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Multi-Level Marketing: A Promise or Problem? A study based on Bangladesh

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Research Proposal on Multi-Level Marketing: A Promise or Problem?

A study based on Bangladesh

Submitted By: Syed Ahsan Pervez 090306

Submitted To: Md. Reaz Uddin

Assistant Professor

Khulna University Business Administration Discipline

4th year, 2nd term Course Title: tutorial of Business Research Methodology

Course no: BA-4202 May 30, 2013

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Abstract

Multi-Level Marketing or MLM is a marketing strategy in which the sales person is compensated

for not only his/her own sales volume but also for the sales volume that made by sales person

recruited by him/her. This strategy is highly cost effective as it uses personal relation and word

of mouth as its main marketing communication method. Thus a lot of third world country is

applying this strategy in the local market, though most of the developed country has banned this

strategy from their country. Recently it was banned by the Bangladeshi government from

Bangladesh. After the banning; most of the people of Bangladesh has developed a negative

perception against multi-level marketing strategy. But as a third world country this strategy can

be proved to be very much useful Bangladeshi economy and business sectors if applied correctly.

So this study is conducted with a view to find out people’s perception about multi-level

marketing. It will also identify the prospects and problems of this strategy for Bangladesh.

Ultimately it will analyze the usefulness of this strategy and the likelihood of applying this

strategy successfully in Bangladesh.

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1. Introduction

Marketing is one of the basic business activities, the only division of a business that earns the

money for the company. Over the time marketing has evolved a lot. In the beginning there was

not any marketing concept. But later in the early stage of 1950s, business concept was evolved

into selling concept and the marketing concept came along. This concept has developed over the

time. Along with many marketing technique, Multi-Level Marketing is one of them. Multi-level

marketing uses personal relationship and social network as its marketing tools. As in recent years

social networking via internet and telecommunication has increased drastically. Social networks

was active for a long time but recently with the introduction of internet web-based form of

social networking like Facebook, twitter it became much more easier to spread MLM and

acquire its investors (Emek and others, 2011). Multi-level marketing was introduced in last

1950s. But it was not applied in Bangladesh before 2000. But recently 45 Multi-level marketing

companies operating in Bangladesh were banned by the government (The New Age, 2013). In

this banning issue the Bangladeshi people is divided into two parts. One supports this decision

while the other portion protests this decision. This study will try to find out why people are

behaving against and for of this strategy. Before banning there were a huge investors segment of

this country, who claimed that they were gaining profit from these companies. To understand

people’s reaction about this banning, pros and cons of MLM companies must be studied first.

This research will help us to apply MLM strategy in Bangladesh in future by analyzing people’s

behavior toward MLM.

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2. Statement of the problem

Recently Bangladesh government has banded most of the MLM companies operation

domestically. So it is only reasonable to identify the problems of MLM in Bangladeshi economy

and also why this strategy cannot offer its full potential in Bangladesh. Over the time people has

develop some certain perception towards MLM. This perception could affect the success of this

strategy in this country. This study is tending to identify people’s observation about this strategy.

Than ultimately it is very important to comparing between the problems and promises and

finding out whether it is a valid marketing strategy in Bangladeshi economy.

3. Review of literature

3.1 Marketing:

According to American marketing Association, “Marketing is the activity, set of institutions, and

processes for creating, communicating, delivering, and exchanging offerings that have value for

customers, clients, partners, and society at large.” From a societal point of view, marketing is the

link between a society’s material requirements and its economic patterns of response. Marketing

satisfies these needs and wants through exchange processes and building long term relationships.

It is the process of communicating the value of a product or service through positioning to

customers. Marketing is a social and managerial activity by which individuals and organization

obtain what they need or want form others through creating and exchanging goods or services or

values (Kotler and Armstrong, 2003). Marketing can be looked at as an organizational function

and a set of processes for creating, delivering and communicating value to customers, and

managing customer relationships in ways that also benefit the organization and its shareholders.

Marketing is the science of choosing target markets through market analysis and market

segmentation, as well as understanding consumer buying behavior and providing superior

customer value.

