Direct sales industry

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Job Satisfaction of Independent Contractors Bloomberg found that independent contractors prioritize and value being one’s own boss, flexibility in schedule and having a better work-life balance. Moreover, over three-quarters (77%) of them are highly satisfied with their work (Source: 2016 Growth and Outlook Report: U.S.  Direct  Selling  in  2015;  Bloomberg  Government Future of the Workforce Survey; U.S. census 2014; DSA national Sales force Study 2014).

Record 20.5  million  people  were  involved  in  direct selling in the United States in 2016, 1.5 % increase from the previous year. These people are affiliated with direct selling companies, and are eligible to purchase products at a discount, and resell them at a profit. They are also eligible to sponsor others to do the same.

5.3 million are building   independent   businesses   as   direct   sellers, meaning they are actively managing a customer base and possibly sponsoring others to do the same. 800,000 of these people are full-time and 4.5 million are part time. In addition, 15.2 million others receive a discount on products and services that they personally enjoy and use. Estimated direct retail sales of $35.54 billion in 2016 is the second most in direct selling history

History of direct selling

In the early 1940’s a company by the name of California Vitamins recognized that all their new sales representatives coming abroad were friends and family of their exiting sales force, primarily because they wanted the product at wholesale cost. They also discovered that it was easier to create a sales force of a lot of people who each sold a small amount for product than it was to find a few superstars who could sell a lot of products. So, they combined those two ideas and designed a sales compensating structure that encouraged their salespeople to invite new representatives from satisfied customers,  most of whom were family and friends, who each had the same right to offer the product and representative status to others, which allowed the sales force to grow exponentially.

The company rewarded them for the sales produced by their entire group or network of sales representatives.  Network  marketing  was  born,  a  few years later; the company changed its name to NutraLite Food Supplement Corporations. In 1956 NutraLite was joined in network marketing by Dr. Forrest Shaklee to gain a boarder distribution of the food supplements he had developed. Not long after, in 1959, former NutraLite distributors Rich Devoss and jay Van Andel started the Amway company as the American way of marketing products (constantin, 2009 an Jain et al., 2015).

Be aware of get rich quick fooling scams

Differences between pyramid scheme, MLM  or direct selling and Ponzi scheme

Legitimate MLMs sometimes confused with illegal pyramid  or Ponzi  schemes, have come under instance security due to the efforts of “rotten apples” which operated illegally and have been forced to pay hefty fines or terminate the operation altogether (Epstein, 2010).

Illegal Pyramid Scheme

Pyramid schemes (and Ponzi schemes) are failed and MLM legal problems often begin when regulators pursue the organization as an illegal pyramid scheme disguised as   an   MLM.  The  FTC  (Financial   and   Tax   Fraud Education Associates) shed some light into how courts and governmental regulators might view the difference in a  case  in  1979  involving  Amway.  This  significant decision  which  held that  Amway did, in  fact, operate legally seems to set the standard for all cases when addressing the difference between MLM and pyramid scheme. For example, the Amway decision was given  great   deference   twenty   years   later   in   U.S.A   gold Unlimited Inc., with the majority upholding a criminal conviction  for  a  corporate  “Get  Rich  Quick”  scheme which focused more on pyramiding and less on retailing. Similarly in Webster v. Omnitrition, Int’l Inc, the Ninth Circuit Court of appeals citing Amway as well noted the pyramid scheme are said to be inherently fraudulent (Epstein, 2010).

Ponzi Scheme

Ponzi schemes (pyramid schemes) are fraudulent investments where earlier investors’ returns are paid from the contributions of later investors. As the quote above indicates,  people  can  be  drawn  into  Ponzi  schemes without a “hard sell,” as long as the perpetrator can create the impression of credibility, oft4en through personality and charisma (Wilkins et al., 2010).

Ponzi schemes are named after Charles Ponzi, who in1920 promised investors he would double their money in 90 days by purchasing foreign postal coupons. His investments originally appeared successful as he paid earlier investors their promised returns; however, the scheme ultimately unraveled when he was unable to pay later investors (Tsai, 2009). Despite decades of media attention   on   Ponzi   schemes,   Mr.   Ponzi’s   methods continue  to  be  used  today.  For  example,  in  2009, investors lost approximately $16.5 billion in Ponzi schemes (Anderson, 2009), and the Madoof fraud alone appears to far exceed that amount. In addition, in early 2009, the SEC charged R. Allen Stanford for a “multi- billion dollar investment  scheme”  (SEC 2009), further evidence of the continuing prevalence of such frauds.

