- The history of network marketing
- Global industry size
- Need of the hour for the direct selling industry to thrive and flourish in India
What is Direct Selling and Network Marketing?
Before we discuss or try to understand the current situation of Network Marketing /MLM or Direct Selling Industry in India, it is important to understand the Industry first.
A simple definition of network marketing or Multi-level marketing (MLM) is that it is a marketing strategy wherein a company does not hire sales force or marketing team to market and sell its products. Instead, they have independent representatives who use their personal network to promote the goods and services of the particular company and make a certain percentage as commission on the overall turnover made by them and their team. Network Marketing enables the company to reach its potential customers that it might not otherwise be able to reach with a traditional online or offline marketing strategy.
Network Marketing, also known as Multi-Level-Marketing is actually a part of the Direct Selling Industry. Direct Selling companies remove the traditional distribution channels in between the consumers and sell their products directly through their independent representatives. In this industry, a person can be a consumer, distributor or a network marketer. Consumers are the ones who only use the products and services from the Direct Selling Company. A distributor is typically someone who is a consumer and also sells the products and services directly to people and earns a retail commission for every sale he makes. Network Marketer is not only a distributor and must sell products and services directly, but also refers and trains other distributors to sell the products and services and build their own businesses. They not only earn retail commissions but also commissions for the total turnover generated by their entire Network.
This allows people to leverage other people’s effort and earn residual income. So contrary to the misconception, in network marketing, no one is paid for recruiting people, but for the personal sales, one makes or for the overall turnover generated from one’s entire team.
History of Direct Selling and Network Marketing
The origin of direct selling or network marketing industry can be traced back to 1886 with the establishment of Avon. This model of direct interaction with the customers was hugely successful. An entirely new chapter of evolution was induced with the introduction of the multi-level marketing compensation plans (MLM plans) by Nutrilite in 1945. In this compensation plan, the individual representative got the opportunity of building their own business by refereeing new distributors into the business and earning revenue from their own sales and the sales of distributors they enrol.
With its success, many companies adopted the MLM plan, including global players like Avon, Tupperware and Amway. The 1990s saw a growth in the global direct selling market with major players expanding globally and entering newer, promising markets like Brazil, China and India.
Global Industry size
As per the study conducted by FICCI and KPMG, Direct selling is a USD167 billion industry globally. Even though the industry grew at a low rate of 5.4 per cent in 2012, due to global economic slowdown, as compared to the overgrowth rate of 19.7 per cent in 2011, the long-term growth projection of the industry remains robust.
Industry size in India
As per KPMG – FICCI report, the Indian market for direct selling or network marketing industry was estimated at Rs.7, 500 crores in 2013-14. It forms around 0.4 percent of the total retail sales in the country. This figure is still far lower than other comparable economies (one-half of direct selling market size of China and one-tenth of Malaysia). As per the reports from FICCI – KPMG Direct selling is likely to reach Rs.64,500 crore billion in India by 2025.
Challenges In India
In India, there are no laws or a regulating body for network marketing or Multi-Level-Marketing (MLM) business, hence, subjecting this industry to frequent criticism and lawsuits. The only law that India currently has is The Prize Chits and Money Circulation Schemes (Banning Act) 1978.
To summarize what the Act says, in simple words, is that the Government legally bans any such schemes wherein the members are paid to recruit members, with no significant products or services to buy or sell and where there is a considerable amount of money collected from people just in exchange for a promise of future returns.
With no proper law in place, this industry is often targeted with lawsuits of scam and fraud. Even companies which pay proper taxes for the turnover made by the business are unfairly targeted and scrutinized. The important point to be noted is that all earnings of the independent representatives are also taxed at the sources by the Government and yet the same company face problems in its operations in India and have to fight lawsuits in the courts for years without any results!
The number one issue that is impacting the growth of the direct selling industry in India is the lack of clear legislation that gives clarity and regulates the activities of the direct selling industry. In the absence of such a law, some authorities, have confused or have formed a view that direct selling companies are covered under the provision of the Prize Chits and Money Circulation Schemes (Banning) Act, 1978. The truth be told, this Act in its current form, cannot distinguish between a genuine direct selling company from fraudulent activities such as the pyramid or Ponzi schemes. An amendment in the Prize Chits and Money Circulation Schemes (Banning Act) will create a favourable legal environment for the industry thereby protecting individuals.
In India, the regulatory environment is also another challenge for the direct selling industry. Because of lack of legislation, often consumers complain is registered under the Prize Chits and Money Circulation Schemes (Banning Act) and are treated as a criminal offence, leading to arrests of key officials, individual representatives, offices getting sealed etc. Such situations send a negative message regarding the business operating environment in India. Many direct selling companies that operate in India face many operational problems, challenges, the allegation as well as media assassination. Companies like Mary Kay wounded up its Indian operations in 2013 citing regulatory environment as one of the reasons. At the point of time, Mary Kay had 2.5 million distributors in about 35 markets globally. In India, it had about 4,500 beauty agents and four third-party warehouses. Amway chairman and CEO, William S Pinckney, was also arrested in 2014 by the Andhra Pradesh Police based on a complaint of alleging unethical circulation of money through Amway’s operation. Other companies like QNET and the likes have also been in the news for illegally extracting money from people based on complaints registered under the Prize Chits and Money Circulation Schemes (Banning Act).
In this light, it is also very important to understand that these companies are the same companies who globally function in markets with very strict direct selling and consumer protection policy like the USA, UK, Malaysia, Singapore, Vietnam, Dubai to mention a few. It is therefore of paramount importance that the Direct Selling companies and the government together find a legislative solution that will clearly differentiate a legitimate direct selling business from frauds and Ponzi schemes.
The need of the hour is an amendment to the Prize Chits and Money Circulation Schemes (Banning Act). Direct selling industry did not even exist in India until the early 1990s and to expect that a law passed in 1978 will do justice to the industry is completely unfair. The Act was never intended to regulate direct selling industry, but the misrepresentation and misapplication of this Act has given the investigating authorities the power to seize, seal and arrest on receiving any complaints. This has proved catastrophic for the direct selling industry. Hence the importance of amending this act to clearly define a “pyramid schemes” and distinguish them from legitimate direct selling companies cannot be undermined. Besides this, it is also important that the Government pass new and separate legislation on direct selling. Many countries like Malaysia, Vietnam, South Korea, Indonesia, Japan, Singapore, Vietnam, and even Bangladesh have enacted a law for direct selling which has helped them in multiple ways.
Separate legislation for the direct selling industry will not only clear the blurred lines between ethical industry players and impersonators but will also help in winning back the confidence of the consumers. As for the industry, it is in double jeopardy at the moment—corrosion of faith and an identity crisis.