Friday, January 14, 2011

Network Marketing

Variously termed as network marketing, multi-level marketing (MLM), and referral marketing, direct selling is a business model that differs from the conventional model in that products are marketed and sold directly to consumers away from fixed retail outlets through personal contact via one-to-one demonstration, word-of-mouth marketing, and personal referrals.

Variously termed as network marketing, multi-level marketing (MLM), and referral marketing, direct selling is a business model that differs from the conventional model in that products are marketed and sold directly to consumers away from fixed retail outlets through personal contact via one-to-one demonstration, word-of-mouth marketing, and personal referrals.

Direct selling typically has a hierarchy of multiple levels of sales agents consisting of a single or a group of sales agents at the top with subsequent levels of agents beneath them. The agents earn their multi-level commissions from direct product sales and from the sales generated by the agents beneath them in the hierarchical structure. MLM activities are prevalent in Oman.

Network marketing is often maligned because of its likeness to pyramid schemes in which an individual is offered a distributorship or franchise primarily for enrolling other people into the scheme rather than to market a product. The real profit is earned, not by the sale of the product, but by the sale of distributorships. A few at the top of the pyramid benefit as the commission earned dwindles steeply down the pyramid. Eventually, as the supply of potential investors is exhausted and individuals at the bottom of the pyramid are unable to recruit any followers themselves, the pyramid collapses. As pyramid schemes are a form of fraud in most countries, the legitimacy of MLM is also called into question.

The key criterion to distinguish a legitimate MLM plan from a pyramid scheme seems to be whether the basis for earning commission is the sales made to the distributors and to people outside the plan or the number of distributors recruited. Development of the organisational structure should be based on expansion of the customer base as new distributors are recruited. Modern-day direct selling plans also use the internet as a matrix for making speedy forays into target markets.

Before investing in an MLM plan, the marketing plans, the promoting company’s track record, product details, payment scheme etc. should be carefully studied. As there is no explicit legal provision on MLM under Omani law, the local law implications for an MLM scheme should be examined in terms of:

• the legal status of the company and the distributors;
• distribution of the products in the local market;
• payment mechanism; and
• customs duty and other tax issues.

In addition, agency law and employment law implications should be thoroughly analyzed for assessing the viability of the scheme.