The question is: "Is direct selling or network marketing a potentially viable additional or alternative option for our company?"

A Corporate Look At The MLM Option

By Jeffrey A. Babener

January, 1996

 

With increasing consistency, well-established companies who market through a myriad of channels, other than network marketing, are taking a close look at the MLM option. These companies may be marketers of consumer products and services who are currently marketing through retail stores, mail order, telemarketing, manufacturers representatives, franchises, or they themselves may be private label manufacturers or suppliers of services to other companies. What they all have in common is that they are looking for ways to extend the sale and extend the demographic base of their consumer market. The question these corporations ask is: Is direct selling or network marketing a potentially viable additional or alternative option for our company? The "nutshell" response to such an inquiry would briefly touch on a number of factors.

Direct selling can be a very viable marketing channel. Most companies in the direct selling industry use a multilevel marketing format in which distributors profit by their own direct sales as well as the receipt of override commissions on sales by distributors in their sales organization. According to the Direct Selling Association, the direct selling industry in the U.S. accounts for about $17 billion in sales and involves about six million distributors. Leaders in the industry include Amway, Shaklee, Tupperware, Avon and Mary Kay.

As this method of distribution tends to draw its distributors from its base of satisfied customers, it is best suited for the sale of consumer-oriented goods and services. It is, effectively, "person to person" sales, and might also be thought of as "word of mouth" sales. Several attributes should be noted: (1) it is very suitable for products needing demonstration or testimonials to make a sale; (2) it rewards consumers for their product loyalty; (3) a company only pays for results and not for unproductive advertising; and (4) it can result in very rapid penetration of the marketplace.

Keep in mind that the direct selling industry is generally one of auxiliary or supplemental income. Approximately 90% of sellers are part time. As compared to professional manufacturers' representatives, it tends to be an industry where many people sell a little, as opposed to a few people selling a lot. Therefore, it is not suited generally to business-oriented and commercial products. In this industry, most people sell within their spheres of influence, i.e. family, friends, work place, church, etc.

If a company adopts this method of distribution, it should be ready to go national immediately, as distributors are eager to sponsor their friends as salespeople, and those contacts are national. In addition, it should prepare a business plan which allows for adequate capital for data processing, sales materials, specialized consulting, and legal assistance.

Unfortunately, pyramid schemes sometimes masquerade as multilevel marketing programs. Legal assistance is thus imperative. In determining whether or not a program is a legitimate multilevel marketing opportunity, the would-be participant or the entrepreneur, who is considering a multilevel marketing program, should consider several important points:

  1. Product or Service. The company should offer a high quality product or service in which consumer satisfaction is guaranteed. It must have a "real" demand in the marketplace. If the product is consumed by distributors themselves, it must be one that distributors would want to buy on its own merits, irrespective of participation in the marketing plan.

  2. Price. The price of the product or service must be fair and competitive in the marketplace. Distributors should be able to purchase the company product at wholesale or at a substantial discount from prices found in retail stores.

  3. Investment Requirement. There should be no investment requirement at all, except a sales kit or demonstration material sold at company cost.

  4. Purchase and Inventory Requirement. A legitimate marketing program should have no minimum purchase requirement, nor any inventory requirement, for one to become a distributor or sales representative. Once in the business, however, ongoing activity or qualification requirements are typical of leading network marketing companies.

  5. Use of Product. Products should be used by consumers and not end up in a garage or basement.

  6. Sales Commissions. Sales commissions should not be paid for the mere act of sponsoring other distributors.

  7. Buy-back Policy. A legitimate multilevel marketing company will agree for some reasonable period of time to buy back inventory and sales kit materials in resalable condition from distributors who cancel participation in the program.

  8. Retail Sales. The focus of the marketing program should be to promote retail sales to nonparticipants. Many states and programs recognize that purchases for personal or family use in reasonable amounts by distributors are also retail sales.

  9. Distributor Activity. Many of the new statutes regarding multilevel distribution companies require that distributors perform a bona fide, supervisory, distributive selling or soliciting function in moving the product to the consumer, i.e. that they have meaningful contact and communication with their downline sales organization.

  10. Earnings Representations. The basic rule is that a legitimate marketing program should not make any earnings representations unless those representations are based on a track record. Testimonials by individuals of their own experiences are not uncommon, however.

  11. Training. A good network marketing program should offer solid training in sales and recruitment to its distributors.

Finally, it would be wise to call one of the industry trade associations for information. The Direct Selling Association can be reached at (202) 293-5760, and the Multi-Level Marketing International Association can be reached at (714) 622-0300. These organizations have all kinds of information on multilevel marketing and have adopted some ethics standards for their members.

Jeffrey A. Babener
Babener & Associates
121 SW Morrison, Suite 1020
Portland, OR 97204
Jeffrey A. Babener, the principal attorney in the Portland, Oregon law firm of Babener & Associates, represents many of the leading direct selling companies in the United States and abroad.

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