Network Marketing, Multi-level Marketing, or Pyramid Schemes?
The future of network marketing will be shaped by regulatory changes, technological advancements, and consumer preferences.
In 2008-2009, the New Zealand Commerce Commission investigated Lifeforce International, a multi-level marketing company selling health supplements. The commission was concerned that the company's business model might be operating as a pyramid scheme. In 2009, Lifeforce agreed to change its business practices to address these concerns without admitting liability.
A year later the Commerce Commission warned consumers about TVI Express, an alleged travel-based multi-level marketing scheme. The commission stated that the scheme had characteristics of a pyramid scheme and advised New Zealanders not to participate.
In 2016-2017 the Commerce Commission investigated Worldventures, a travel-based multi-level marketing company. In 2017, the company agreed to change how it promoted its business opportunity in New Zealand following concerns raised by the Commission about potential breaches of the Fair-Trading Act.
A year later, the Commerce Commission issued a warning to Jamberry, a nail-wrap multi-level marketing company, over concerns about its claims regarding the potential income consultants could earn. The company subsequently went into liquidation. Then in 2019 the Commerce Commission filed charges against Kiwi Seed, a Canterbury-based company, alleging it operated a pyramid selling scheme. This case was notable as it was one of the first times the Commission had taken a company to court specifically for operating a pyramid scheme under the Fair-Trading Act.
It's important to note that in many of these cases, the companies involved did not admit to any wrongdoing but agreed to change their practices to address the Commerce Commission's concerns. The Commission's approach often involves issuing warnings, seeking voluntary compliance, and only pursuing legal action in more serious cases.
The Commerce Commission continues to monitor the network marketing industry in New Zealand. They encourage consumers to be cautious and to report any suspicious schemes or misleading practices. They also provide guidance to businesses operating in this space to ensure compliance with New Zealand consumer protection laws.
But what is network marketing?
Network marketing, also known as multi-level marketing (MLM) or direct selling, is a business model that has gained significant attention and controversy over the past few decades. It is fundamentally a strategy that many companies use to encourage existing distributors to recruit new distributors who sell the companies' products. The distributors earn a percentage of their recruits' sales. The recruits are known as a distributor's “downline,” and can consist of multiple levels of recruitment. Network marketing turns distributors into advocates for the product or service, encouraging them to sell not just the product but also the business opportunity to others. This creates a network of distributors and a hierarchy of multiple levels of compensation.
The concept of network marketing can be traced back to the 1940s. One of the earliest and most well-known network marketing companies is Nutrilite, which was founded in 1945. The company sold vitamins and dietary supplements through a network of distributors. In 1959, two Nutrilite distributors, Rich DeVos and Jay Van Andel, founded Amway, which adopted and refined the network marketing model. Amway's success led to a proliferation of network marketing companies in various industries, from cosmetics to home goods to wellness products.
The basic structure of a network marketing business typically includes a number of elements. The company offers a range of products or services that distributors can sell. These independent contractors then sell the company's products and recruit new distributors. Distributors often sell products directly to consumers, often through home parties, one-on-one demonstrations, or online platforms, but they are encouraged to recruit others to join the company as distributors. Distributors earn money not only from their own sales but also from the sales of their recruits (downline).
Proponents of network marketing often highlight several potential benefits. Compared to starting a traditional business, becoming a distributor for a network marketing company often requires minimal initial investment. Distributors can often work part-time and set their own schedules, and many network marketing companies provide training, marketing materials, and ongoing support to their distributors. As distributors build their downline, they can potentially earn income from the sales of others in their network.
Despite its potential benefits, network marketing has faced significant criticisms and controversies and some network marketing companies have been accused of operating as illegal pyramid schemes, where the primary focus is on recruitment rather than product sales. Critics argue that many companies exaggerate the income potential for distributors, leading to unrealistic expectations, and as more distributors join a network, it can become increasingly difficult for new distributors to make sales or recruit others. Studies suggest that a large percentage of network marketing distributors fail to make significant income or lose money. Often, products sold through network marketing are overpriced or of inferior quality compared to traditional retail products.
The legal status of network marketing companies has been a subject of debate and regulatory scrutiny. Legitimate companies focus on selling products to end consumers, not just recruiting new distributors, and may offer a reasonable buy-back policy for unsold inventory. From a legal standpoint, companies and distributors must not make unrealistic or exaggerated income claims, and distributors should not be required to purchase large amounts of inventory or sales aids.
The rise of the internet and social media has significantly impacted network marketing. Many companies now offer e-commerce platforms for distributors to sell products online, and distributors often use social media to promote products and recruit new team members. Companies can now offer online training sessions and virtual conferences, reducing costs and increasing accessibility. Certainly, the internet has made it easier for network marketing companies to expand internationally.
As the business landscape continues to evolve, network marketing faces both challenges and opportunities. There may be more stringent regulations to protect consumers and distributors, and companies will continue to integrate new technologies to support their distributors and enhance the customer experience.
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There may be a trend towards more sustainable, eco-friendly, or technologically advanced products to meet changing consumer preferences. Some companies may adopt hybrid models that combine elements of network marketing with traditional retail or e-commerce approaches.
There are several examples of network marketing companies operating in New Zealand today. While not originally from New Zealand, Tupperware has been a well-established network marketing company in the country for decades. They sell food storage containers and kitchen products through home parties and personal consultants. Arbonne, which offers skincare, cosmetics, and nutrition products, has a significant presence in New Zealand. It operates on a multi-level marketing model and has been in the country since 2007. USANA Health Sciences which sells nutritional products and skincare items, has also been operating in New Zealand since 2007, as has Herbalife Nutrition, another international company with a strong presence in New Zealand, Herbalife sells nutritional supplements and weight management products through independent distributors.
Amway is one of the oldest and largest network marketing companies globally, Amway has been operating in New Zealand for many years, selling a wide range of products including home care, personal care, and nutritional supplements.
Other networking companies operating in this country Norwex, which focuses on eco-friendly cleaning products; Scentsy, known for its wickless candles and fragrance products;? Rodan + Fields, a skincare company; and Nu Skin, another global player in the skincare and nutritional supplement space.
It's worth noting that while these companies operate in New Zealand, the network marketing industry is subject to specific regulations in the country over and above the ?Commerce Commission, which is responsible for enforcing consumer protection laws and can investigate companies suspected of operating pyramid schemes. The Fair-Trading Act 1986 governs trade practices in New Zealand, including those of network marketing companies, and New Zealand law distinguishes between legitimate multi-level marketing businesses and illegal pyramid schemes, similar to many other countries. Companies should be careful about making income claims and must accurately represent the earning potential of their business opportunity.
The Direct Selling Association of New Zealand (DSANZ) is a self-regulatory body that many network marketing companies operating in New Zealand choose to join. It sets standards for ethical business practices in the industry.
While network marketing can provide opportunities for entrepreneurship, potential distributors should always carefully research any company they're considering joining. They should examine the company's track record in New Zealand, understand the compensation plan, and have realistic expectations about the potential income and effort required.
Network marketing remains a controversial business model, with passionate advocates and critics. While it offers potential benefits such as low start-up costs and flexibility, it also faces challenges including legal scrutiny and high failure rates among distributors. As with any business opportunity, individuals considering network marketing should carefully research the company, products, and compensation plan, and maintain realistic expectations about potential income and required effort.
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