THE PITFALLS OF NETWORK MARKETING

IN THE PHILIPPINES
Patrick G Dablio

Introduction

Multilevel or network marketing (also known as “matrix marketing”) is ‘a strategy

for selling products and services in which independent salesman are permitted to recruit

other salesmen and to draw commissions from the sales of their recruits’ (Adagbon,

2007). For simplicity, network marketing is an art of taking advantage of your existing

contacts and further using these contacts to obtain another series of contacts and

obtain income through that connection (Manning, 2001:175). Organizations in the

business of multilevel marketing have been active in Philippines since the early 90’s and

have been enjoying rapid expansion. Multilevel marketing is believed to be more

promising than what franchising was to the fifties and sixties. They also have goods and

services which they directly sell to consumers using a sales force made up of network of

individuals alternately called independent business owners, agents, distributors or

consultants.

In this paper, the author aims to explore the nature, ideology and characteristics

of multilevel marketing. Secondly, the author also looks at why people (most especially

Filipinos) get involved with, and sustains their commitment to multilevel or network

marketing and the strategies they employ to cope with the authenticity in this kind of

“work”. Finally, aims to deliver that despite its (multilevel marketing) promising results in

the recent years, multilevel marketing still poses major pitfalls that are detrimental to

Filipino traders.

Characteristics of Network Marketing

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Multilevel marketing plans, also known as "network" or "matrix" marketing are a

way of selling goods or services through distributors. It is a system in which the

manufacturer or the producer pays people outside the company to sell its products and

services directly to consumers. People within the company usually start from their

personal contacts and expand it through a series of referrals. For simplicity, networking

is an art of taking advantage of your existing contacts in building a progression of

connections and generates profit using that connection (Manning, 2001). The producer

supplies certain products and creates a network of an outside seller to dispose their

products in the market. The individual distributor is then encouraged to engage into a

recruitment process. The more sellers they recruit to the company, the bigger the sales

force they would become.

Technically speaking, anybody can enter the business of multilevel marketing.

Multilevel marketing is not limited only to those who are experienced and well equipped

businessmen. But despite the ease of entry, one must consider the cost of entering into

a business. No matter which networking company, all of them requires a start up fees or

“starting investment.” This cost typically includes a sales kit complete with company

information and a few product samples. Some incoming distributors are opting to pay

more than the required fee so that they can have more products on hand. The monetary

requirements definitely vary from one company to another. A company which sells a low

scale product might require smaller investment compared to those company who wells

large scale products. For an instance, Company X that sells product A that can be sold

for 5Php each while Company Y sells product B that can be sold for 20Php, Company Y
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initial investment requirements will then have bigger investment requirements compared

to company X, assuming all factors are equal.

Moreover, these multilevel marketing companies typically promise that if you sign

up as a distributor, you will receive commissions for both your sales of the plan's 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 the distributor's "downline.” As defined by Harris, downlines are

distributors within the lower level hierarchy of another distributor (2004:14). Each

salesperson is therefore given the opportunity to build his or her own independent sales

force (downline) by recruiting, training, and motivating others to sell the same products

and services. The former is then called the upline or simply the manager of the downline

network.

On the other hand, some company employ a single-level model in which the

seller is paid based only on his or her own sales. Although most operate using a

multilevel structure in which distributors receive a percentage of their sales and the

sales of members in their downline. The number of levels and the percentages paid per

level vary from one company to the next. Some companies offer a minimum of 5% to a

maximum of 15% commission from sales. Within a multilevel structure, some

companies, rather than paying a percentage per level, pay on total sales accumulated

by its distributors across several levels. Some less legitimate companies produce other

revenues by providing their participants a percentage of the investment made by their

recruits.
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Promising Results brought by Network Marketing

Over the past few decades, multilevel marketing has proven its appeal to be a

business of choice among many individuals most especially Filipinos. Hundreds of

multilevel marketing exist up to this date and among the promising results made my

multilevel marketing were the companies who have succeed in using multilevel

marketing strategy. According to Google’s Latest Trend (2012 - 2013) result, Avon

Philippines, Aim Global, Herbalife, Amway and DXN top the statistics.

Avon being one of the major distributors of cosmetic products and lady’s apparel

today, it is one of the pioneers in the industry of direct selling. Avon’s founder Mr.

McConnell keenly understood the importance and the power of “relationship-based”

sales, and knew that women could be the most effective and trustworthy salespeople

(AVON.com.ph:2013). Avon started as perfume and soap producer that caters women

and be sold by women. One of the biggest plus AVON had was their narrowed market

segment and relationship-based selling. Through proper market segmentation, AVON

was able to specify their target clients thus increased their chance of survival in the

market and eventually were able to incredibly expand throughout the world.

Furthermore, Alliance in Motion Global, Inc (AIM Global) a marketing company

established in March 2006 is a multilevel networking company that solely distribute

Nature’s Way products in the Philippines and all over the world. AIM Global is

conceptualized to provide unmatched quality distribution of exceptional products and

services through a combination of advanced technology, distinctive marketing

strategies, excellent product lines and exemplary leadership that secures the success of

the company (www.alliaceinmotion.com). Aside from its dynamic product line, “pro-
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distributor” concept of AIM Global has become one of its defining edges among other

multilevel companies in the world. AIM Global offers their downline distributors

“extravagant” packages such as transferrable scholarships, free medical services and

insurances through their affiliates. By that means, downline distributors are motivated

enough to increase their sales and increase their incentives through their sales.

