Saturday, August 09, 2008


"YESTERDAY, I ran into a disciple of Charles Ponzi," announced the economics professor in the staff room. "Charles who?" asked Alice, professor of zoology. "I'm sure you've seen many of them," Professor Kumar answered, "though you might not have recognised one."

Ponzi could be an adult of any age, but the typical member of this ilk is on the wrong side of 30. As the grey hairs, if not the balding pate, lend his words an amount of credibility, an older person fits the bill eminently. You know him casually. He is an affable, respectable person.
You run into him at a wedding reception or a public meeting where he renews the contact. A few days later, you receive an unexpected telephone call from him. In stray cases, it could be a surprise visit to your home. The initial move has been made. The conversation follows a predictable pattern: exchange of pleasantries followed by comparison of notes about loneliness in old age or the need for an active life that naturally leads to the topic of interaction with the other members of society. He would strike the unsuspecting prey at this moment.

"I have just what the doctor ordered," he will tell you. "You can meet respectable people on equal terms, you can lead an active life, you can keep fit and earn some money in the bargain," he tempts you. Who would complain if, in exchange of some effort, you get good health, active life and respect in society, with small change as the icing on the cake? Lets face it, if someone flashes money in your face, you're bound to take it. It is thus that you get into the wonderland of multilevel marketing (MLM), also called network marketing or pyramid marketing.

It is all very simple, he assures you. There are some world-class companies making top quality products that are not sold through the conventional route of distributors and retailers. In fact, these are not available in the market at all. These products are sold only through direct marketing (DM). As the quality is excellent and the products are frequently advertised in the media through catchy advertisements, you do not have to walk around selling your wares like a salesman. All you have to do is to buy and stock goods worth a few thousands of rupees and sell it to people you know.

You are invited to a small gathering where you are introduced to a few successful entrepreneurs who have made a neat pile doing this.
The rewards are not all monetary. There are other bonuses for performers. Usha shows off the umbrella gifted by the company and the other gifts such as perfumes she has been plied with as incentive for her sales. You are told that Albert, the star performer, could not come because he is in Naples -- the aggressive sales pitch and the figures he clocked fetched him a free family holiday. A housewife buttonholes you and tells you that the price tag of the items is apparently heavy, but you can make do with less quantity, and in the ultimate analysis, it works out to be less expensive.

To `see the quality of the product for yourself', you are given a sample sachet of car shampoo or detergent. Though the product is on the pricey side, the results are satisfying, you find. Be it wax polish, protein supplement, toothpaste or car wash, each of the products is excellent. The modern buzz word, VFM (value for money), sums it up. You might face difficulty in selling shoddy stuff, but vending quality products is no big deal. You can do it.

So you decide to join the network. You will distribute sample sachets, sell the goods among friends and relatives, buy more goods and continue the trade. You will experience, like the celebrated carpenter who built the better mousetrap, that those who have used it once will beat a path to your door. Your mind goes into overdrive; you get visions of Lindt chocolates, Tanishq jewellery and Pattaya Beach. You will get a handsome commission. Not just that, when you induct a new person into the system, you grow in the hierarchy and are entitled to an over-riding commission on the sales he canvasses. And on the sales of the persons he inducts. And so on. Every fortnight, you will get a hefty cheque and a computerised statement indicating how the amount has been worked out. You'll laugh all the way to the bank. Reads like a dream, doesn't it?

The tragedy is that it is destined to remain a dream because of the way MLM works (read `does not work'). The paradox is that it is very easy to understand how a Ponzi scheme (see `House of Cards' on MP-3) should work; it all seems so simple and so obvious. It is, unfortunately, somewhat more difficult to understand why this kind of scheme does not work. The truth is, this scheme does not work, except for those who get in at the first few levels. The vast majority of participants in such a scheme will only lose their original investment, and make no profit at all.

Why is this so? Simple arithmetic and common sense: there aren't so many people who would be willing to participate and the potential market for these goods is given. Most will not be able to get any buyers and therefore will make no money at all. "I ended up using all the toothpaste and had to give it away free to friends," confesses Aswathy.

All legitimate business activities, in some way, create wealth, or contribute to the creation of wealth. When you create a product that is worth more than what it cost to produce, you've created wealth. When you perform a service that is worth more than it cost to provide, you've created wealth. If you spend Rs. 50 for some tea leaves, sugar, water and kerosene, and then use these to make sufficient tea that can be sold to 30 people for Rs. 3 a cup, you've created wealth. You've taken ingredients worth Rs. 50 and used them to create a product worth Rs. 90. You've created new wealth worth Rs. 40.

Pyramid schemes produce goods of no significance, and they provide no service. In MLM, as in Ponzi schemes, no new wealth is created, the only wealth gained by any participant is the wealth lost by other participants. All they do is move existing wealth.

MLM or network marketing does exactly this.

There are, however, scores of loyalists who swear by network marketing.
They have made oodles of money, received expensive gifts and been treated to paid holidays by the company they work for.

Talk of the offensive mounted against MLM, and they are quick to dismiss it as the ranting of peeved retailers. The reason, they say, is not far to seek: having been kept out, they lose out on their profit and are, understandably, cheesed off. This is their truth!

1 comment:

Santanu Sinha Chaudhuri said...

I don't know how I missed it earlier. You have written on a useful topic, because lots and lots of poor people have lost money and some times much more thanks to these MLM schemes. I personally know two of them.

One person's story was particularly tragic. He was a watchman at our condo. The security agency used to pay him
Rs.1,600 a month and he used to make another Rs.500 or so by washing cars at our parking lot. As he was unmarried and lived with his mother, who had a small income herself, he managed somehow.

A punctual and reliable worker, he left the job suddenly and later we came to know that he had joined a Ponzy scheme. He was out of it soon. He lost his job and the borrowed sum of Rs.7,000, which was the joining fee for the scheme.

And you know how difficult it is to earn even Rs.2,000 in the Marxist Bengal!