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Some relative or friend may have sold you a product that offers excellent value for money and yet is not available off store shelves. Some such stuff could be imported, made of rare herbs or have excellent effects on your health and wellbeing but not available easily. Hence, to get it again, you need to contact your friend or relative and place the order.
This is a brief description of what Multi Level Marketing (MLM) involves. It means, you work for a company that does not sell its products in the open market. Instead, it depends upon a wide network of people to promote and sell products in a social circle.
Multi Level Marketing is not a new concept. It has a history dating back hundreds of years. In ancient days, individuals would work for seafarers. They would work like agents for merchants who imported exotic stuff from different land. These people would buy the stuff and sell it within their community, on behalf of the merchant, for profit. Since imported things were rare, they never made it to the open market and were privilege of those who could afford. They found others who were willing to find more buyers for the rare imported goods and developed a network.
In modern days, MLM traces history to 1932 when Dr. Joseph Wachter launched a company to sell healthcare and beauty products based on marine plants and sea-salts. Instead of selling these products through retailers, Dr. Wachter enlisted the help of ordinary citizens to work as associates. These associates would buy and stock Dr. Wachter’s products at a fixed price and sell them for profit.
In our times, MLM has evolved into small, home-based business. You can sing-up as MLM associate with one or more top companies. Some companies provide free training and other resources to registered associates. These associates buy products from the company at a lower price and sell them directly to consumers at slightly higher rates. However, MLM is a lot more than merely buying something low and selling for profit. It also involves publicity in a different manner.
Workings of MLM
Rather than depending upon conventional advertizing in print and electronic media, MLM is reliant on word-of-the-mouth publicity. It works on the principle that satisfied customers will spread the word about the goodness and properties of a product to their social circle. This word-of-the-mouth publicity tempts others to try a product. Hence, they approach the MLM associate who is selling it. Here begins the vital difference between simple buying and selling.
Broadening MLM Network
Once word-of-the-mouth publicity creates demand for a brand of products, MLM associates encourage others to act on their behalf. Hence, they register more people to function as promoters and direct sellers. Since every person enrolled has individual social circles, the brand gets more publicity and finds lot many buyers. This encourages others to start selling the product.
This way, the promotion and marketing network of an MLM company increases. The associate, who encouraged more people to enroll as promoters and marketers, gets a small margin of profits on sales made by others. This process continues as more and more people enlist friends and relatives to sell the brand within their social circle.
MLM is sometimes called pyramid marketing, a system that also became infamous as Ponzi schemes. However, they are very different.
MLM v/s Pyramid v/s Ponzi
When we talk of MLM, it is also essential to know how it stands apart from Pyramid and Ponzi schemes. Generally, MLM involves selling a product by working as promoter and marketer for one or more companies. It does not require you to enlist more and more members to increase your profits. You can work within your own social network and find customers outside too. As explained earlier, profits are generated by selling products at retail prices fixed by the company. You can lower the price as special consideration for a relative or close friend, though it means a small profit.
Pyramid and Ponzi schemes make it compulsory for associates to sign-up more members. Unless you register more people for the scheme, there are no profits. Membership is paid and you receive part of the fees that new entrants that you have enlisted to the scheme, as commission. To recover membership fees and make profits, people whom you have registered also have to enlist more. The system of registering newer members is unending. Pyramid and Ponzi schemes do not involve selling product on behalf of a company. Instead, you will be selling some vague financial service or savings scheme with no guarantees of return on investment. You cannot offer discounts for the schemes since prices are regulated by the firm operating the Ponzi.
You can exit an MLM program anytime, without losing money. At best, you may have to sell some products that remain or use them personally. Some companies accept returns provided the products are intact and in saleable condition. Pyramid and Ponzi schemes do not have provision for exit. You have to remain subscribed to continue making profits. The only exit is possible when the pyramid collapses because members are unable to enlist new ones.
In India, MLM is permitted for companies that make nutritional supplements, herbal medicines and cosmetics, household requirements and other consumables. However, to offer MLM schemes, the company has to prove its credentials to the Indian government and get the required permission.
The Indian government strictly prohibits any company or individual from offering financial schemes on MLM or Pyramid/ Ponzi basis. Anyone caught doing so is liable to face severe penalties including cash fines and long jail terms. Reserve Bank of India has circulars warning people against falling prey to fraudulent schemes that offer rich rewards for low investments.
MLM is great as small, home-based business for any person. It offers excellent opportunities to make money in legitimate manner. Since MLM involves social networking, you also meet newer people as part of your business and forge friendships. Your social base increases through MLM. It is best suited for housewives, unemployed persons, senior citizens and anyone who wants to make extra money in spare time.