Network Marketing

1
Network Marketing

• Recruitment and training and the industrial ban
  in China
• Antony K.Y.Poon
• April 2003

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Contents

• Definition of DS and Network Marketing and their
  relationship to each other
• DS in China in 1998
• Role of recruitment and training in network
  marketing

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• Different faces different names

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Definition DS

• WFDSA definition of DS
•  The marketing of products and services directly
  to consumers in a face-to-face manner, generally
  in their homes or the homes of others, at their
  workplace and other places from permanent retail
  location 

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Definition of network marketing

• This subset of the DS industry has a compensation
  plan which enables salespersons or distributors
  to earn compensation from the sales group or
  distributors
• 2 kind of compensation
• Personal sales
• Sales of the distributor group

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• Specificity multiplying effect
• DS companies
• single level
• multi-level companies are the only one to use
  multiplying effect
• 1998 70 of the revenue from the DS industry
  was generated by network marketing companies
  (Amway, Nuskin, Shaklee) that use multi-level
  compensation plan.

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DS in China

• end of 1980 a Japanese company was the 1st DS
  company without licence
• Avon was the first with a licence obtained in
  1990
• April 1996 Chinese government issued the first
  41 national DS licenses
• 1998 ban of the DS industry

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Reasons for the ban

• Berry says   The only similarity between a
  pyramid scheme and a network marketing direct
  selling organization is that both offer an
  incentive to every new participant to introduce
  others. 
• Definition of pyramid A pyramid is a scheme in
  which a recruit pays an entry fee for the
  opportunity to receive future benefits (money or
  privileges) which are derived from that recruits
  introduction of additional participants into the
  scheme, rather than from the sales of products.
• According to WFDSA (2003), pyramid schemes are
  not commercially substainable because they have
  no real trading in viable goods or services
•  Early pyramid were readily identified and
  successfully proscribed because of their lack of
  tangible products. Subsequent fraudulent schemes
  have attempted to deceive the public and avoid
  prosecution by asserting that they are genuine
  businesses operating a multi-level marketing plan
  since they  sell  goods and services.

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• According to WFDSA, the factors that
  differentiate illegal pyramids from lawful DS
  businesses are
• Legitimate DS companies offer business based on
  the sale of quality products to comsumers, offer
  satisfaction guarantees, cancellation rights.
• Legitimate DS companies discourage overstocking
  inventories, possibility to return unused
  products.
• Minimal start-up costs and little or no
  inventory, modest entry fees
• The sales and marketing plans of legal DS
  companies are based on the progressive
  recognition and reward of DSellers for the
  development of customers.

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Peoples perception of legitimate DS companies
and pyramid Selling companies

• Pyramide schemes often attempted to pass
  themselves off as legitimate DS businesses
• Making people unable to distinguish
• Bad image of all the industry
• ¾ people in the US would not choose this industry
  as an occupation (1997)

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• DS industry has still a bad image and regarded by
  many consumers as inherenttly dishonest (1995)
• 2 main reasons for bad image according Chan
  (1993)
• - Illegal and unethical practices of pyramid
  scheme
• - False claims from distributors

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In April 1998, the chinese government issued the
SAIC doc. N46

• China banned the industry in order
• to protect the rights of consumers
• to promote fair competition
• to protect the economic order of the market and
  social stability.
• Many  chun xiao  firms sell smugled, inferior,
  counterfeit products, upon which no tax was paid
  and sold at anormal prices. These firms used such
  products to cheat people. Their business
  practices promoted unfair treatment and caused
  social damage to consumers and enterprises.

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Chinese legislation on DS after 1998

• The administrative authorities
• - had investigated over 2528 cases of illegal
  chuan xiao operations
• - issued RMB 100 million of fines
• - found over RMB 71.38 million worth of illegal
  chuan xiao products
• - banned 577 unlicenced chuan xiao companies
• The government imposed a complete et immediate
  ban on DS companies including foreign companies,
  which started from October 31, 1998.

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Conversion regulation MOFTEC 455

• Foreign companies were allowed to operate in
  China under the new law
• A company employing (not permanent) salespersons
• A company that earned commission through the
  promotion and selling of the products without
  employing salespersons.
• Other conditions
• Amway China followed the regulation.
• Its sales ? from RMB 1,500 million in 1997 to RMB
  320 million in 1998.

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The role of recruitment

• The process of recruiting new distributor is
  regarded as the key to success in network
  marketing.
• 2 benefits
• Distributor earns more commission from recruiting
  downlines, who may contribute sales to the
  network
• Newly recruits contribute to increase sales and
  enable the network of the whole company to grow
  at a faster rate.

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Training

• does not directly lead to improve sales but is
  very important.
• is important as are supervision and motivation
• gives proper guidelines on what to present and
  how it should be presented.
• Helps salepeople to be ethical and upright when
  they sell
• Enable salepeople to present the features and
  benefits of the products they offer
• Instructs distributors about product knowledge
  and sale know-how
• Ensure distributors to be aware of their ethical
  responsabilities

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Analytical overview of recruitment and training

• Recruitment approach used in network marketing
   union building 
• Others way of recruiting
• - One-to-one used in labor union. It uses
  trained and volunteer members to persuade a non
  member, outside the office, to join an
  organization
• - Word-of-mouth according a study, firms with
  less than 50 employees regard this method as the
  best method as it allowed them to reduce the
  recruitment budget and achieve high level of
  effectiveness
• - Like-recruits-like people recruit into an
  union other people with similar qualities who are
  usually in the same demographic group or have
  similar occupational identity

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Recruitment methods in network marketing

• According to Scott
• - 3 basic forms
• ? One-to-one presentation
• ? Home gatherings
• ? Large presentations
• According to Nichols
• - 7 different forms
• ? One-to-one
• ? Two-to-one
• ? Group presentation or opportunity meetings
• ? Audio or video presentations
• ? Teleconferencing
• ? 24-hour information lines
• ? Fax-on-demand

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Training program in network marketing

• Training programs include
• Product knowledge
• Analysis, selection and follow-up of prospective
  distributors
• ? Training of trainers

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Conclusion and future research

• This article provides more understanding of the
  DS industry and reveals the characteristics of a
  network marketing organization.
• Recruitment and training are 2 important
  functions for the survival and expansion of a
  company.