Study of Consumer Perceptions of the Products Sold Through Multilevel Marketing

Rekha Attri, Asst. Professor, Core Business School, Indore Mr. Sunil Chaturvedi, Dean, Core Business School, Indore

ABSTRACT Often we are approached by a neighbour, colleague or a family member who promises to unveil an incredible ground level business opportunity where one can work at his/her own terms and conditions and carve out a bright future. Multilevel Marketing (MLM) is a specific form of direct selling which experienced significant international growth during the 1990s. Multilevel marketing plans also known as network or matrix marketing are a way of selling goods or services through distributors. These plans typically promise that if you sign up as a distributor, you will receive commissions- for both your sales for the plans goods or services and those of other people you recruit to join the distributors. Multilevel marketing plans usually promise to pay commissions through two or more levels of recruits known as distributors downlines. During the same period there was a corresponding increase in the investigation and prosecution of illegal pyramid schemes. Since then Multilevel Marketing Programs are a constant source of debate. In a legitimate MLM company, commissions are earned only on the sales of the companys products or services. No money may be earned from recruiting alone (signup-fees). If participants are paid primarily from money received from new recruits then the company is an illegal pyramid scheme. This paper attempts to study the ethical issues involved in multilevel marketing and the awareness of the same amongst the public. The genuineness of the products offered in relation to value for money and product quality is another area of study of this paper. With multilevel marketing often a perception of the people is that it is a get rich in no time opportunity. Through this research paper the truth of this belief is also studied.

INTRODUCTION More and more companies today are selling their products and services directly to customers without intermediaries and are thus identifying new prospects through a process called direct marketing. Peterson defines direct selling as face to face selling away from a fixed retail location. (Peterson, Albaum & Ridgway 1989) Direct selling typically includes in home selling situations such as door to door solicitations, appointments, referrals, and product parties as well as the catalogues and the Internet to disseminate information.(Frenzen & Davis 1990) According to Indian Direct Selling Association (2001) almost all salespeople representing direct selling organizations operate as independent contractors rather than employees. The sales force is generally paid through a commission system which provides maximum selling motivation. (Peterson & Wotruba 1996;Wotruba & Tyagi 1991). Often the terms Multilevel marketing and direct marketing are used synonymously. Hence it is of utmost importance to first understand the difference between these two terms. Various forms of marketing activities involved in Direct Marketing include Faceto-Face selling, Direct mail, Catalogue marketing, Telemarketing, TV and other direct response media, Kiosk marketing etc. In FacetoFace selling the professional sales force locate the prospects, develop them into customers or distributors and grow the business. Direct Mail involves sending an offer, announcement, reminder or other item to a person at a particular address. Using highly selective mailing lists, direct marketers send out millions of mail pieces each year as letters, flyers, foldouts etc. Although the cost per thousand people reached is higher than with mass

media, the people reached are much better prospects. Catalog marketing occurs when companies mail one or more product catalogs to selected addresses. Telemarketing describes the use of telephone operators to attract new customers, to contact existing customers to ascertain satisfaction levels or to take orders. Direct marketers use all the major media to make direct offers to potential buyers. Newspapers and magazines carry abundant print ads offering books, articles for clothing, appliances, vacation and other goods and services that individuals can order by dialing a toll-free number. Home shopping networks (HSN), videotext and interactive TV also facilitate direct response. Some companies have designed customer-order-placing machines called Kiosks and placed them in stores, airports and other locations. (Kotler 1999)

A specific form of direct selling, Multilevel Marketing (MLM) experienced significant international growth during the 1990s. In Multilevel Marketing the sellers are compensated not just for their respective sales but for sales generated by people they recruit. Because those involved are compensated down through multiple levels of recruits, this type of direct selling is often called multilevel marketing. The recruiting is generally done through personal networking; thus multilevel marketing is also called Network Marketing (Muncy 2004) LITERATURE REVIEW:

History of Multilevel Marketing The term network marketing specifically is 20th century creation. Its genesis lies in the post World War era of the late 40s and early 50s. The development of the concept of network marketing and its first use has been credited to Nutrilite, a US based direct selling organization. In the mid 1940s the company was involved in the production and sale of food supplements, for which it had developed a very particular and unique method of marketing. In essence the organizations compensation programme encouraged each of its salespeople to build up their own independent teams which were in turn responsible for selling and distributing the companys products. Salespeople were rewarded proportionately according to the contribution that they were able to make to the overall profits of the company (Biggart, 1991). The sales team was thus rewarded not only for the sales they themselves initiated, but also for those initiated by the individuals they had introduced to the organization. It is this characteristic which distinguished network marketing from other forms of direct selling. Wojnowski in his paper gives the example of a company named California Vitamins which realized that many of their new sales recruits were friends and family of their existing sales force. These new recruits primary motivation to becoming sales associates was that they wanted the products for themselves at the wholesale cost. Thus the company recognized that it was easier to build a sales force with a lot of people who sell a small amount of product, than it was to find a small number of top sellers who would move mountains of product. California Vitamins therefore designed a revolutionary sales compensation model encouraging their salespeople to invite new representatives from satisfied customers, most of whom were family and friends. Each of those new representatives in turn had the same right to offer the product and opportunity to become a representative to others. This allowed the sales force to grow exponentially. The company rewarded its representatives for the sales produced by their entire group or network of sales representatives. And so multi-level marketing was born (Wojnowski, 2007) Multilevel marketing thus is a way of distributing products or services in which the distributors earn income from their own retail sales and from retail sales made by their direct and indirect recruits. As a form of direct selling, MLM involves

non store retailing based on face to face communications between a selling representative and a potential buyer (Brodie, Stanworth & Wotruba, 2002) . One salient characteristic of network marketing exchange is the existence of seller customer social ties stemming from kinships or friendships prior to the transactions. The governance of the social ties, the future exchange possibility and the indiscernible social interaction in the network marketing exchange illustrate that it manifests the Socially Embedded Exchange (SEE) concept. Customers are ambivalent to recognize the accurate meaning, rewards and applications of the exchange. This ambiguous situation likely causes tension in the personal relationship between sellers and customers. (H .Ho 2002) Previous studies on consumer buying experience with sellers of network marketing firms indicate that consumer attitudes and perceptions vary remarkably. The varying consumer perceptions and attitudes have not been dealt with in detail in the research papers on MLM. Hence an attempt of this paper is towards studying the varying consumer perceptions about the genuineness of the products and the price-quality relationship along with an overall perception about these network marketing organizations amongst the consumers. Difference between Legitimate Multilevel Marketing and Illegal Pyramid Scheme Since a MLM operates by recruiting a network of salespeople, the chances of such organizations to easily degenerate into unethical, fraudulent, recruitmentcentered pyramid schemes is quite high. The distributor's compensation depends entirely on the organization they build. A legitimate MLM company will pay the distributor in three basic ways: Commission on products you sell to your retail customers and buy yourself Commission on products your distributor sells to their own customers Commission on products they sell to their distributors, and so on down the line up to five to seven levels down from you. (Note, in order for a legitimate MLM to be financially viable, your compensation has to stop after a certain number of levels down from you) (Dunn 2008) Some critics are of the viewpoint that product in MLM is really a mere diversion from the real profit making mechanism. Profits actually accrue through the creation of a downline. The product is merely an excuse to attempt to legitimate the real money making engine (Wisdom, n.d.) Multilevel Marketing or Network Marketing is very different from Pyramid scheme though both are often taken in the same sense. Even if a company is fulfilling its legal obligations, it does not necessarily mean that all its practices are ethically correct. Legal does not necessarily mean ethical (J. Vander Nat & W. Keep 2002). Some guidelines can be followed to differentiate legitimate multilevel marketing from illegal pyramid marketing. A legitimate direct selling company should offer a genuine business opportunity based on consumers where consumer satisfaction guarantees and cancellation rights are offered and wherein consumers may return the product for replacement or refund if they are dissatisfied. Pyramid schemes have no such commercially viable product sales base (Indian Direct Selling Association). Legitimate multilevel marketing companies compensate their salespeople for selling products or services to ultimate consumers and not for simply recruiting people as in pyramid schemes (Muncy, 2004).Secondly it

