Network marketing

The history of network marketing dates back to 1945 , when American entrepreneurs Lee S. Mytinger and William S. Casselberry became national distributors of Nutrilite Products, based on the principles of network marketing, which later became widespread ^{[10] [16 ] ]} .

In the late 1950s, two companies were created in the USA that have by now become the most powerful representatives of this sector of the economy, Shaklee and Amway ^[10] (the latter was created by Rich DeVos and Jay Van Endel in 1959 under the name American Way Corporation ").

The heyday of the industry came in the 1980s - 1990s. By the mid-1990s, network companies were offering consumers any kind of goods and services — from cosmetics, underwear and art objects to automobile tires, household appliances, computers, and long-distance telephone services ^[16] .

Network Marketing in the USA

At the beginning of the 2000s, formal regulation of MLM-companies was introduced in six states of the USA ( Georgia , Maryland , New York , New Mexico , Wyoming and Louisiana ) and Puerto Rico . Legislation governing the activities of MLM companies typically provides the following requirements:

• the right of sales agents to break agreements with MLM-companies and the obligation of companies to take back unsold products at a price not lower than 90% of the original;
• a ban on the use in attracting new sales agents of statements guaranteeing them a particular income level;
• a ban on establishing the minimum quantity of products that a sales agent is required to purchase from a company upon conclusion of an agreement;
• the prohibition of schemes providing for the payment of only activities to attract (recruit) new sales agents.

At the same time, many US states that do not have legislative regulation of MLM companies have laws prohibiting the creation and use of financial pyramid schemes . Based on these laws, control over possible violations in the activities of MLM-companies is carried out ^[17] .

Network Marketing in Russia

In Russia, the first practical application of the concept of network marketing dates back to the early 1990s. The mass involvement of people in network companies was facilitated by the sharply worsened socio-economic situation. In the first half of the 1990s, network marketing was represented by no more than a dozen foreign companies with an assortment of biologically active food additives and cosmetics. In the second half of the 1990s , Russian network companies began to appear, engaged in the production of their own products or the distribution of products of Russian manufacturers ^[18] .

Network Marketing in China

In the PRC, from 1998 to 2005, direct sales were banned due to the emergence of many criminal "pyramid" schemes operating under the guise of direct selling companies, in which many millions of participants were involved, which resulted in riots and social tension ^[19] .

In connection with the ban, ten foreign direct selling companies that were allowed to operate in China were forced to change their business systems and sell their products through retail outlets and sales representatives ^[20] .

Since November 1, 2005, in connection with the obligations of China to the WTO, the ban was lifted, but strict restrictions were imposed on the organization of direct sales. Only 14 out of 200 direct selling companies operating in the country were licensed to carry out such activities, including four Chinese and ten multinational companies (including Avon , Amway , Mary Kay Inc. ). The transition to a new scheme and obtaining licenses required additional investment. For example, Amway , which began operations in China in 1995, had to spend considerable money on rebuilding its network of 180 thousand direct sellers and switching to a new business model that includes retail outlets, a service network, distributors and direct sellers . Some of the former direct sellers received the status of regional distributors and official employees of the company ^[19] .

Despite the limitations that led to higher operating costs and lower sales, large network companies decided to continue their activities in the Chinese market, based on its high potential. By mid-2007, 14 multinational and five local companies had licenses for direct sales ^[21] :

• Avon (China) Ltd.,
• Nu Skin (China) Daily-Use & Health Products Ltd.,
• Pro-Health (China) Daily-Use & Health Products Ltd.,
• YOFOTO Daily-Use & Health Products Ltd.,
• Oriflame Cosmetics (China) Co., Ltd.,
• Kasly-Ju (Tianjin) Ltd.,
• For You Group LLC,
• Mary Kay (China) Cosmetics Ltd.,
• Amway (China) Daily-Use & Health Products Ltd.,
• Perfect (China) Daily-Use & Health Products Ltd.,
• Guangdong Apollo (Group) Co., Ltd.,
• Nanfang Lee Kum Kee Co., Ltd.,
• Herbalife (China) Daily-Use & Health Products Ltd.,
• Shaklee (China) Co., Ltd
• Liaoning Yilishen Tinxi Group Ltd.,
• Nanjing JOYMAIN Technology Development Ltd.,
• New Era Health Industry (Group) Co., Ltd.,
• Guangdong Kang Li Medicines Co., Ltd.,
• Beijing Luo Mai Pharmaceutical Ltd.

