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Do retail sales matter?

Look at part of a declaration by Dr Peter J VanderNat, a US Federal Trade Commission economist and expert witness on “pyramid schemes” in the case of FTC vs. Equinox International Corporation, in 1999. “In distinguishing between a pyramid scheme and a legitimate business,” he said, “the critical issue is whether rewards paid in connection with recruitment are tied to, or are derived from, the sales of goods and services to the general public (i.e. retail sales)”.

The previous year, the prepared statement of Debra A. Valentine, General Counsel for the U.S. Federal Trade Commission on pyramid schemes, presented at the International Monetary Fund's “Seminar on Current Legal Issues Affecting Central Banks” in Washington DC, contained these words: “Pyramid schemes now come in so many forms that they may be difficult to recognize immediately. However, they all share one overriding characteristic. They promise consumers or investors large profits based primarily on recruiting others to join their program, not based on profits from any real investment or real sale of goods to the public. Some schemes may purport to sell a product, but they often simply use the product to hide their pyramid structure. A lack of retail sales is also a red flag that a pyramid exists.”

So, there have to be genuine retail sales to genuine retail customers, in network marketing, otherwise the business isn’t legal. This is one of the reasons why the products matter so much: if people (meaning not just distributors!) aren’t actually buying them, the business will eventually be closed down by the legal/regulatory authorities and/or courts.

For network marketing, product matters enormously.

As a network marketer, you are hitching your business and your income (and eventually those of other people, too, albeit that that's ultimately their own responsibility) to the stability, success and longevity of a company whose fortunes and survival you're normally unable to influence. The network marketing companies that survive for the long term are the ones with quality products in genuine retail demand. No company makes money for the long term without being able to sell its products. And not just to people joining for the business opportunity.

There are also huge legal issues around product, at least in Northern America and all of Europe, and I believe elsewhere, too: the products have to be of genuine value. The primary legal test that all enforcement agencies, regulators and authorities use when initially looking at a company if they ever get any complaints/inquiries about it is “Are the products of genuine value and being sold to people for value other than because of the attached business opportunity?” No company that doesn't produce a clear “yes” to that question can survive indefinitely.

This is one the most important and most fundamental reasons (though there are many others) for joining only well-established companies that have already successfully proven, in a notoriously difficult “industry”, that their products have value and are genuinely being sold (i.e. not just being bought by people because of an attached business opportunity).

Here’s an article from the website of a specialist network marketing law-firm in America, explaining why the true value of the products, and the fact that they mustn't be linked to recruiting, is so absolutely fundamental to the legality of network marketing businesses.

Three questions answered

This afternoon someone asked me (in a forum) three questions about what I do, and my answers overlapped so much with what I was intending to offer here as my next blog post that I decided I could amend my reply only slightly and put it here, too. So here it is:-

What is it that you do?

I'm a distributor with a British-owned MLM company which exists in the UK and 8 other countries of Eastern/Northern Europe only. I've been in it for 7 years (near enough) now and it was about 8 years old when I joined (and had existed even for a while before that in a non-MLM form).

I have a big and growing UK downline which I run/grow jointly with one of my key distributors who lives in London

I also have a not-so-big but now very rapidly growing downline in another Eastern European country where I go regularly as a guest speaker/trainer for 5-day visits, with Distributor Training meetings during the day and Opportunity Meetings in the evenings - all very old-fashioned stuff tailored to an emerging market in a country where many people are actively looking for a stable, proven, home-based business opportunity (and all very lucky for me, of course).

What makes you successful at it?

Here’s a big mixture of stuff (in no particular order and without any planning, it‘s just "thinking aloud"!) that I think made/makes me successful at it:-

- a purely lucky start: I was just 18 when I started and wandered into it without really knowing exactly what I was doing

- I chose a well-established company with genuinely good products in genuine demand from genuine retail customers and very high re-order rates (and the sales volumes to prove that)

- I treated it seriously as a business, with working capital, in the form of a small business development loan, and a business plan from day one, and I had to be successful otherwise I would have had to get a job (and the only other work I had readily available was something I didn’t enjoy and wanted to stop doing, though I admit it was well paid)

- we have one simple, reliable, easily duplicable business-building formula which has been proven to work for all those who are willing to follow it (without this, you really have nothing at all), and recently it’s actually been getting better and better because all our competitors these days are trying to build their businesses on the internet (often unsuccessfully, hence their high drop-out rates), leaving the field much clearer for us in the real world