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3.2 Multi-level marketing: Multi-level marketing or MLM is a marketing approach that motivates its participants to promote

a certain product among their friends. The popularity of this approach increases due to the

accessibility of modern social networks. However, it existed in one form or the other long before

the Internet age began which is the pyramid scheme. The basic of MLM is relationship

marketing. Relationship marketing is defined as building, developing and maintaining strong

relationships with customers and other stakeholders in order to obtain a high profitability (Berry,

1983, Grönroos, 1989, 1994, 1996, Hunt, 1994, 1997, Mattsson, 1997). Most commonly in

MLM, the salespeople are expected to sell products directly to consumers by means of

relationship referrals and word of mouth marketing. Some refer MLM as direct selling. But in

reality MLM is just one type of direct selling. Wotruba (1996) define direct selling as “face-to-

face selling away from a fixed retail location” (p. 6). The main lucrative part of MLM is that the

sales force are compensated for their personal sales volume and also for the sales volume made

by the sales person recruited by them (Wikipedia, 2013). In MLM companies effective recruiting

of investors is very essential for the very existence of the majority of direct selling companies

including multilevel marketing organizations because the survival of these organizations depend

on the ability to make more and more new recruits to replace those who have discontinued.

MLM distributors can have a relationship with both their “upline” sponsor and their “downline”

recruits. They also often work cooperatively by holding common recruitment meetings and sales

training sessions. Distributors of multilevel marketing companies foster a combination of

friendship and instrumentality in developing networks.

3.3 Pyramid Scheme:

The pyramid scheme is structured like a pyramid. It starts with one person or company, who is

the initial recruiter (who is on top, at the apex of the pyramid). This person or company recruits

investor A, who is required to invest" say $100, which is paid to the company. In order to make

his or her money back, the new recruit must recruit investor B and other investors, each of whom

will also have to invest $100. Investor A earns a commission on each investment he brings in,

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and, as long as the pyramid continues to grow, he will make his money back and a handsome

profit. The problem is that the pyramid scheme cannot go on forever because there are a finite

number of people who can join the scheme. It is the most non-sustainable business model that

involves promising participants payment or services, primarily for enrolling other people into the

scheme, rather than supplying any real investment or sale of products or services to the public.

Various forms of pyramid schemes are illegal in many countries including Albania, Australia,

Austria, Brazil, Canada, China, Colombia, Denmark, the Dominican Republic, Estonia, France,

Germany, Hong Kong, Hungary, Iceland, Iran, Italy, Japan, Malaysia, Mexico, Nepal, the

Netherlands, New Zealand, Norway, the Philippines, Poland, Portugal, Romania, Russian

Federation, South Africa, Spain, Sri Lanka, Sweden, Switzerland, Taiwan, Thailand, Turkey, the

United Kingdom, and the United States (Wikipedia, 2013).

3.4 Investors of Multi-level marketing

In multi-level marketing, organizations do not use any traditional medium for promotion or

advertising. Rather it uses direct selling technique and personal relation of the salesperson. MLM

companies operate like regular organizations. The only difference is that it uses personal relation

and direct selling. But in light of Bangladeshi practice of MLM strategy, these salespersons are

referred as investors. In Bangladesh, when a person buys a product of any MLM organization

s/he become a part of the organization. As s/he sales more to other persons they become linked

up in his/her downline and the person from whom s/he bought the product that person is linked

up in his/her upline. So the diagram looks a lot like pyramid (Wikipedia, 2013).

Fig: multi-level marketing structure.

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3.5 History of Multi-level marketing:

Nobody does not know when started the World famous MLM business. Some are saying it

started before the 2nd world war. And the first MLM Company was “Newtrilight”. It started its

products marketing through MLM system in 1940 – 41 and the founder was a chemist Dr. Carl

Rehn Bourgh of California. In 1949 there are two young named Rich DeVos and Jay Van Andel

join to the “Newtrilight” as distributor and they created a new trend for MLM after 10 years. At

US parliament MLM win by 10 votes to started its business with franchise as parallel in 1958.

After that MLM got the renewed system in marketing and sprayed its business all over the world.

In 1959 Rich DeVos and Jay Van Andel founded a new MLM company named Amway

Corporation. After some years they bought the Company “Newtrilight” and merged it with

Amway Corporation. Now a day, more than 135 countries and more than 12000 company

operation their business for selling products and services in MLM system (Haque, 2009).

3.6 Operation of Multi-level marketing:

MLM works in the following manner: Company X will recruit Vender A to sell its products. For

each unit that Vender A sells, he gets a commission. To encourage the growth of the distribution

network, however, Company X tells Vender A that he can earn a lot more money if he recruits

other vendors to sell products. So Vender A recruits Vender B and five other friends to sell

products. Now, rather than spend as much time selling products directly to consumers, Vender A

becomes Distributor A and supplies products to Vender B and others, earning a commission for

everything sold. After gaining some experience, Vender B might recruit and sell to Vender C and

five other friends. If he does, Distributor A will earn commissions from what both B and C sell.

