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WHAT IS DIRECT SELLING?

• The distinguishing characteristic of this method of marketing is that the direct seller or retailer initiates contact with the potential customer instead of waiting for the customer to come to a store or some permanent place of business.
• The direct seller or direct retailer, therefore, is a person who sells consumer products and renders a service by direct personal contact with the consumer - usually, but not always in the consumer's home.
• In Malaysia, direct selling or direct retailing is a diversified business with sizeable product categories. It is increasingly becoming a significant distribution channel within the country's total retail enterprise system. It offers a high growth alternative to a retail system, still lagging behind in accommodating the changing and busier lifestyle of Malaysian consumers.

CONVENTIONAL DISTRIBUTION SYSTEM & DIRECT SELLING - HOW DIFFERENT OR HOW SIMILAR

• While both methods have various price mark - up at each distribution level, the conventional method impose an additional 11% mark-up or so for advertising and promotion.
• In direct selling distribution system, a distributor perform multiple roles of wholesaler/retailer/promoter etc

TYPES OF DIRECT SALES

While some direct sellers/retailers may be employees of a direct sales company, authorised to act for the company in business matters, most direct sellers/retailers are independent business operators or self-employed - they enjoy the advantage of deciding when and how much time will be devoted to selling the company's products.

And while there is a multitude of direct selling companies in Malaysia, they basically, fall into four categories.

I. DOOR-TO-DOOR/SIMPLE COMMISSION PLAN

In this type of plan, the agent or dealer obtains an immediate discount from the company, at the point of purchase. He then makes a profit by selling the product to the consumer at the recommended retail price.

The line of distribution in such plan is simple, involving the direct sales company, the dealer and the consumer.

In some cases, the "dealer" or "agent" is a salaried employee of the company.

II. THE HOSTESS/PARTY PLAN

Under this type of plan, the direct seller or retailer arranges with a friend who shall act as "hostess" to invite a group of friends for demonstrations of a product or products. In the course of this "party", orders are received for products. The "hostess' receives merchandise/products as compensation for the use of her home and her help in getting their friends together.

III. MULTI-LEVEL MARKETING OR DISTRIBUTOR NETWORK PLAN

This plan allows the direct seller to manage and service a large direct retail network or distributor network. Those interested in this plan must first be sponsored by an existing distributor of the company. With the help of this distributor, he then builds his monthly sales volume to qualify for higher monetary incentives and higher level of recognitions.

At direct distributor level, he functions both as a wholesaler and retailer, purchasing products in bulk from the company and distributing them to his distributors who in turn sells them to the customers. All income earned by a distributor is based upon the volume of sales and no other considerations. There is one standard distributor price for products to distributors and one standard retail price for products to customers.

IV. PYRAMID PLAN

In this plan, commissions are earned for the mere act of recruiting more new members to the plan, sometimes called "head hunting". New members are normally charged a substantial entry fee, often obscured by large up-front investments in inventory. (usually low quality products of little value).

Because of legislation overseas, pyramid companies are now more sophisticated and now disguise up-front loading with either higher membership fee, mandatory purchase of products and various other impositions like payment for computer and other information services, training materials etc.

Pyramid selling is a fraud. It is a mechanism by which promoters of so-called "investment" or "trading" schemes enrich themselves in a geometric progression through the payments made by recruits to such schemes. Related deceitful schemes have been described in various international jurisdictions as "chain letters," "snow balls," "chain selling," "money games," "referral selling" and "investment lotteries".

Numerous legislatures around the globe have proscribed pyramid selling. The wording of relevant statutes, codes, articles, acts, regulations and the like vary, but all contain the following core concept: 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 primarily derived from that recruit's (and/or subsequent recruits') introduction of additional participants in the scheme, rather than from the sale of products to consumers.