- we show our business opportunity only to people who are already looking for a home-based business opportunity (that’s easy at the moment - there are if anything too many of them right now!); no persuading, no convincing, no trying to "build relationships" with people just so they’ll look at my business opportunity "because it’s me who’s asking" and I’ve "established credibility" and all the other crap words of wisdom you hear people discussing about prospecting when they have either a financial or a misplaced emotional incentive in trying to use one of the many and various kinds of "bait and switch" methods to build their businesses

- I don’t use any kind of internet marketing at all to build my business (and neither does anyone else in my company who’s achieved any real success)

- I don’t use "warm market" techniques at all (my own warm market are not people looking for a business opportunity - though this isn’t true at all of my downline in one country where I’m building, where my people can actually build successfully from their warm markets just because they all already know a lot of people who really are looking - this is due to local economic circumstances in Eastern Europe)

- I won’t sponsor people who are currently involved with any other MLM company (and I try my very hardest to duplicate that throughout my entire downline in every country in which we trade)

- I won’t sponsor people who have a history in the industry that makes me think they’re probably a "jumper": anyone can take a few goes to find the right fit for themselves; anyone can have a company or two go under, especially if they didn’t know how to do due diligence, but if they’ve previously been in four or five other companies, they are really not welcome with us; call us prejudiced if you like, but to me it’s just a businesslike, statistical thing to ensure that we avoid wasting our time (and I try my very hardest to duplicate that throughout my entire downline in every country in which we trade) - I think this is a really big and significant point, because it dramatically reduces the proportion of our time and effort and money that we’re spending identifying, screening, training and supporting people who are, collectively, highly likely only to disappear on us!

- I try not to sponsor anyone who I think loves complaining/criticising (this is a personal thing for me: I just don't want distributors whose phone-calls I'll want to avoid!)

- I try not to sponsor anyone who wants to re-invent the wheel (we screen out these people with our initial materials, really: they have to understand fully and clearly that they’re going to be given a simple duplicable formula and they’re going to duplicate it, first, to get as far as having a live conversation with us)

- I don’t measure my success by "numbers of people sponsored" but by what they do (it’s easy to sponsor jumpers, people looking for "work at home", people who want to use internet marketing, and so on, but only very rarely would they ever build your business for you: the reality is that two years later they’re not still there and you’ve just wasted a huge amount of time and effort looking for them and getting them started)

- I'm not emotionally attached to the results (and to be honest I never was, after about my first month in the business). When (as every day) I'm talking to a prospective associate on the phone, it genuinely makes absolutely no difference to me whether or not they join. If it's not that person, it will be another. At the end of the month, or the quarter, or the year, I will have sponsored as many people as I have the time and inclination to sponsor and my income will continue to grow, barring accidents

- I don't sponsor people who don’t have enough working capital to set up, run and develop their business, and know - at least roughly and even if only from me - what that involves (and I err on the side of exaggerating the amount they'll need, to make quite sure about this - and again, I try my very hardest to duplicate that throughout my entire downline in every country in which we trade)

- I don’t undervalue my time by doing myself things which I can employ someone else to do at less than the hourly rate at which I value my own time (and that’s a lot of money now, but I used to work it out pretty carefully and accurately even in my first year when I saved up or did half a day’s work at something else just to be able to pay people to hand out flyers and drop-cards for me)

- I spend time/money/effort trying to attract educated (because they‘re known to be educable, at least in some contexts), intelligent, successful people with a business mindset who have no experience of MLM but are looking for a home-based business opportunity because (for whatever reasons, e.g. redundancy, economic forces, physical disability or just disillusionment with their current profession) they want to earn a big, full-time income by being self-employed at home

- I’m very reliable: if I say I’ll do something for someone then I always follow through and do it, if humanly possible (and its corollary: I don’t agree to do stuff that will be too difficult or too time-consuming for me, and especially if people want to try something new, then I don’t even want to know/talk about it, and I tell them that really openly and clearly and with reasons before they start, to avoid later disappointments - theirs and mine!)

And why do you love it?

Well, I don’t always! (But I do other things as well, to break up the monotony a bit). There are still times I feel I don’t own my business as much as it owns me, to be honest, but most self-employed people with successful businesses probably feel that sometimes? Anyway, it’s easy enough and it’s better than working for someone else, isn’t it? And the flexibility is great: I can work the hours/days I choose (within reason). And then of course there’s the money, which is really compelling, I admit. I never tell anyone exactly what I earn from it, but as a ball-park impression, I have a long-running friendly fraternal earnings competition with my much older brother (and he’s not a street-sweeper: he’s actually a very successful heart surgeon in a private hospital in the UK, just to give you an indication of his earnings-potential) and in 2008 I actually earned a little more than he did - so, ok, it‘s not "footballer money" or "pop-star money", but it’s still a fortune for someone my age with no professional qualifications who has never actually held a proper job at all or wanted one. And all the time, of course, I’m building up an appreciating asset that I can sell any future time I like for a big capital sum. So, yes, I suppose I love it.