On the other hand, Herbalife and DXN are of the most successful health and

wellness-focused multilevel marketing companies in the Philippines. Herbalife trade

nutrition, weight-management and personal care products while DXN sells wellness

products that contain Ganoderma Lucidum (a potent mushroom extract). The secret to

success of these companies lies on product trust and credibility. Both Herbalife and

DXN were able to address the leading cause of morbidity most especially here in the

Philippines, which are cancer and obesity. Both companies focused on product

development and improvement although out the years maintaining the established trust

and confidence of its customer.

Finally, Amway (American Way) successfully established itself as a leading

multilevel marketing business that continues to sustain its company today. As stated in

Amway’s official site, Amway “supports the fundamental freedom of people to determine

their own future, allowing them the time and resources to protect and nurture their

family” (Amway2u.com, 2013). Amway distributes a variety of products. From personal

care, beauty and wellness, home care all the way to agricultural products. Amway’s

distributor distributors are not limited to what they could offer. Distributors have the lee

way to decide on what kind of product to sell based on the field of their specialty.
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Major Pitfalls of Network Marketing

Many, if not most of the college students, young professionals, single mothers

and even working professionals at some time have been approached by a sales person

or have seen job opening which offers a an urgent hiring of some young part-timers.

One might have been told that you can top-up your salary by just working two to three

hours a day, or if one willing enough to commit, become financially stable within few

years. Or maybe one has been told about the gigantic opportunity that he or she might

be missing. If so, then one might have been approached by a distributor of multilevel

marketing company.

There must be no wonder if someone would be curious about such offers. One

will be assured that this type of plan something not too good to be true and there is no

hidden danger behind it. In Multi-level Marketing: A Practical Guide to Successful

Network Selling, Clothier (1992) says just that: "It all sounds too good to be true; there

must be a catch somewhere. No catch!” Is there really no catch? On the contrary, there

are major pitfalls of multilevel marketing that the agents failed to recognize or to

disclose within the business proposal discussion. Positively, there are many people who

have made some money and a selected few who have made lots of money from

multilevel marketing. But there is a major drawback for this business.

First and foremost is the over saturated market share. Market saturation can be

defined as the level at which all people who want the product at the desired selling

price, will buy the product. In other words, no product or services will 100% penetrate

the market since not everyone will buy it or can afford to buy it. The fact that multilevel

marketing is based on expanding its network of seller or distributor, this type of system
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may not work for all distributors. To illustrate the problem that regards to market

saturation, let us assume a multilevel Company X. Company X sells sanitary napkin

which happens to be a basic commodity nowadays. The approximate population of the

Philippines as of July 2012 is 103 million. Obviously only women ages 12 – 40 years old

will use sanitary napkins. That means only 39 million among 103 million will buy this

product. But it doesn’t end here. If Company X sells the sanitary napkin for 20Php we

can eliminate most women who belong to those who are in below poverty line

(approximately 10.5 million). The target market then narrowed down to 10.5 million out

of 103 total population ceteris paribus. In the same way, not every Filipinos wish to buy

a slimming tea, a healthy bracelet and the like. No one in the real world of business will

accept the promising argument of the multilevel marketers of having a product with an

infinite market demand. Moreover, in his online article, Van Druff (n.d.) discusses that:

The all-too-obvious point here is that management of supply and demand,

and keen insight into realistic market penetration and saturation are crucial

to any business, for any product or service. Mismanagement of this aspect

of a business will eclipse good market access, excellent product design,

human resource assets, production quality, and so on.

Any business must consider the mechanism of supply and demand in the market.

“Failure to hit the target” could lead to either producing more than how much is needed

which is a surplus, or producing less than how much is needed which is a shortage. In

the case of most multilevel marketing, surplus takes place most of the time than

shortage. The analogy is simple: when the number of distributor increases, there is a

need to increase the production of products and services, yet the number of target
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customers remains constant to decreasing. Moreover, criticizing multilevel marketing in

a mathematical context, multilevel marketing creates series of progression wherein the

uplines are required to recruit six more (for example) and ask those recruits to do the

same and their recruits instruct the same so on and so forth. A certain point will come

where the number of distributor exceeds the number of its target market. We can

therefore conclude that only the first up to the third level uplines could maximize the

benefit of their downlines’ commission.