should be identified whether the products would be able to benefit the lives of the people who buy them or distributors will have to push low value products on friends and family in order to receive compensation (Koehn 2001). A classic test for pyramid scheme has been known as the Koscot test, named after the case of Koscot vs. FTC (1975). The rule is that, to avoid being considered an illegal pyramid scheme, compensation must be based on sales to ultimate customers. Because of this, almost all opportunities require the movement of some products (Grimes & Reese, n.d.). Legitimate multilevel marketing can be pursued with minimal start up costs and little or no inventory investment. In some cases the entry fee is also refundable if the new entrant decides against pursuing the marketing activities. Pyramid schemes on the other hand require high entry fees and a substantial investment in inventory which are non refundable (Indian direct selling association). Thus it should not cost much to become involved with a direct selling organization. The more money required to be involved, the higher the chances that money is primarily made from recruiting and not from the movement of products. Almost all direct selling organizations require a registration fee to get involved. This fee covers the cost of maintaining an account and the necessary literature to get started (Muncy, 2004) Legitimate multilevel marketing companies strongly discourage overstocking of inventory and participants who leave the plan can return any unused, saleable merchandise to the company for a refund of upto90% of the salespersons net cost. Companies following the pyramid structure offer no such buyback option and the disappointed scheme participants are left with dead stock which could neither be sold nor returned (Indian Direct Selling Association). Thus in Pyramid schemes the way to make money from recruiting is through inventory loading which is highly unethical (Muncy 2004). In general the MLMs must do the following to be legitimate: 1. 2. 3. 4. Monitor performance of independent agents to ensure that they really are making retail sales. Have buy back policies in place so that independent contractors do not get stuck with excess product. Charge low upfront fees for the right to market the MLM product Make purchases of sales training materials completely voluntary (Koehn 2001)

Typical MLM Claims: Most multilevel marketing companies claim to offer better opportunities than all other conventional business and professional models for making large amounts of money. People involved in Network marketing propose that this is the most popular and effective new way to bring products into the market. Consumers like to buy products on a one-to-one basis in the MLM model and eventually any product could be sold by MLM. Retail stores, shopping malls, catalogues and most forms of advertising would soon be rendered obsolete by MLM as it promises a new way of life that offers happiness and fulfillment. Success in MLM is easy through the support of friends and relatives who are the natural prospects since those who love and support you will become your lifetime customers. MLM activities could be carried out in ones spare time and it offers the greatest flexibility and personal freedom of time.

A few hours a week can earn a significant supplemental income and grow to a very large income, making other work unnecessary. Hence the ardent followers of MLM believe that it is the best option for owning ones own business and attaining real economic independence. (Fitzpatrick 2002)

