The pointy end
When your business strategy rests on frequent recruitment and sky-high engagement, it’s important to have a strong brand identity that’s capable of drawing anyone who engages with the business into further involvement, then keeping them there with an even stronger internal culture.
In some cases, this focus on recruitment and team culture has shown up in the form of a scam that masquerades as a direct-sales-style business.
Pyramid selling scheme: Pyramid selling schemes are a form of financial scam, and they’re illegal under the Fair Trading Act in New Zealand. They’re problematic because the way that they’re structured means most participants will always be at or near the base of the pyramid and will not see the promised return on their investment.
The Commerce Commission explains that what differentiates a pyramid scheme from the legal direct-sales-style business structures above is an emphasis on recruitment over product sales. If a structure has the following two elements, be suspicious:
- It offers a financial return based on the payments made by new recruits
- The return is dependent primarily on the continued recruitment of new members, not sales of a product or service.
There’s evidence internationally that the MLM model may have a dauntingly low rate of return on investment for participants. A 2011 report, The Case (for and) against Multi-level Marketing,by Jon Taylor of the Consumer Awareness Institute, analysed earnings data and compensation plans from 350 US MLMs only to find that less than 1 percent of MLM participants turned a profit. Similarly, a 2018 survey by the website Magnifymoney found that of the 1,049 American MLM participants polled, nearly 60 percent of respondents reported earning less than $500 over the past five years.
Several prominent international MLMs have recently been taken to court over claims that their rate of return is so low that the business is effectively an illegal pyramid scheme. Herbalife dodged the label in 2016 and paid a fine, while similar class action suits against Arbonne and Amway were dismissed last year and settled in 2010, respectively.
However, the majority of New Zealand’s MLMs, network marketers and direct sellers are legitimate businesses which trade in accordance with New Zealand law. There are around 47 companies of this type currently active in New Zealand, all but four or five of which are registered with the DSANZ. The Commerce Commission has received just 13 complaints relating to the 42 DSANZ member companies since 2006, and the DSANZ receives around three to four complaints through its code per year.
Garth Wyllie, executive director of the Direct Selling Association of New Zealand, says direct sellers, network marketers and MLMs’ laser focus on customer care tends to keep category complaints low.
“Distributor to the end customer is the bit that counts the most in terms of the perception of the market, and so we’re very firm on that area,” he says. “But we would only get one or two complaints in that space a year against a member company. It’s really quite small.”
He says the DSANZ advises unhappy customers to first complain to the distributor, then if that fails, approach the company. More often than not, Wyllie says, this results in a quick resolution.
“We don’t see a big issue because the companies themselves are 100 percent focused on the end consumer. They would rather refund a product, even if there’s some question as to whether the customer has a genuine complaint or not, than have an upset customer.”