As long as the rewards are based on selling products to consumers, MLM is a legitimate business

model, particularly if Company X buys back unsold goods from its vendors. The problem occurs

when the product gets lost and the commissions become based solely on recruiting new

members. Then MLM becomes what is known as a pyramid scheme (Afrin and Sabet, 2012).

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3.7 Current condition of Multi-level marketing:

Multilevel marketing is a huge, global industry. Estimates of worldwide sales are as high as

ninety billion dollars (Dyer 2001). Estimates of the number of people who purchase products and

services from multilevel marketing organizations are high, with one study finding that over half

of the respondents had purchased at least one item from a multilevel marketing company. The

industry appears to be growing. In 2011, the total sales figure from major multilevel marketing

companies by around 16 million distributors’ generated sales of almost $30 billion in America.

Worldwide, some 92 million distributors grossed $154 billion, according to the Direct Selling

Association (The economist, 2013). Unfortunately with the growth of the industry has been the

growth of questionable companies and practices (like pyramid scheme). Currently there are over

1000s of Multi-level companies are operation around the world. Among them there are 60

companies, who name popped up every time someone wants to know about multi-level

marketing. But still these are the top ten MLM companies around the world (Nexera, 2012).

1. Amway

2. Melaleuca

3. USANA

4. Nu Skin

5. Isagenix

6. Forever Living

7. Legal Shield

8. ACN

9. Herbalife

10. 4Life

After all this success still multi-level marketing is being criticized around the world especially in

developed county. The Federal Trade Commission (FTC) issued a decision, regarding Amway

Corp., in 1979 in which it indicated that multi-level marketing was not illegal per se in the

United States. However, Amway was found guilty of price fixing (by requiring “independent”

distributors to sell at the low price) and making exaggerated income claims. MLM organizations

have been described by some as cults, pyramid schemes, or organizations rife with misleading,

deceptive, and unethical behavior, such as the questionable use of evangelical discourse to

promote the business, and the exploitation of personal relationships for financial gain

(Wikipedia, 2013). Fraudulent MLM schemes can usually be identified by high entrance fees or

requirements to purchase expensive inventories. They often collapse quickly when the

merchandise cannot be resold, leaving all but those at the top of the pyramid with financial

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losses. The real problem with MLM is not MLM itself, but some of the people it attracts. Multi-

level marketing is just a business model, and it really amounts to "micro-franchising". Its upside

is that it has a very low cost of entry, with the potential for exceptional revenue, and there are

those who achieve that. Many multi-level marketers over-sell the opportunities, inappropriately

discuss business in social environments and programs, over-focus on new recruits and neglect

the existing customers and in most cases they pass inappropriate information and talk in a

deceptive way.

3.8 Current condition of Multi-level marketing in Bangladesh:

Multilevel Marketing (MLM) is a recent activities and trend added to the business of

Bangladesh. It is a concept used by many countries around the world with USA, Canada,

Singapore, Malaysia, Taiwan, and India almost 55 years. And it entered the Bangladesh in 1998

through GGN (Global Guardian Network). MLM not only operates as direct marketing channel

but also it is being practiced by Multi-Level Marketing, Network Marketing, and Direct Selling

etc. On that line of selling so many companies operates in Bangladesh. Now a day there are 65

companies are operating their business through MLM system. Most of these 62 companies

operates via pyramid Schemes in disguise of legitimate MLM businesses. Because there is no

government monitoring of the activities of the MLM companies in Bangladesh, no one really

knows how much money any MLM company is collecting from the people and how much they

are either investing or simply spending in bad projects. Destiny-2000 Limited one the greatest

and biggest company which operation its business through MLM system. But recently

government has banned this company with 45 other companies. Bangladesh Bank has halted the

bank accounts of Destiny; it allegedly transferred a lot of money from those accounts.

Reportedly, its directors, hold a total number of 443 bank accounts where funds worth only Tk.

1.77 billion could be traced. Among the total number of bank accounts, 225 were found closed.

(The Financial Express, June 10, 2012). It has recently been reported that at least two other

companies have defrauded public by billions: Unipay‐2 and Jubok.

The government is already moving towards greater regulation. The commerce ministry has

recently sent a letter to the Securities and Exchange Commission and other stakeholder agencies,

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asking for their opinion on an MLM act “Direct Sales Law‐2011” in a bid to increase

accountability of the MLM business. The ministry has assured that the MLM (Control) Act 2011

will soon be enacted. A draft law on the marketing strategy has already been formulated with

provisions of prison, fines and cancellation of licenses if the MLM companies are found engaged

in 21 types of businesses.