Claims are made that the demand for these MLM products is rising rapidly and these products literally sell themselves because they are less expensive as the costs are cut down because of the absence of middlemen. Also these products are unique and so repeat purchases will never be a problem as substitutes are not readily available. Unlike franchises and other business startups, the capital required to start a MLM is very minimal. Those involved with MLM organizations also believe that their tools for success are unbeatable. By just signing up for seminars and conferences and buying books and tapes would assure success in this business. (Taylor 2008) The Other Side of the Story: Mehta, Stephanie N. (1995) suggest that although the opportunities promised by multilevel marketing companies are huge as the independent contractors earn commissions on products sold to neighbours, friends and colleagues but the ground reality however suggests that distributors are often sucked in by the promises of big money and ultimately succumb to pressures to buy overpriced products and land up earning less money themselves. MLM organizations mostly prosper by exploiting peoples relationships. Being a part of a MLM organization means that one must accept that selling to friends, neighbors and family is a part of building the business also termed as networking. But to those not in the MLM, it seems as if the friendship is being abused or used merely a pretext for selling. Lifelong friends are now prospects and neighborhood is now a market(Croft, Cutts & Mould, 2000a). The views of the customers (earlier friends, relatives etc.) about the changed relations and the pressures of purchasing the high priced products to oblige the friend has not been presented in detail. Myth of Great Income Opportunity: According to John Taylor (2008) people associated with MLM claim that it is a great income opportunity which everyone is capable of replicating and thus earning huge income. It has however been observed that almost all new recruits lose money and it is the few at the top who benefit at the expense of these new recruits. MLM meetings often are pitched as getting rich quick opportunities where people are encouraged to be more materialistic by pushing the sales of expensive products to their friends and relatives for which cheaper alternatives are available in the market. Work Less Earn More : It has been researched that the ground reality of Get Rich Quick claims made by these multilevel marketing organizations is that it involves hard work and a full time job and unless one hires support staff he is actually wearing many hats. (Dunn 2008) All MLM proponents claim it to be a legitimate business scheme and the reality of these MLMs turning into illegal pyramid schemes is always denied. One reason which attracts the people to join the MLM scheme is the promise made that one just needs to spare one to two hours of work hours a day and that would enable them to build up a residual income that will allow them the freedom to quit their present jobs and spend more time with the family and

do what one wants. The reality however lies in that to profit in MLM, one has to be willing to work long hours and continue to recruit to replace dropouts. This involves deceiving a lot of recruits and alluring them to the get rich quick opportunities. (Taylor 2008) Compensation Plans: Compensation programs in MLM vary. Some plans allow recruits to break away from their sponsors eventually. Others require sponsors to pass one or two recruits upline to their immediate supervisor (Nichols1995; Poe1995). Buyback Options Vs. Frontloading: Robin Croft et al (2000) state that one of the key features of the legal regulation of Network Marketing Schemes around the world is buyback- the statutory duty of firms to repurchase the unsold stocks of distributors leaving the scheme. The Direct Selling Association in 1992 adopted an ethics policy that requires members to buy inventory back from distributors for at least 90% of the purchase price. The extent to which these MLM companies follow this buyback policy has not been dealt with at length in any of the research topics. (Croft, Cutts & Mould 2000b)

India And Network Marketing: Being a well established and prominent industry in almost all parts of the world, Direct Selling is still in an evolutionary phase in the Indian subcontinent. Lack of knowledge and education on direct selling is perhaps the biggest block in the rapid development of this industry. Early players like Amway India, Modicare and Oriflame India are some of the ones who really introduced the concept of direct selling &MLM to the people of this country. Indian Direct Selling Association (IDSA) : The IDSA is the apex body of direct selling firms in India and is affiliated to the World Federation of Direct Selling Associations (WFEDSA). According to IDSA estimates, the direct selling industry in India is currently at Rs. 3100 crores growing at 20%. The prominent Direct Selling Firms in India are : Amway India ,Sunrider India ,Forever India ,Oriflame India ,AMC Cookware ,Hindustan Lever Network ,Modicare ,Direct Educational Technologies ,Daehsan Trading India ,Avon Beauty ,Herbalife ,Tupperware India ( Anonymous, 2006) Brief Note On MLM Companies Operating In India : Amway started its operations in India in 1998 and has launched a range of cosmetics called Attitude for women and Dynamite for men. These offerings are same as their global brand Artistry but at one third the price. The company has also introduced vitamins and proteins powders that are suitable to Indian consumers physical demands.(Amway to expand business in India , advertise on TV).Swedish cosmetics major Oriflame Cosmetics entered the Indian market towards the end of 1996 and was credited with introducing the concept of multilevel marketing in India . These products were sold through a direct selling system where company distributors sold to people they knew as opposed to random door to door sales . Avon emphasizes to be the best at understanding and satisfying the product , service and self fulfillment needs of women globally. Modicare was created in 1995 as the largest and the only Indian MLM company in the country.HLL, a dominant player and market leader in the fast moving consumer goods segment forayed into direct marketing in 1999 with a premium brand of personal care products for women, with women acting as consultants.

