The arrest of the Amway India Managing Director and CEO, William Scott Pinckney, and two other Indian executives on charges of duping members of their direct selling network has created a great deal of confusion around marketing concepts such as direct selling (DS), multi level marketing (MLM) and pyramid marketing schemes.
Ajay Chanam, Head, Corporate Affairs (India) of the Hong Kong-based direct selling FMCG company, QNET, demystifies these concepts in an interview.
Q. What are the implications for direct marketing companies if pyramid marketing schemes are banned?
A. Firstly, the correct terminology for the industry is 'direct selling' (companies) . Direct marketing is a subset of the advertising industry and is in no way related to direct selling.
Direct selling companies will benefit if pyramid marketing schemes are banned in this country. Banning of pyramid scams will help people save their hard earned money. We welcome a ban on pyramid companies which are completely illegitimate and disguise themselves as direct selling companies. This has resulted in the entire industry being affected negatively. The need of the hour is a clear legislation that helps distinguish between legitimate direct selling companies and illegal pyramid schemes.
Pyramid marketing schemes are companies and individuals which pay out incentives/commission to distributors who get new distributors (individuals) to join the network. They are known as 'pyramid' because of the fact that the person who initiates the same or joins earlier makes the maximum amount of money. They are unviable because payout of commissions can only happen if new individuals join.
Q. What exactly is direct selling?
A. The issue is with direct selling (DS) MLM or networking companies and not pure-play direct selling companies like Eureka Forbes. Direct Selling is the marketing of products and services directly to consumers in a face to face manner, away from retail locations. In DS MLM companies, individuals join the direct selling company to consume the products at a discount or to earn by retailing the products/services to the people they know and also have the opportunity to earn when the products/services get promoted or consumed by the people they have introduced in their personal network.
Q. What are the main differences between MLM/DS companies and pyramid marketing companies?
A. The differences are:
>> DS is NOT a "get-rich-quick scheme": DS may be very lucrative, but it is also a tough business. Right from the start, genuine businesses will tell you that the results happen only if you put in the time and effort. Any company that promises you an easy way to riches should be regarded with caution.
>> DS companies deliver quality products or services: Pyramid schemes have no legitimate products or services. Good direct selling companies dedicate substantial resources to research and development to create quality products that are of actual use to people.
>> Direct selling companies have restrictions in their compensation plan. Reputable direct selling companies limit the number of people who can earn a commission through sales. This is to level the playing field for its members. In a pyramid scheme, the "uplines" or the ones at the top make all the money, while the "downlines" or the ones at the bottom, lag behind due to late participation.
>> DS does not earn commission solely through recruitment: Recruiting new members is not a requirement for real network marketers to earn a commission. Legitimate DS companies are structured to reward people for promoting their products. In a pyramid scheme, there is no financial return unless others are successfully enrolled.