On the other hand, another pitfall of multilevel marketing is the pyramid-like

structure of the network. In the classic Ponzi Scam scheme, contributor solely

generates revenue by recruiting new investor into the company. The typical trademark

of this scheme is the promise of getting back the investment in shorter period of time for

doing nothing but recruiting more investors to the company and letting others do the

same. But what makes the illegitimate multilevel marketing company legitimate is their

product. Van Druff again describes multilevel marketing as “having an inherent basis in

a pyramid structure since, for most MLMs, the product is really a just window-dressing

to divert attention from the real profit-making dynamic: joining fees selling product

internally and distributorships” (n.d.). Otherwise stated, multilevel networking companies

nowadays are so hard to point out on whether they are legitimate or not. Multilevel

networking companies come in many form nowadays. But one dominant characteristic

is shared by those companies: the promise to their customers or investors to receive

bigger commission if they both recruit and sell their products. On the contrary, as

mentioned above only the first up to the third degree upline will benefit the most in this

kind of arrangement.
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Moreover, a moral and ethical issue is another pitfall of multilevel marketing.

Bloch stresses in her article: “From an operational point of view, one company is

particularly notorious for its distributors phoning up people to offer them the opportunity

and refusing to tell them what it is all about until the night of the presentation (1996).”

This is true to most, if not all of the multilevel marketing recruiters. They invite people

like their friends, close relatives, old college classmates and even family to a dinner. All

of a sudden a dinner has become a product presentation and business proposal.

Multilevel marketing is a great venue for dishonest and deceitful salespersons. Along

with that, much relevant information was not fully disclosed on that first meeting. No

single multilevel marketing recruiter would ever tell that the product he is selling will just

become a long term inventory in their houses. Misleading information was disseminated

about the quality and feasibility of selling their products. Furthermore, greed and

materialism can also be observed in multilevel marketing. Bigger commission and

higher income is the driving force of most multilevel marketing company. In fact, one

way of convincing people is the presentation of the past checks received by the higher

managers of the multilevel marketing company. Distributors are most likely to

overemphasize the importance of money and material rewards by recruiting more

downlines in disposing products or recruiting more who will do the same.

Most books about multilevel marketing claims that “there is nothing wrong with

selling” and no one should argue about that. But the points is, if all products are sellable

using the conventional way then why sell it the MLM way?
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Conclusion

Despite its promising results made in the recent years, multilevel marketing still

poses major pitfalls that are detrimental among Filipino traders. The “pyramid” structure

of a network marketing exhibits threat to many Filipinos who perceived it as a “pyramid

scam”. In addition, an over-saturated and imbalanced market supply and demand

mechanism alters the possibility of growth of any businesses in the Philippines. A

healthy economy is like a healthy body that requires a balanced intake and output. Both

supply and demand of the market system must be in balanced to achieve a vigorous

and active economic exchange of commodities. Also, multilevel marketing teaches one

to be greedy and materialistic. The most distinct driving power of a multilevel company

is the goal of increasing their sales and down line network thus increasing their

commissions. And lastly, multilevel marketing reveals the unethical and immoral issues

of dishonesty. MLM tends to exploit people by feeding them with misleading information

and false reassurance.

Choosing and going into a business is like taking a midterm exam. When you

study the subject religiously and keenly you will never be lost in the day of the exam. As

in choosing a business you want to go through, knowing deeply the nature of the

business, the pros and cons of getting through it will surely give you a hint to really

determine on where to go. And just like a midterm exam once you pass your exam

paper, there might be no more room for another chance.

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Reference List:

Books:

Futrell, C. M. (2002). Fundamentals of selling: Customers for life. New York: McGraw

Hill.

Manning, G. L., & Reece, B. L. (2001). Selling today: Building quality partnerships.

New Jersey: Prentice Hall.

Miletsky, M. N. & Callander, J. A. (2009). Perspective on increasing sales. USA:

CENAGE Learning.

Goh, D. (1999). 52 ways to make more money in network marketing. India: Sterling

Publishers.

Solomon, M. R. (2009). The truth about what customers really want. England: Pearson

Education.

Article in a Book:

Barrow, C. (2008). Finding the right business opportunity. Starting business from

home (pp. 13-23). USA: Kogan Page Ltd.

Journal:

Susman, K. (September/October 2003). Top ten networking mistakes: One-night

stands and other networking disasters. Commercial Law Bulletin, 18 (5), 38.

Magazine:

Bud, M. (Fall 2000). The truth about networking. AFP Exchange, pp 144-145.
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Harris, W. (2004 November). Network marketing or pyramid scheme? Black

Enterprise, 35, 102-110. Retrieved from

http://search.proquest.com/docview/217911991?accountid=141440

Article from a Database:

Bloch, B. (1996). Multilevel marketing: What's the catch? The Journal of Consumer

Marketing, 13(4), 18-26. Retrieved on July 2013 from

http://search.proquest.com/docview/220134972?accountid=141440

Online Sources:

Druff, D. V. (n.d.). What's Wrong With Multi-Level Marketing?. Retrieved July 2013,

from http://www.vandruff.com/mlm.html

Gregorio, J. (2012). Network marketing/MLM in the Philippines - An overview.

Retrieved July 2013, from http://onlinemlmexplosion.com/online-

mlm/2010/01/30/network-marketingmlm-in-the-philippines-an-overview/

Calderon, Justin (30 April 2013). "How feudalism will undo the Philippine

elections". Inside Investor. Retrieved 1 May 2013.

Websites:

www.AVON.com.ph

www.alliaceinmotion.com