Aviance, the brand name under which the products were sold, was limited in its domain and scope of operation. It offered customized beauty solution and a range of cosmetic and skin care products to its consumers.Tupperware entered India in November 1996. Its marketing strategy was described by its three Ps Product, Party plan and People. The Tupperware products carried a lifetime guarantee. Any damaged product (cracks or breaks) could be replaced by same /similar new Tupperware product from any place in the world. Shahnaz Herbals will through their new company, Veda Dynamics provide people various earning opportunities, rewards and recognition using direct selling approach. In order to become a Veda Dynamics consultant a person has to buy a Veda Dynamics Product Kit. After registration the person would be eligible for three kinds of income, namely network income, retail income and retail generation income (Das 2007). RESEARCH OBJECTIVES: Based on the literature review the objectives of this research paper are to study: To study the brand awareness, price sensitivity, loyalty and the demographic profiling of the consumer for the products offered by these MLM companies The buyback vs. frontloading options of MLM organizations The justification of price-quality relationship of the products offered To study the compensation plan followed by these companies

RESEARCH METHODOLOGY: To study the brand awareness, price sensitivity, loyalty and the demographic profiling of the consumer for the products offered by these MLM companies, an exploratory study through questionnaire was carried out amongst the consumers to collect the primary data. The distributors/agents of different MLM companies operating in Indore were approached for in depth interviews and a separate set of questionnaire was designed for them. Also secondary resources such as academic journals, published company reports were used for the purpose of literature review. Research was conducted in the city of Indore with a representative sample size of 114 customers and 36 distributors of different Network organizations through a combination of qualitative and quantitative techniques. SPSS software was used for arriving at various statistical results. ANALYSIS AND RESULTS: Crosstabulation was carried out on the responses given by both the genders towards their being pushed towards becoming the distributor of a particular company.

Table 1 - Gender Vs. Pushed For Distributorship

From the above crosstabulation we observe that a higher percentage of both males as well as females disagree that they are being pushed towards the distributorship of a MLM product. But the percentage of females who agree being pushed towards distributorship is higher than that compared to the males.

Crosstabulation was also done on the occupation pursued by a respondent and their being pushed towards distributorship. The chart depicts that amongst the housewives a greater percentage of females disagree that they are normally being pushed towards distributorship. The service class people are mostly of the opinion that they are forced towards being a distributor of an MLM product. Even those into business disagreed that they are pushed to become the distributor of MLM company. Table 2: Occupation Vs. Pushed towards Distributorship

Table 3 - Awareness Percentage for MLM companies amongst customers

Amway Awareness percentage 89.6

Avon 68.7

Oriflame 63.5

Tupperware 80

Herbalife 44.3

Modicare 48.7

The awareness percentage of different Multilevel companies given in the table above depicts that the awareness of Amway is the highest (89.6%) followed by Tupperware (80%) and Avon (68.7%).

Table 4 - Use Percentage of Products Of Different MLM Companies

Amway Used percentage 42.6

Avon 49.6

Oriflame 40

Tupperware 63.5

Herbalife 27

Modicare 13.9

Exhibit 1: AWARENESS %
Awareness percentage 100 90 80 70 60 50 40 30 20 10 0
Av on Or if la m Tu e pp er wa re He rb ali fe M od ic a re Am wa y

Exhibit 2: USE %
Used percentage 70 60 50 40 30 20 10 0
wa y Av on Or if Tu lam e pp er wa re He rb ali fe M od ic a re Am

Awareness percentage

Used percentage

The response about the usage of products offered by these companies depicts a higher usage of Tupperware products (63.5%) followed by Avon (49.6%) and then Amway (42.6%). On enquiring about the mode by which the consumers were approached it became evident that the distributors of MLM products resorted to holding formal meetings wherein they invited customers to a party or had promotional talks about the benefits of the product and that of being a distributor.

