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SpirE-Journal 2011 Q1

What’s Next in Multi-level Marketing

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In line with global economic trends, Multi-level Marketing (MLM) companies have shifted their focus from the West towards Asia and Emerging Markets. Asia’s MLM market is estimated to be the world’s largest. With Green and “healthy-lifestyle” products poised to become the next big thing in MLM, do the best days of Asian MLM lie ahead?

What is Multi-level Marketing?

Multi-level marketing (MLM), otherwise known as network marketing, evolved to reach out to customers who were either beyond the reach of conventional bricks and mortar retailers or who needed to be convinced face-to-face by someone they trusted to buy pricey, high involvement products. 

The world’s most successful MLM firms have been equally successful at two things. The first is creating products that people want to buy through network sales rather than other channels. The second is perfecting a process for recruiting, training and motivating sales representatives. From Avon to Tupperware, and Tahitian Noni Juice to Diamond Filtration, the reach of multi-level marketing has been astounding. 

A well-established industry in OECD countries like the United States, United Kingdom and Australia, the industry has evolved and is becoming increasingly hard to ignore. In 2010, sales figures for MLM companies in the United States were USD24.8 billion, with leading market players Avon Products and Mary Kay accounting for 9.2% and 5.9% market shares respectively. 

Multi-level marketing (MLM) can be described as having a pyramid-like structure. However, unlike disreputable pyramid schemes, MLM compensates sales persons only when new members sell products, and not for the recruitment of new members in and of itself. 

Relying heavily on face-to-face communication and relationships, the MLM sales force typically uses one of two formats: the person-to-person and the party plan format . The former is favored in Asian countries such as Singapore and Malaysia. This form of direct selling typically requires the agent to discuss details with the customer on a one-to-one basis. On the other hand, the party plan format relies on one-to-many interaction in the setting of a party or event, so as to solicit sales and recruit new members “downline” in the multi-level marketing chain.

From Avon to Tupperware, and Tahitian Noni Juice to Diamond Filtration, the reach of multilevel marketing has been astounding.
Multi-Level Marketing in Asia and Emerging Markets

Encouraged by the success of multi-level marketing in OECD countries, MLM firms have shifted their focus to Asia in recent years. Their efforts have paid off. Asia registered USD 37 billion in MLM product sales in 2007, and is now the world’s biggest region for multi-level marketing . Trailing behind are North America (USD 32 billion including Canada), Europe, Africa and the Middle East (USD 27 billion), Central America, Southern America and the Caribbean (USD 17 billion), and Australia and the Pacific (USD1.4 billion). 

The success of multi-level marketing could partly be attributed to lower rates of urbanization and development in Asia. This means that more consumers with disposable income are living in small towns or even villages beyond the reach of big retailers. Enabling under-served rural consumers to buy “urban” consumer durables was among the biggest reasons why governments supported the growth of MLM in Brazil and Malaysia. In Brazil, the wide geographic penetration of multi-level marketing coupled with the booming Brazilian economy saw the market grow by 20% in 2010, with bullish forecasts for the next few years ; while the Malaysian government promoted a robust legal and regulatory framework to aid the movement of goods from urban to rural areas through MLM in the 1980s and 1990s. 

MLM’s success in Asia also comes from the strength of family networks. Asian families tend to be more cohesive geographically, with more instances of multiple generations co-residing in the same city, district or even house . This makes it easier for MLM sales persons to tap into familial networks to find customers, “downline” sales persons and referrals. 

That said, the resilience of MLM lies in its versatility across economic booms and downturns. Its flexible structure allows for seasonal “employees”, who are in fact micro-entrepreneurs, to draw an additional income stream not only in times of economic boom but also during recessions. In fact, anecdotal evidence from Singapore suggests that the sales force of MLM companies rose during the 2009 downturn as more people sought to supplement their income. 

The extra income stream is particularly attractive to the silver-haired population. Best World, a publicly-listed nutritional supplement manufacturer in Singapore, specifically recruits older consumers to sell their products. Most of its consumers are in their 40s. Those aged over 55 make up more than a quarter of Best World’s revenue.