Work in a network company can be attractive for those who need extra money and have free time, or for those who have the opportunity to work only on a flexible schedule (students, young mothers, etc.). According to the results of studies conducted by the Direct Selling Association (USA), 90% of sales agents of MLM companies are employed less than 30 hours a week, and 50% less than 10 hours a week ^[1] .

Work in network marketing is a form of private enterprise . For beginners, it can be convenient in that large investments are not required to open “your own business”. At the same time, however, one desire to become a successful entrepreneur is not enough, and only a small proportion of those who try to work in the network business remain in it for a long time and receive substantial incomes ^[1] .

From the point of view of the MLM companies themselves, we can talk about the following advantages of network marketing ^[10] :

• the use of direct sales allows you to save on advertising and retail space;
• sales based on the demonstration of the exclusivity of their own goods can be more effective than sales through stores that offer a wide range of similar products;
• the company can raise loyal customers who prefer to buy only from people they know;
• companies are driving sales growth with significant commissions to distributors.

Network companies are better at experiencing economic crises than linear businesses. Some difficulties arise for those companies that are focused on financial services or the sale of expensive goods. During the crisis period, there may even be an increase in interest in the network business - people try to hedge themselves, not having a firm belief that their workplace is safe, and often come to network marketing ^[12] .

Network marketing allows a person to independently choose the growth rate, schedule and employment, as well as business partners. A distributor interacts in a network on a partnership basis, which avoids subordination relationships. Most companies conduct various trainings for distributors, including those aimed at stimulating personal development. ^[12] .

In network companies, people regularly receive public recognition of their results. Improving personal performance leads to increased income for distributors. But it also leads to an increase in revenue for the entire company. Therefore, in network marketing, an atmosphere of mutual assistance and partnership usually develops. Companies regularly meet to congratulate their distributors who have reached a certain level. ^[12]

According to John Won Aiken , the longer a person works and the more clients he has, the more income he receives from his activities. Over time, the business begins to work for him ^[12] . In terms of network marketing, it is much more important not the number of personal customers, but the number of distributors ( referrals ) involved, the size of the network created.

Basic principles of building labor relations of MLM companies with distributors

In relations with distributors and customers, MLM companies are required to follow the laws of the country in which they operate. For example, regardless of the statements of MLM companies, people who are over the age of 18 (the age of full civil legal capacity ^{[22] [23]} ) have the right to become a distributor in the Russian Federation (hereinafter - the RF) and Ukraine.

As mentioned above, MLM activity is legally regulated in six states in the USA and, among other things, it is forbidden to promise a distributor earnings in a certain amount. At the same time, if we consider the legislation of the Russian Federation and Ukraine, we can see that in the Russian Federation “Salary for an employee is established by an employment contract” ^[24] , in Ukraine - by a collective and labor agreement ^[25] and its size “cannot be lower than the cost of living minimum working-age population ” ^{[26] [27]} . As a rule, relations with distributors in well-known international MLM companies (Amway, Herbalife, Mary Kay, Oriflame ^{[28] [29] [30] [31]} ) are built on a contractual basis, which means that the MLM company’s contract with the distributor is not a form of employment contract, and remuneration is not a form of wages. Accordingly, the distributor is not covered by social guarantees provided for employees.

Basic principles and requirements for obtaining the status of "distributor"

The legislation of the country does not regulate the conditions that a person must fulfill in order to become a distributor. They are determined by internal regulatory documents of MLM companies. As a rule, in order to become a distributor of an MLM company, it is necessary to fulfill a number of requirements. In each MLM company, these requirements differ, but a characteristic feature is the requirement to buy or sell products of the MLM company for a certain amount.

For example, to become an Amway distributor in Ukraine, you need ^[32] :

1. contact the current “distributor” or register on the company’s website;
2. fill in the contract form;
3. order a specific set of products;
4. pay a fixed annual one-time compensation for administrative services ^[33] .

In turn, as another example, we can cite Bing Han International, which has similar requirements for candidates for “distributors” in Russia, but with some significant differences ^[34] :

1. contact the company office or register on the site;
2. Get recommendations from 2 existing distributors;
3. buy or sell 1 company product;
4. attend 5 company trainings.