Relatedly, Ponzi scheme is named after Charles Ponzi, and Italian immigrant and already convicted who perpetrated a fraud on investors who were duped into thinking they could gain investment returns of 50 percent in less than two months. Unlike the legitimate MLM or the fraudulent pyramid scheme, a Ponzi scheme is an offer of a financial investment opportunity usually guaranteeing higher than average returns but without any further effort by the investors. While the terms “pyramid scheme” and “Ponzi scheme” are often used interchangeably, both are slightly different and they are illegal. In recent years, the number of Ponzi schemes that have been exposed has simply exploded. Anyone is susceptible  to  becoming  a  victim of  Ponzi  scheme  as demonstrated by the recent economic melt-down causing investors to withdraw their money from investment firms and banks (Epstein, 2010).

Business analysts have noticed that contrary to regular businesses, MLM companies’ success run counter to economic cycles (Cahn, 2008). MLM companies and the MLM model have generated legitimate direct selling business opportunities for non- salaried, independent representative business owners in the United States and around  the  world.  Michigan-based  Amway  Global  is often   recognized  as  one  of  the  most  popular  and successful MLM’s and celebrated its 50th  anniversary in 2009.

 Opportunities to work with an MLM such as Amway include the opportunity to start one’s own home. Published legal research in the area of MLM appears to be somewhat lacking however (Epstein, 2010). These firms usually have their success in countries that had just experienced an economic crisis (Cahn, 2008). MLMs claim that they offer business opportunities for those who believe in their goods or services and wish to participate in  selling  them.  However,  the  phrase  business opportunity is actually a legal definition which has been legislated and explained at the federal and state levels as a matter of consumer protection. According to FTC (Federal Trade Commission) website, twenty-six states currently have statues which specifically address business opportunities  and  are  almost  always  enforced  though state attorney general offices (Epstein, 2010). In a study conducted in Mexico, during the economic changes of the 1980’s towards a more capitalistic market, MLM companies entered the market experiencing success as the citizens were looking to live under the new neoliberal model instead of the old social welfare system (Cahn,2008).

Masi de Casanova (2011) conducted an ethnographic study like Cahn (2008) analyzed direct selling and MLM in Latin America, focusing hers in Ecuador. Her research involved several interviews and experiencing the lives of women involved in direct sales working for Yanbal, a leading cosmetics MLM firm form Peru.Consequently,  the  economic  turn  that  Cahn  (2008) discussed in his research in Mexico that led to the growth  of MLM companies, was also witnessed in Thailand by Wilson (1999).

Masi de Casanova (2011) made a connection  between  these types  of companies  and  the informal   economy   without   mentioning   the   informal sector per sector. Cahn (2008) stated that after the 1997 financial crisis in Thailand, Thai newspapers were promoting direct sales and MLM companies as an alternative  to  complement  their  salaries  and  in  some cases people used it as a source of income to avoid being unemployed. The highlight of this business is that it provides income opportunities to low-skilled workers making it attractive to working and low-middle class members (Wilson, 1999). Nga and Mum 92011), witnessed the growth of MLM companies in Malaysia, another emerging market country. Like Vander et al. (2002), the authors begin by differentiating MLM with pyramid schemes. Since wages are decreasing and unemployment is rising in the country, the authors conducted a study to analyze perception of MLM in Malaysia by the young future university graduates and on their willingness to take up MLM as a career. The study found that the youth in Malaysia were willing to take MLM  as  a  permanent  career  option  or  to  supplement their income (Nga et al., 2001).

Franco and Perez sowing those customer-to-customer relations can be very efficient at expansion because the consumers at some point become the sellers of the same products they are consuming. These consumers may become independent sellers for these companies because of their attractive compensation plans and profits. Profits are made through the sales made by the seller or by the sales generated by those whom they recruited (Franco and   Perez,   2016).   A   company   using   this   type   of marketing is a MLM company. The MLM company may be an individual, firm, corporation or other type of business entity. Avon, Amway, Equinox International Mary Kay, NuSkin and Tupperware are all MLMs 9see appendix five). All the companies have different compensation plans and “compensation plan structure can have a profound effect on how distributors’ time is spent, and  therefore  plays  a  critical  role  in  the  company’s overall growth and success through time (Coughlan and Grayson, 1998). Also, Croft and Woodruff (1996) studies the international network of MLM between the United States and Japan, and found than in certain specific cases (when there are strong social or family bounds) network marketing channel could be more effective.

Furthermore, Dai et al (2011) found that many Chinese immigrant in western countries began  entrepreneurial  activists  by joining major MLM networks at their host countries.

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