In 2010, MLM companies in the United States sold USD24.8 billion worth of products.
Adapting to Trends for a Stronger Foothold in Asia

MLM companies have begun to offer health products that cater to the needs of increasingly health-conscious Asian consumers. Products such as NUTRILITE (Amway) and Herbalife have all made their way into the homes of the health conscious, each with stunning success. 

Herbalife, a nutrition and weight-management company based in the United States, reported a 100% increase in net sales from 2006 to 2009 to USD 152.3 million since expanding its operations to more than 20 provinces in China. 

Amway, too, has achieved great success in China and India with its NUTRILITE category hitting close to USD 4 billion in sales in 20105. Not only did NUTRILITE contribute largely to the overall category growth. The brand also executed a global awareness program (“Color Yourself Healthy”) to promote the health benefits of plant ingredients.

Multi-level marketing in the booming Brazilian economy grew by 20% in 2010.
The Future of MLM in Emerging markets

Moving forward, the growth paths for MLM in Asia and Emerging markets are clear – products promoting Green (or eco-friendly) and healthy lifestyles. 

Eco-consciousness has risen in many Asian cities, particularly among higher-income segments . Going forward, MLM brands are likely to arise around re-useable products and energy-saving household products to cater to the burgeoning eco-friendly customer segment. While this is very much a nascent trend, the success of products like fibre shopping bags point to how this could be a promising market. 

Healthy lifestyle products are more of a traditional MLM staple. From air purifiers to home water filters to health supplements, there is still life in the health products MLM market. The next frontier here may well be smaller cities, towns and rural parts of emerging Asia. For example, India’s healthcare industry is one of the fastest growing sectors in the country. But only 25% of its population has access to Western medicine and most of these live in India’s cities. Indians living in small towns will become a promising market for health-foods, supplements and devices. 

That said, MLM firms have to tread with care in emerging markets. The biggest risk surrounds the reputation of the MLM industry. MLM is still perceived in some quarters as disreputable, and scandals erupt from time to time, usually when rogue firms cross the line between MLM and “pyramid selling.” For instance, in 2009, James Phang Wah, the founder of Sunshine Empire (a direct selling company in Singapore) was found to have misappropriated more than SGD 180 million worth of funds. JU Network and We Best, two major MLM players in South Korea, were also involved in fraud scandals which led to their downfall. Governments are not insensitive to these risks, which explains why the China government took so long to develop something resembling a proper code of law and enforcement around MLM. 

Fortunately for the industry, most Asian governments are improving their regulatory and educational frameworks around MLM. For example, the Singapore Government regulates all multi-level marketing activities through the Multi-level Marketing and Pyramid Selling (Prohibition) Act. The purpose of the act is to differentiate MLM from pyramid selling, and to inform the public to steer clear of illegal pyramid selling schemes. The Act was first passed in 1973, and was later amended in 2000 to expand and refine the definition of pyramid selling. 

A second challenge is posed by the rise of online shopping, which has a huge and growing following in Asia. Many consumers would prefer the anonymity of online shopping in private to talking to an MLM representative. Furthermore, online shopping levels out the playing field as it facilitates price comparison. However even in countries with an extremely high penetration of online shopping, like South Korea, there are still substantial revenues in both MLM and TV home shopping, which shows how some segments of consumers (and seniors are likely to be prominent here) simply prefer a more involved, interactive selling experience. 

Another note of caution surrounds urbanization. More than 50% of the world’s population now lives in cities and by 2020, 70% of Asia’s population will do so as well. As emerging Asia becomes more urbanized, the advantages of MLM in rural and semi-rural areas would decline. Hence, multi-level marketing companies should continue to evolve and reinvent themselves so as to remain relevant to the needs of urban consumers. 

There is every reason to believe that MLM firms will continue to succeed in emerging markets, borne aloft by three trends – aging societies, health-consciousness and Green ideas.

Going forward, MLM brands are likely to arise around reusable products and energy-saving household products to cater to the burgeoning eco-friendly customer segment.
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