The management of this company motivates its demand for attending trainings by the fact that only after them the distributor will act in accordance with the company's mission, principles and rules of its work ^[35] . At the same time, Amway, like many others, also declares a requirement for distributors to comply with the company's mission and its principles ^[36] , but does not officially require candidates to attend their trainings to obtain distributor status.

The activities of companies using network marketing methods often cause controversy in society, and MLM companies themselves from time to time become the subjects of litigation. Controversial aspects of MLM:

• the similarity of network marketing with fraudulent schemes of financial pyramids ;
• accusations of price collusion (fixing prices for the products offered);
• the actual compulsion of novice distributors to unproductive expenses at the initial stage (participation in paid training seminars, trainings and other events, the acquisition of training materials, etc.);
• emphasized emphasis on expanding the network by attracting new low-level members, to the detriment of increased actual sales;
• encouraging (and sometimes even enforcing) the practice of distributors purchasing MLM products for their own use;
• the potential possibility of exploiting personal relationships as a channel for recruiting new network participants and a way to ensure sales expansion;
• meeting invitations without specifying a specific purpose;
• not informing potential participants about possible financial risks, about the potential destruction of the network due to the exit of people who fail.
• the use of overly complicated compensation schemes;
• the use of specific rituals and techniques aimed at maintaining the enthusiasm of ordinary participants and the zealous service of their company.

The activities of network marketing companies often take place outside the legal field. The goods are not accepted back and are not exchanged, as required by the law on consumer rights . Money is not returned for unsold goods, there are cases of fraud ^[37] .

In June 1987, an article was published in Money Magazine stating that network distributors who expect millions of dollars in revenue and sell huge quantities of goods, after deducting the costs of their business, received very little profit. Some even had to mortgage their own real estate. Thus, in the state of Texas in the United States , 300-400 thousand dollars were invested in 1986 in the now defunct Starcom company ^[10] .

Multilevel marketing is often compared to financial pyramids . However, an article in Money Magazine emphasizes that legitimate pyramid-shaped structures in network marketing consist of distributors who make money primarily from selling specific goods in person and by lower-level people they invited. Actors include Amway , the Ada, Mich. company, Shaklee, AL Williams ^[10] . In a lawsuit lasting from 1975 to 1979, it was determined that the Amway sales and marketing plan was not an illegal pyramid scheme.

Fred Hochsztein, an assistant to Florida's chief attorney, notes that some network marketing firms are legal, but many of them are not. Illegal companies give their distributors the opportunity to make money not by selling goods, but by charging fees for joining the company to new distributors ^[10] .

Even legitimate companies often do not notify potential distributors of the true costs and efforts that will be required for a sustainable income in this business, while mailing lists and company brochures contain generous promises ^[10] . For example, according to Amway , an average working distributor earns $ 76 per month ^[10] .

Some distributors quickly change companies and sell products of several network marketing companies at once ^[10] .

Network marketing is often criticized by representatives of the Russian Orthodox Church , who call companies that use the network concept to sell goods, commercial cults ^{[38] [39]} . In their opinion, each such company does not have its own religious teachings, but has a cult of wealth and prosperity, which is condemned. Network companies mingle with New Age movements and are accused of forcibly changing a person’s worldview and creating psychological dependence. Priest Sergiy Dashchenko believes: “Such a psychological dependence in patristic theology is called a vice, when a person is no longer able to fix anything. In this case, the Lord himself can have a psychotherapeutic effect through the prayers of relatives ” ^[40] .

• Financial pyramid
• Amway litigation

• Features of the structuring of distribution networks (Economic Review, Marketing, No. 3, 2002)
• Law and Multilevel Network Marketing
• Specialists are required. Payment in dollars , Komsomolskaya Pravda, November 9, 2001. Continuation: Recruited a friend - get a percentage , Komsomolskaya Pravda, November 16, 2001
• Carroll R. T. Multilevel Marketing // Encyclopedia of Delusions: a collection of incredible facts, amazing discoveries and dangerous beliefs . - M .: Williams Publishing House, 2005. - 672 p. - ISBN 5-8459-0830-2 , ISBN 0-471-27242-6 .