Cash gifting scams

 Once again I see a fresh wave of new-ish members of forums (not our forum because we "edit" if ever needed), making many short posts in order to have their signature files displayed as much as possible to promote their illegal cash-gifting programs. Some forums are now blocking them and deleting their posts in order to protect themselves against the allegation that they're aiding the promulgation of this illegality; others are not.

I think the current economic downturn and uncertainty is going to attract large numbers of people into this sort of illegal "opportunity". Those of us making a living in Network Marketing should particularly be on our guard and speak out about them. Saying nothing is not, on any level, the right thing to do. Ours is also the business model that gets seriously damaged in the long term by the way these criminal programs market themselves.

I thought it might be useful to point out a few things and provide some helpful links on this subject.

1. Some of these criminal enterprises dress themselves up as "multi-level marketing", but if there's no genuine product (and in many cases there isn't even a pretence of one) they are rightly illegal. In the US, Canada and all of Europe anyway - and I'm pretty confidently guessing in other countries, too.

2. Their promoters invariably say things like "There's nothing illegal about cash gifting" and challenge critics to point to the specific item of statutory law, which varies from country to country of course, saying that gifting is illegal. It isn't always statutory law - it's sometimes case law. The reality is that they are trying to con us, and sometimes to fool us by quoting tax regulations which are entirely irrelevant. Gifting itself is not illegal, but soliciting a cash gift from a recipient whose intention at the time of the "gift" is to become apparently entitled to make profits by soliciting cash gifts in turn from third parties is illegal. Don't get sucked in by the lure of "easy money". People go to prison for this. Don't be one of them. Don't assume "eew, well, that's just other people, not me".

3. Members living in the US may be interested to see this page on the FTC's own website warning about the illegality of these "opportunities".

4. In a recent forum discussion, my friend Robin kindly shared this link from the North Carolina Department of Justice. (This particular one was shared simply because one of the people who apparently didn't understand why cash gifting programs are such a big deal happened to be from North Carolina, but information like this is widely available online from just about every state in the U.S. and most countries around the world. This just happens to be a nice concise one, explaining the illegality unambiguously.)

5. I have no idea how "official" this site is (I suspect not very), or to whom it belongs, but if anyone's interested, I've recently come across the "Cash Gifting Watchdog".

There are also lots of "opportunities" which don't call themselves "cash gifting" but actually are. Typically, they have a "product" of which the sole purpose is to learn how to promote the business itself, i.e. not a real product which anyone would buy other than for the attached business "opportunity". Some people are gullible enough seriously to imagine that because there's a "product" at all, that somehow makes it legal. Others have a "don't know - don't care" attitude to the legalities involved. Some even have the sheer brazen effrontery to promote these things online, at forums like WAHM.com. For anyone with a macabre fascination in the seedy side of life, here's a link to a recent WAHM.com discussion. And here's a very recent one about exactly the kind of scam made increasingly popular by the current economic climate (look quickly before their Moderators delete it!)

Discounts

Do you give customers discounts on your company’s products?

I don’t.

Our products are fantastic value at RRP (recommended retail price).

In network marketing, three things happen when you give people a discount on a product:-

(I) you devalue that product in the eyes of its purchaser

(ii) you devalue that product in the eyes of its vendor

(iii) you duplicate and perpetuate a system in which people don’t make wholesale-to-retail profits

Everything you do in network marketing tends to duplicate: the things you want to be duplicated and the things you don’t, alike.

Many people become distributors when they regularly re-order the products, in order to buy at wholesale prices. And the ones who do that are the ones who subsequently discover that they have a few retail customers of their own, and in this way, a low-key, product-orientated, retail-based network grows. We get paid when people buy products. If nobody makes profits, nobody earns very much and your business ultimately fails to develop as it should.

In our company, we actually don’t have the facility to retail products at less than RRP (well, not without a lot of inconvenience, anyway): everyone orders direct from the company, on a free-phone 800 number, can pay by credit-card over the phone, and gets free delivery direct from the company. Who would want to have to handle their customers’ products (and payments)?