend to feel that they have to have passion for the product. That they have to love the product so much that they can refer it to their friends. While this might make sense at first thought, unfortunately, it's completely untrue. As I mentioned before, MLM/Network Marketing is just like any other business. And when you first start a business, there are a few factors that one must look at.

1) Competitive Advantage
Does your company have a product or service that has a competitive advantage over the rest of the market? Competitive advantage can be in price, in quality of the product, or in patents and formulas. Can you answer why someone would want to buy from you?
2) Competitors
Of those 1,700 companies in the DSA, about 92% of them are in telecommunicaitons, household products, or nutrition. Are you selling a product that is competing with a lot of other members in different MLM/Network Marketing companies? Can you lose your people in your team to other companies?
3) Market Niche
How big is your target market and is their a niche in this market?
4) Barrier of Entry
What's stopping another company from creating the exact same product that you have and offering a better compensation plan of $1.00? If there is no stopping that, than you'll lose people in your team

If you can answer well to these questions, than you're off to a great start and you've probably done enough of your own due diligence.

Rule #6 - Can you lose your investment?
One thing that I always look at is what is the worse-case scenario? What if I invest my money, and I'm not able to build a team of people, what then? What is the absolute worse case scenario. In most cases, if you are getting a product or service that is of true value, and is cheaper than what you can get in the public, than that's not so bad. But, if you can find the exact product or service for the same price or cheaper in the public, than that's a pretty bad. The reason because you've just invested a few hundred dollars for a product or service that you could have gotten cheaper in the public.

Nothing hurts me more than to see people join a MLM/Network Marketing company and to not only lose their dreams, but to lose the value for their money.

I sincerely wish everyone the best of luck in their own endeavors. I know what it feels like to have invested several hundred to several thousands of dollars into a MLM/Network Marketing company and felt that I never received true value of my money. I hope that this blog has helped many people in making a wise and informed decision.

I guess what a few readers may be thinking is with all of my own due diligence down, how does my company Global Wealth Trade that I joined par up to the research and steps I mentioned above.

I would be more than happy to explain in more details to anyone my own personal research I've done and share that with you. Please simply email me at rene.liaw@gmail.com. In short, Global Wealth Trade through my research passes all the rules above and has the perfect formula for success. And best of all, no one ever loses their investment!

1 comment:

Cindy said...

Hey Rene. Thanks for the blog. I have been exploring this issue and trying to find answers.