Because of misunderstandings and incorrect information, direct sales has received an undeservedly bad reputation. In reality there are many completely legitimate companies that operate using this business model, but still, some people only associate direct sales with multi-level marketing scams.
To set the record straight and help consumers understand how the business model actually works, consider these three points most people don’t know about the direct selling industry:
1. Direct Selling Involves Real Product Sales
In a single-level direct sales organization, representatives are paid commissions on the actual sales of an affiliate’s products. For each product sold, a portion of the product cost is set aside as a bonus. Typically, the bonus is shared by the seller and other distributors who work together in sales groups.
In comparison, in a pyramid scheme, members are recruited to enroll others into the scheme through a promise of payments or services. No real commercial activity happens in a pyramid scheme. A pyramid scheme requires anyone who joins the scheme to make a (usually large) upfront payment. In exchange, members are told that they will receive a portion of the money received from each new member that they recruit. The directors of the scheme, who are on top of the pyramid, also take a share of the payment, whether or not they actually perform any work.
Eventually, however, further recruitment efforts fail because no more new members are available, and the pyramid scheme collapses. Typically in a pyramid scheme, people at the top of the pyramid profit. Those in the lower layers lose money as the pyramid scheme falls apart after they’ve paid their fees.
2. Not All Direct Selling Requires Recruitment
Some direct selling companies encourage recruitment—but not all. With some companies, distributors only earn money when real sales are made. Although other team members can share in the sales revenues, they do so by helping distributors to become more successful sellers.
Investments in direct selling programs are generally minimal and refundable. Direct sales company Amway, for instance, charges its Independent Business Owners (IBOs) a $62 registration fee, but this fee is fully refundable upon resignation within the first 90 days. Amway’s IBOs are not required to purchase products, but any products they do buy are backed by a 100 percent satisfaction guarantee. Based on this information, is Amway a pyramid scheme or multi-level marketing scam? The answer is neither.
3. Direct Selling Can Help People Succeed
People engage in direct sales for a number of highly legitimate reasons—some enjoy direct sales as a part-time opportunity to supplement their incomes, while some are budding entrepreneurs building bigger businesses and earning even greater income. Others affiliate with a company because they like its products and want to buy them at discount.
Many types of companies can benefit from integrating direct sales programs into their own businesses. Because their pay is commission-based, distributors are strongly motivated to do well. To help new representatives achieve success, and earn bonus money for themselves, team members provide new product distributors with free training, mentoring, tips, and considerable support.
In every industry there are reputable companies and there are corrupt companies. It’s up to you to judge based on the individual company, not the business model it uses.