11 reasons why MLM companies go phut so often

SHRINIDHI HANDE writes from Madras: Not a year goes by without news of some company or the other, somewhere or the other, suddenly going under the water, and leaving “innocent” depositors in the lurch. It could be Bangalore or Bombay, Mysore or Madras.

This year, it is Madras.

Madras police have opened investigations on QuestNet/ Goldquest, a multi-level marketing (MLM) company, which, like every other MLM company, claimed to be “genuine” and promised windfall wealth creation for everyone involved at every level.

All went well, till there was, as usual, the twist in the tale.

So what gives?

Because most of the companies have some products to cover their money schemes, because there are no laws which disallow such operations, because MLM promoters manage to get some high-profile persons on board to show their credibility, all goes well during early months/years.

News of the wealth creation spreads like wildfire and thousands sign up.

Some early birds make pots of money. Seeing them buy luxury homes and cars only propels the greed of new entrants who start promoting the scheme with greater energy and aggression. But then, the market reaches a kind of saturation and it is not possible to enroll new members at the rate it was possible earlier.

This is when the trouble begins.

The concept of MLM survives on the belief that the chain can continue to grow sine die in a never-ending fashion and that existing subscribers do not leave. But unfortunately this doesn’t happen. As the saturation is neared, desperate members start resorting to unethical practices with a sheer greed of making quick money.

So what are the reasons MLM companies go phut so often?

1) Because members are all told that it is all very easy: Many prospective members are told, “You just invest the money, I will bring more people and enroll them under you. You don’t have to do anything”. Those who fall for these assuring words feel cheated if their friend fails to recruit people under him, resulting in loss of his investment.

2) Because members are given the wrong picture: “Use one credit card to make payment now. After 50 days, use ‘balance transfer facility’ and transfer the balance to second credit card. You’ll get three months’ time. This way you can get your money back.” But in most cases the member doesn’t recover his investment back in the first few months. Besides losing money he also ends up paying hefty credit card interest. This results in direct rage against the company and his up-line who suggested such an approach.

3) Because members invest their own money on behalf of others: Sometime, for specific reasons, members pay on behalf of their down-line (because both legs need to be balanced or because a person thinks his friend is very much capable of signing up people or other reasons), and sign-up people for free. This approach may not give expected results adding to frustration.

4) Because key facts are hidden from members: Many people hide several required facts from prospective members because their sole objective is to sign you on the spot. Some facts which are never disclosed: Both side needs to be balanced, maximum payable amount, annual charges, cancellation/refund policies, ongoing legal cases and other negative news, minimum amount of money you’re expected to bring in (by referring people under you) to get back your money, what rights you have/do not have as a member, etc. People discover some of these facts sooner or later. This results in a sense of betrayal.

5) Because new memberships are forced: Ideally you should make a prospective member aware of both positive and negative aspects of the business and let the person take his own time to decide. But more often than not, they are given only the positive side and are often forced to sign up on the spot. A hypnotic environment conducted by the up-line and faith in their friends may make people sign up on the spot but they may repent later for that.

6) Because the company does not take action against members involving in unethical practices: Ideally, a company is expected to terminate the membership of those who use unethical practises to promote the business. But we seldom hear such news. As long as money flows in, company doesn’t really bother about the approach used. (They rely on a well-crafted fine print to protect themselves in case something goes wrong). Only when things go out of control (like when someone files police complaint), they look for scapegoats.

7) Because there is a drop in the company’s efficiency: Most companies operate promptly during the initial months/ years, by sending out cheques and products in time. This builds trust and members soon canvass on behalf of the company. But when the member base grows beyond control, some companies fail to maintain the same efficiency. Products do not reach in time and cheques take forever to come. If this happens, credibility starts falling and the bad word spreads real fast.

8) Because there is a falsely induced sense of cultism: Gradually, up-line tries to exercise influence on their down-line even in areas not related to business. Some examples: Encouraging down-line to quit his main job and take MLM full time, setting targets and pressurizing them to meet the same, discouraging members from using competitor products (even when they are cheaper and better than MLM one), forcing down-line to attend meetings and seminars, humiliating those who do not show enough commitment or question things and so on.

9) Because of bad policies: Most companies do not offer any of the following: a proper refund policy (if only they can provide a simple option where unhappy/ dissatisfied members can surrender their membership/ product and get their money back, most problems would have been avoided), a vigilance team to ensure its members don’t promote the idea in unethical ways by making false promises, an active customer support cell to address member grievances. Add to these, some network marketing companies have rules that stipulate that you need to keep spending a certain minimum amount every year (in the name of membership fee, product purchases, etc) even when you are not earning a penny out of the scheme.

10) Because early warning signs are ignored: Because of the unquestionable faith members develop towards their company, up-line and its business model, early signs of warning, even if detected by a few in time, are often suppressed and ignored. Beliefs that “That can’t happen to me” or “He failed because he didn’t work hard” or “There must have been some misunderstanding-everything is fine” or “This is a small issue, we’ll get over it”, etc, keep members hooked to their dream. Only when things go totally out of control do they wake up to the reality. A lot of trouble can be saved if members maintain an open mind to question and verify any negative news that they come across, without any prejudice.

11) Because when the going gets tough, the management hides: When something goes wrong on a big scale, promoters of network marketing companies often prefer to close their business and open shop under a new identity after some time. Because they have made their pile, it is not in their interest to stand up and support members. When Questnet was banned in Sri Lanka, the company should have offered to refund money to those who joined it recently, (instead they silently left and after sometime opened a new shop: Lotus marketing). When Madras police were investigating QN, Datuk Vijay Eswaran could have flown in and explained to the police and public why his company was legitimate and should be allowed to operate. Instead, promoters often choose to stay away, letting some agents become scapegoats sinking huge money of thousands of people.

Note: All companies may not face all the above issues, must most of them do at some time or the other. These are general observations-some companies may take exception w.r.t. certain points.