I still remember one beautiful day a friend of mine had pitched me about an exciting business opportunity during my college days. He told me that we need to purchase the product (which was an online course), and then we would become the reseller and gain commission on every successful sale that we and our network make.
Sounds exciting, isn’t it?
It was how I came to know about Multi-Level Marketing business, which later turned out to be a ‘PYRAMID SCHEME.’ I am pretty sure you must be introduced to a multi-level marketing business similarly.
Many people in India have been falling for such’ get rich quick schemes’, and many ‘fake’ companies have been exploiting people from time to time in the name of ‘Legitimate’ network marketing business.
It becomes crucial to understand the difference between fake companies and legitimate network marketing companies in India and how to identify them.
What is a Pyramid Scheme?
Network Marketing Pyramid Scheme is an unsustainable business model that closely resembles a legitimate MLM/ network marketing business.
The main characteristic of a Pyramid scheme is that the member makes money only by recruiting other people.
There can be two types of pyramid schemes.
One is an investment based pyramid scheme, and the other is ‘product’ based.’
In an investment based pyramid scheme, there is no real product to sell; instead, there is an ‘investment opportunity.’
The recruiter recruits (say) 5 people, and each of them pay some initial investment (say 1 lakh) to the recruiter.
Then the recruiter asks each of these five people to recruit five more people.
Upon successful recruitment, each of these five people will get back their initial investment with a profit of 4 lakh each.
And the process continues.
The second type of pyramid scheme is product-based. Some times to disguise themself as a legitimate MLM model, some pyramid scheme company run their operations by selling products instead of the ‘investment-opportunity.’
The recruiter recruits say five people by selling them a bucket of products and make a commission.
These five people now have to hire five more people, and the recruiter tells them to focus more on recruitment rather than sales.
The products itself do not carry any intrinsic value and have a low-profit margin; as a result, there no-repeat order of the products within the network, and therefore the only way to earn more is by recruiting more people.
How to identify a pyramid scheme?
There is a very thin line between a pyramid scheme and a legitimate MLM company.
So it becomes tough to identify a fake company, and hence many people fall into a pyramid scheme which is a ‘get rich quick scheme.’
However, there are a few key characteristics of a pyramid scheme that we can use to identify one.
If you observe, in the two types of pyramid scheme explained above, there is a thing in common between them. In both cases, there are no real products to sell. People will earn only by recruiting others, and this process of recruitment gets difficult with each step.
We need to understand one thing very carefully. To survive and grow in the market, the products or the service must be of good quality, whether it is a network marketing company or any other company. If the consumers are enjoying the products and if the products of the company are adding value in the life of its consumers, then only it will grow, and then only the business model will sustain in the long run.
The key points to consider for identifying a pyramid scheme.
- There should be a product rather than an ‘investment opportunity.’
- The product should be of good quality and a reasonable price.
- The company’s focus shouldn’t be on recruitment and should not offer money on recruitment.
- There should be a demand for the products in the market.
- There should not be an initial investment upon joining the company.
- The company should not put pressure on the bulk purchasing of the products.
We need to understand that the Network Marketing business is not a get rich quick scheme and should prevent ourselves from getting scammed. To be successful in the Network Marketing business, one needs to invest time and energy to gain knowledge about the industry and to perform consistently.
Is Network marketing legal in India?
We need to understand that network marketing is a business model that any company can adopt to distribute its products to its consumers. It is different than the traditional Distribution model. In this distribution model, consumers also gain profit from their purchase.
This business model has been successful in many countries like the USA, China, Spain, Germany, Malaysia, etc. However, in India, it is still at a very nascent stage. Due to a lack of awareness and knowledge, many fake companies have been exploiting the consumers in the name of network marketing.
So network marketing is a 100% legal business model in India. To protect its consumers, the government has drawn guidelines for the network marketing industry in India.
NETWORK MARKETING GUIDELINES IN INDIA
The direct selling industry was introduced in India back in early 1995. Since then, many Pyramid or Ponzi schemes had exploited consumers taking advantage of their lack of knowledge and legal framework. These were running with different names and with various business plans. Due to a lack of awareness about the industry, many people got scammed.
To prevent fraud and to protect the legitimate rights and interests of the consumers, it was necessary to draft a regulation for India’s direct selling industry. The guideline was also essential to protect the future of the direct selling industry of India.
In 2016 the Network marketing guidelines of India were formulated. It becomes mandatory for all the direct selling companies in India to comply with this guideline.
Let’s take a look at the critical points of the guidelines.
The direct seller will not receive any remuneration or incentives for the enrollment of a new participant.
A direct selling company will not put any registration fee or entry fee for a new participant.
Purchase of goods or service
New participants do not require to purchase goods in bulk quantity or a quantity beyond an expected value.
Also, The participant does not need to purchase goods or services for an amount beyond the expected price.
The direct selling entity should make provisions for a buyback policy for the goods sold to the participant at the request of the participant at reasonable terms.
The direct selling entity must disclose the method and the calculation of the remuneration, And the reward must be from the sales of goods are the services.
Legal network marketing companies in India
Many network marketing companies in India have been following the direct selling guidelines and are successfully operating in India.
Vestige Marketing Private Limited
It is an Indian company which started its operation in 2004 and deals in Wellness and personal care products. Vestige is an iso 9001-2015 certificate company. The company has state-of-the-art manufacturing facilities and has been introducing innovative products every year.
Since its inception, the company has been growing at a phenomenal rate And recently has been ranked 30th in the world’s top hundred direct selling company.
It is also an Indian direct selling company which started its operation in 1996. The company deals with Wellness and personal care products.
Amway is a US-based direct selling company which started its operation in the year 1995 in India. Amway deals with health beauty and home care products. To make distinctive quality products in India, Amway has recently started its manufacturing facility in Tamil Nadu, India.
Forever Living is an Arizona based network marketing company which deals with aloe-vera based nutritional juice And be derived cosmetics And personal care products. The company was founded in 1978 by so Rex Maughan.
Oriflame is a Sweden based network marketing company. It was started by two brothers in 1967. The company primarily deals with innovative beauty products.
Herbal life is a US-based network marketing company that deals primarily with nutritional products the company started in 1999 in India.
The network marketing industry is at the nascent stage in India but has been snowballing. Experts say that the network marketing industry has tremendous potential and a great future in India, and it can minimize the gap between the rich and the poor in India. The government understands the industry’s potential and hence framed the much-needed guidelines for the industry in 2016. However, it’s our duty as a consumer to understand the industry and the business model before participating in it and save guard ourselves from fake companies.