November 04, 2010

Network marketing programs

Dear Consumer Ed:

I was approached after church by a friend to join a network marketing program. I’m told I can make a lot of money if I work hard at it. My only concern is that I have to pay $75.00 up front to join. Is this legitimate?

Consumer Ed says:

You should take a close look before paying any money. Network marketing, also known as multi-level marketing, is a marketing strategy where a company will recruit individuals to act as promoters for the company and its products.  The promoters are responsible not only for selling the company’s products themselves, but also for recruiting new individuals who will also act as promoters for the company. The goal of network marketing is to create a large marketing and sales force, where individual promoters are paid commissions based on their own sales and the sales of those they recruited into the network.  Mary Kay Cosmetics and Amway are popular examples of companies that use network marketing. 

Obviously, each system is different, but companies that use network marketing are often the subject of much controversy.  Before joining a network marketing program, you should gather as much information as possible about the company and its compensation structure.  First, find out where in the organization you would start, and request a breakdown of the average commission and bonus payout to individuals at each level of the organization.  If the company will not provide this crucial information, it may be a signal that they are concealing high loss rates.  Second, find out generally how much time and money you would have to spend, in addition to the introductory fee, in order to sell enough products and recruit enough new promoters to turn a profit.  Again, companies should provide information on this subject, and if they are unwilling to do so, it should be another red flag. 

You should also consider where you will go to recruit new promoters for the company.  If you hope to recruit among your fellow church members, consider that you will already be competing with the person who recruited you and anyone else he or she may have recruited at church.  Similarly, you might run into similar competition at your child’s school, your local community center, or even among your friends and neighbors.  Furthermore, the smaller your community, the more difficult it will be to keep coming up with new, untapped sources.  In fact, even if you are initially successful in finding new recruits, consider that each person you recruit today will be competing with you for new recruits tomorrow. 

The basic point is that recruiting new promoters into the organization will only get more and more difficult as your community becomes “saturated” with other promoters.  This is why the Federal Trade Commission has repeatedly warned against network marketing systems that provide greater incentives for recruitment than for selling products.  These recruitment-focused programs comprise a majority of all network marketing systems, and in most cases, you will only begin to see returns on your initial investment after a long, aggressive recruiting campaign.  As recruitment becomes more and more difficult, the company typically does not have enough revenue to pay commissions to its many members.  If that happens, those who have not had enough time to recruit enough new promoters will typically lose their investment.

Related to: