Sunday, October 19, 2008

Network marketers: pros or cons?

Monte Enbysk is a lead editor for the network and writes occasionally about technology for small businesses.
By Monte Enbysk

Network marketing adheres to a fundamental tenet: Lotions, potions and a slew of other products can be better sold face-to-face, without stores or middlemen.
The industry got its start in the early 1900s, and became popular in recent years through companies such as Amway. Network marketers sold door to door for years, with varying degrees of success.

The Internet era hasn't done anything to change this. However, the Web has revolutionized some marketing and distribution practices within the industry. It has made it faster and less costly for legitimate network-marketing companies to get the attention of potential customers.

Unfortunately, the Internet also has made it easier for illegal companies — mostly the skilled perpetrators of pyramid schemes and related scams — to get in the face of consumers as well. Many of these scam artists portray themselves as honest network marketers.

If you are interested in this high-risk but potentially lucrative industry, read on. You'll find some background on network marketing, as well as eight tips to help you distinguish a legitimate business opportunity from a fraud.

Amway spearheaded industry growth

First, some background on network marketing, which is also known as multi-level marketing (many people use the terms interchangeably).

Among its founding principles:

• A direct selling process lets distributors of certain products "educate" consumers more successfully (and more economically) on the products' merits than catchy TV ads or fancy store displays.

• Customers who are sold on a certain product can be motivated to sell it themselves, and to recruit others to become sellers as well (forming a business "pyramid" of sorts over time).

• Sellers will have an incentive to sell and to recruit others, as they'll be paid commissions both on their own sales and their recruits' sales. In other words, the earlier you get in to the network, the more money you can make.

• Last, but not least, success is not guaranteed, and only the best products and services — and the best network marketers — will survive in the business.

Founded in 1959, Amway has built a multi-billion-dollar business on these basic premises. In the late 1970s, it successfully fought off claims by the federal government that it was an illegal pyramid scheme. In prevailing in court, Amway proved the key test of a legitimate business — that even the last person recruited into its networks can make money. (In a pyramid scheme, large numbers of people at the bottom end up paying money to only a few people at the top.)

Today, legitimate network marketing companies span the globe, with several hundred in the U.S., including recognizable names such as Avon, Mary Kay, NuSkin, Unicity Network (formerly Rexall) and Herbalife. The products they sell range from vitamins and weight-loss plans to skin-care lotions to software and even dental insurance. Together, network marketing companies generated $28.7 billion in U.S. sales in 2002, according to the Direct Selling Association (DSA), a lobbying association that represents network marketers and other companies who sell directly to consumers.

'Technology a two-edged sword'

How pervasive is fraud in the industry? More pervasive than ever before, say many industry experts, although the Federal Trade Commission does not have statistics to quantify the impact. "I can tell you that, in the last 10 years, with the growth of ,the Internet, we have seen a significant growth in the number of apparent pyramid schemes," says Jim Kohm, the FTC's assistant director of marketing practices.

The low cost of entry into the industry long has encouraged scam artists. But the Internet has enabled them to market their schemes to consumers as successfully as it has legitimate network marketers, Kohm says. "Technology has proven to be a two-edged sword," notes Keith Laggos, an Amway veteran and industry expert who publishes Money Maker's Monthly ( and Direct Sales Journal (

8 fraud detectors

So how can you tell a scam or a shady business from a legitimate money-making opportunity? Here are eight things to consider before you take the plunge.

1. Make sure that a solid product or service figures prominently in the business.
Sounds simple, but in many pyramid schemes, the product or service is a mere "fig leaf" to an illegal source of revenue — often the signup or membership fees required just to join a network. (Most will never see their money again.) Be convinced the product or service is not a gimmick or a throwaway, but one you'd buy yourself.A related scam, the Ponzi scheme, involves no products at all, but rather promises of investment or insurance windfalls. Most network marketers do charge a nominal signup fee of $30 to $60. But if there is no product being sold, keep your money — don't be swayed by the "benefits" of becoming part of a network.

2. Confirm that the commission structure is supported by product sales.

Note that you are not becoming an "employee," but rather an independent business operator earning sales commissions. In illegal businesses, you can sell well but have your commissions diluted by other costs or obligations. For example, the FTC in 2000 shut down a Las Vegas-based company operating in eight states, because it required participants to pay excessively for seminars and desk space. Only a handful ever made any money.

3. Don't pay more than $500 in initial "buy-in" costs.

Most network marketing companies require you to buy a certain amount of product to get started. If joining the company means you have to buy $500 in products or services, or if you see excessive product inventory costs, period, watch out. And again, if you are asked to fork over money without getting any product at all, flee as fast as you can.

4. Beware of high earnings claims.

Many convicted pyramid schemers have been charged with misrepresenting the potential earnings of participants. You should expect reasonable commissions and growth opportunities, but nothing grandiose. Be wary of inordinate product and earnings hype. A rule of thumb: If it sounds too good to be true, it probably is.
5. Don't participate unless the company is willing to buy back inventory. Many scams — and some legitimate businesses — will refuse to buy back the leftover inventory you've purchased, even if you decide within a year that network marketing is not for you. In its membership requirements, the DSA mandates that network marketers be willing to buy back unused inventory, for at least 90% of the sale price, within a year of the sale.

6. Find out if the network marketer is a DSA member.

The nine-decade-old association is the closest thing to a governing body for network marketers. The Direct Sales Association has about 150 U.S. member companies and some 50 others undergoing an intense application process for membership, says Joseph Mariano, executive vice president and legal counsel. All members are listed on its Web site. While less than half the U.S. network marketers are members, if the company you're interested in is a member, that's a good sign.

7. Find out how long the company has been in business.

At least 90% of all network marketers fail within three years. About 80% fail within the first year, notes Bill Rodgers, a veteran Seattle-area network marketer who served as president of the Mercer Island Chamber of Commerce. If the company you're interested in has been around for more than three years, it is likely not only legitimate, but viable.

8. Do your due diligence.

While you want to stay away from scam artists, you also want to avoid wasting time and money with a loser company. In Rodgers' own guidelines for assessing network marketing opportunities, he asks:

"The FTC has been quick to identify and act on the companies engaging in illegal practices," says Rodgers, a marketer for Unicity Network. "Unfortunately, it takes a number of people to be swindled before the problem surfaces.

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