4. Objectives of the research

The main objective of the study is to find out the viability of applying multi-level marketing

strategy in Bangladeshi economy and the finding out the perception of investors toward MLM

strategy. This objective will be achieved through completing these four objectives.

1. Identifying the promises of Multi-level marketing.

2. Finding out the problems of Multi-level marketing.

3. Finding out the general people’s view about MLM.

4. Comparing the problems and promises of MLM and identifying whether this strategy

can successfully implemented in Bangladesh.

5. Research Questions 1. What are the promises of multi-level marketing?

2. What are the problems of multi-level marketing in Bangladesh?

3. What are the people’s perceptions about multi-level marketing?

4. Is the MLM strategy is implementable and profitable for the consumers in

Bangladesh?

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6. Research Methodology

6.1 Research Instrument

A questionnaire will be developed with the help of secondary data analysis, which will be used

for first objective. For first three objectives open ended question and depth interview is

appropriate.

6.2 Data Collection

Data will be collected from Dhaka and Khulna city. Respondents will be people who were

involved with MLM business in Bangladesh, as they will be able to provide insights about the

promises and problems about MLM. Also people who was not involved with MLM but hold a

considerable knowledge about this strategy will help to achieve the third objective.

6.3 Sample Selection

Sampling units will be Destiny 2000 ltd, MXN Modern Herbal ltd, Unipay2u ltd, Dolancer

Outsourcing ltd. These four companies cover most of the segments of the customers, which will

be helpful for sampling and the sample will represent the population easily. Total numbers of

investors in these four companies are around 200,000 to 300,000. But the precise number is

difficult to find out. So it is safe to consider the sample size 200.

6.4 Sampling Technique Sampling technique will be snowball and Quota sampling. Snowball sampling will be used

because there no precise list of investors of this companies which can be accessed directly.

Sample size will be 200 where 50 will from each of the four companies. Each of these 50

respondents will be categorized in the following way:

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Occupation Number of respondents

Government service holder 10

Non-Government service holder 10

Students 10

Business people 10

Unemployed 10

6.5 Statistical Tools The research will be conducted mainly in exploratory and descriptive way. The main focus of

this strategy is to find out the viability of multi-level marketing in Bangladeshi economy. This

study will mainly use secondary data. For first and third objectives of finding the promises or

advantages of MLM and people’s perception about these, open ended questionnaire will be used.

With the collected responses I will try to identify the main advantages of MLM from investor’s

point of view. And from the responses for the third objective, it will be identified why people are

rejecting or accepting MLM strategy. The second objective will be achieved through depth

interview of investors, secondary data and expert interview. From the information I will try to

analysis the factors which are main obstacle for flourishing and applying the MLM strategy in

Bangladesh. The last objective will be completed by analyzing collected secondary data from

published literature, journals, books etc. and also by expert interview on this matter. The data

will analyzed with statistical tools like percentage analysis ranking problems from the investors

points of view. Same tool will be used for promises as well. Result will be graphically presented

using pie charts and histograms.

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7. Significance of the research

A number of studies have been conducted on Multi-level marketing strategy. But there is no

research on multi-level marketing’s problems and advantages based on Bangladesh. As

Bangladesh has a booming economy with increasing GDP, there are different companies are

starting their operations in Bangladesh in different sectors. Multi-level marketing has proven to

be a valid marketing strategy in some third world countries though this strategy in banned in

most of the first world countries. The future prospect of multi-level marketing is tremendous in

Bangladesh if it is being applied properly. So this research will evaluate it pros and cons in

Bangladeshi economy and investor’s intention for such strategy. It will add value to the

companies who are interested to apply this strategy and those future investors who will be

interested to invest in such companies.

8. Limitations of the study: i. The study will be limited only in Dhaka and Khulna city.

ii. Finding proper respondents will be very difficult, as it will be difficult to locate

investors as two of the companies are shut down by the government. But still these two

has the highest number of investors in the industry.

iii. Samples are drawn from four companies with different product segments. But as there

are total 65 companies, so result may vary from company to company.

iv. The sample is drawn on non-probability sampling basis. Because there is no precise list

of investors. It may not represent the entire population.

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9. Conclusions: This study is will try to explore all the advantages and disadvantages of multi-level marketing on

the basis of Bangladeshi economy. It will analysis people’s point of view about MLM to

understand their behavior towards MLM. This analysis can be used for future references. For a

third world country like Bangladesh, MLM can be become to be viable marketing strategy. But

people should make sure ethical practice of this strategy to get its full potential. And future

companies who will try to implement this strategy, they must be aware of their investor’s

perception and intention about the company.

Bibliography/References