Exhibit 3: Mode of Approach

Percentage 40 35 30 25 20 15 10 5 0

Percentage

Attended Video Shows

A higher percentage of the respondents were housewives (40%) followed by the service class (36.5%). The percentage of people belonging to business class was lower (16.5%) than that of other two categories. About 65% of the respondents agreed on being provided with brochures and catalogs by the MLM distributors so that they could make a choice from the various product ranges as all the products were not readily available with the distributor. In some instances the product was ordered by the distributor only after an order was placed. About 43.5% of the respondents neither agreed nor disagreed that the salespeople/distributors of MLM companies were very pushy towards selling their products . 27% of the respondents however agreed to the distributors being very pushy towards selling the products to friends, relatives and acquaintances. Table 5: Customer experience with MLM salespeople

Pushy salespeople Strongly Agree Agree Pushy Sales People Obligated to Purchase 8.7 17.4 27.0 22.6

Attended Promotional Talks

Attended Meetings

Neither Agree Disagree Nor Disagree 43.5 17.4 11.3 23.5

Strongly Disagree 9.6 19.1

There was a mixed response by the respondents when they were asked whether they were obligated to buy the product since the person approaching them was either their friend or acquaintance. 23.5% of the respondents disagreed that they felt obligated to purchase the product and closely following this response was 22.6% respondents agreeing to their feeling obligated to purchase the product as it was difficult for them to refuse a friend or relative approaching them.

Table 6: Agreement with the product quality Frequency Product quality Poor Average Good Very Good Total 1 35 56 23 115 .9 30.4 48.7 20.0 100.0 Percent

Around 49% of the respondents felt that the product quality offered was good and 30% of the respondents replied that the quality of the goods was average. Most of the respondents agreed having good friendly relations with the person involved in selling the MLM products to them. About 35% of the respondents said that the trial of the product before purchase was average. The response was however more on a negative side with 27% of respondents saying that the trial was poor. Some customers feel highly satisfied with such buying experience whereas some are distressed and frustrated. Most of the respondents did not find a very good value for the money spent by them on the purchase of these goods. About 47% of the respondents felt that the value for money lies on an average scale that is neither too poor nor too good. A separate questionnaire was directed towards 36 distributors of various Multilevel marketing companies operating in Indore to get in depth knowledge on the various policies of these companies. On analysis it was found that an equal percentage of respondents (22.22%) were associated with Amway , Oriflame and Tupperware companies

Exhibit 4: Association Percentage with different MLM Companies as distributors

About 36% of the distributors have been associated with the organization for one to two years and 25% of the respondents have been associated for more than four years. About 11% of the respondents have been associated for a very less duration i.e. less than a year.

Exhibit 5: Years of Association Percentage with different MLM Companies as distributors

Also a huge percentage of respondents (distributors) i.e. 91.7% were females. 31% of the distributors represent housewives who find becoming a distributor of MLM companies as a good option to earn from home based on their social networking. 36% of the respondents belonged to the service class and the remaining 33% represented the business class. Conclusion: From the analysis of data it can be concluded that the main targets of MLM companies are the housewives as shown in table 2. They fall easy targets because of their interest to earn from home and the way in which they can connect with the family/ friends . Where the justification of the product price is concerned, it becomes an issue, since the same kind of product or even a better one is readily available in the market. Also there isnt that much of an income while selling the product as claimed by the MLM company while recruiting distributors. Even the acceptance of this kind of marketing in the Indian market is slow since they find it difficult to accept the relative as their prospective clients/customers and hence the chances for this kind of marketing to succeed falls short. Most of the distributors are falling prey to the frontloading of the product because if the distributor is unable to move the product in the market, it becomes a dead stock for them. Legitimate companies should have a buyback policy so as to lessen the distributors burden and strengthen their relationship. Though such claims are made in the initial stages of recruiting distributors but most of the cases reflect that promises made by the company have not been honoured. It is therefore very important for people to understand the ins and outs of earning extra income from the luxury of home through multilevel marketing structure and caution needs to be observed before getting enrolled with any such earning opportunities.

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