Thus, the scheme's rewards effectively come from the addition of new participants and their investments, not from the sale and distribution of real products to persons who actually use or consume them. No real trading in viable goods or services takes place, and the scheme essentially involves an internal redistribution of wealth from new entrants to the promoters. The scheme serves no legitimate commercial function. The only "trade" being carried on is actually in scheme participants' rights, and the redistribution of participants' entry fees or investments.

Pyramid schemes are not commercially sustainable because they essentially assume an inexhaustible flow of recruits - all willing to pay to enter the scheme and to be enriched by subsequent recruits doing the same thing. As the number of available recruits is finite, however, successive recruits have arithmetically less chance of enrichment than the schemes' promoters. Consequently, such schemes are usually short-lived and those who enter last have virtually no chance of recovering their entry fee much less benefiting from the scheme.

Early pyramids were readily identified and successfully proscribed because of their lack of tangible product. Subsequent fraudulent schemes, however, have attempted to deceive the public and avoid prosecution by asserting that they are genuine businesses operating a multilevel marketing plan since they "sell" goods and services. Multilevel marketing is, of course, a well-recognized means of compensating direct sellers for the sale of products to consumers, including participants in the plan, through a network of independent distributors.

A closer inspection of a pyramid scheme's so called "products" typically reveals that they have no real market value. This is because the products are often "gimmicks" such as certificates, spurious training programs or magazine subscriptions, illusory discounts, or over-priced and under-performing "miracle" treatments and the like. Recruits are often obliged to "invest" in large quantities of these products with no realistic prospect of marketing them to actual consumers (or returning them for credit). Their investments, however, generate substantial income for the promoter who enticed them into the scheme.

The following factors differentiate illegal pyramids from lawful Direct Selling businesses:

1. Legitimate direct selling companies offer a genuine business opportunity based on the sale of quality products to consumers. They routinely offer consumers satisfaction guarantees or cancellation rights so that the consumer may return the product for replacement or refund if the consumer is dissatisfied. Pyramids schemes have no such commercially viable product sales base.
2. Legitimate direct selling companies strongly discourage overstocking of inventory and provide participants leaving the plan with an opportunity to return any unused, saleable merchandise to the company for a refund of not less than 90% of the salesperson's net cost. In contrast, pyramid schemes often encourage or require large stocks of non-refundable inventory and disappointed scheme participants are then left with stock which they can neither sell nor return.
3. Legitimate direct selling opportunities may be taken up with minimal start-up costs and little or no inventory investment. Even modest entry fees may be refundable if the new direct seller decides not to pursue the opportunity. Conversely, pyramid selling schemes often require high entry fees and/or substantial "investment" in inventory, and neither are refundable. This is because pyramid operators make their money from new recruits to their schemes.
4. The sales and marketing plans of credible direct selling companies are based on the progressive recognition and reward of direct sellers for the development of a customer base for consumption of the company's products. The development and stability of a direct seller's business is dependent on satisfied consumers and fairly remunerated direct selling network members. Pyramid schemes, on the other hand, offer get-rich-quick schemes to induce participants to buy "ground-floor" or "leadership" positions. In pyramid selling schemes there is no viable, long-term business opportunity.

ILLEGAL PYRAMID SCHEMES AND LEGITIMATE MULTI-LEVEL MARKETING

STRUCTURE VERSUS OPERATIONAL

·        Almost all organisations, irrespective of whether they belong to direct-selling, conventional business or government departments, are pyramidal or hierarchal in structure.

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• In terms of structure, therefore, there is some similarity between pyramid schemes and all other organisations.
• The important distinction between pyramid schemes and other organisation, however, is in the operational area. That is to say, does its operations follow a chain letter principle? In terms of income, do members of the organisation derive income from the mere act of recruiting? Are there actual sales to end consumers in the company's operations? To join the business, do participants have to pay a high entry fee? And if one wishes to opt out of the business, is there a provision for him to recover his money?

DIFFERENCES BETWEEN LEGITIMATE DIRECT SELLING COMPANIES COMPANIES AND PYRAMID SCHEMES