Network Marketing Recruitment and training and the industrial ban in China Antony K.Y.Poon April 2003

Contents Definition of DS and Network Marketing and their relationship to each other DS in China in 1998 Role of recruitment and training in network marketing

Different faces different names

Definition DS WFDSA definition of DS: « The marketing of products and services directly to consumers in a face-to-face manner, generally in their homes or the homes of others, at their workplace and other places from permanent retail location »

Definition of network marketing This subset of the DS industry has a compensation plan which enables salespersons or distributors to earn compensation from the sales group or distributors 2 kind of compensation : * Personal sales * Sales of the distributor group

Specificity: Specificity: multiplying effect DS companies: single level multi-level companies are the only one to use multiplying effect 1998 : 70 % of the revenue from the DS industry was generated by network marketing companies (Amway, Nuskin, Shaklee) that use multi-level compensation plan.

DS in China end of 1980: a Japanese company was the 1st DS company without licence Avon was the first with a licence obtained in 1990 April 1996: Chinese government issued the first 41 national DS licenses 1998: ban of the DS industry

Reasons for the ban Berry says: « The only similarity between a pyramid scheme and a network marketing direct selling organization is that both offer an incentive to every new participant to introduce others. » Definition of pyramid:Definition of pyramid: A pyramid is a scheme in which a recruit pays an entry fee for the opportunity to receive future benefits (money or privileges) which are derived from that recruit’s introduction of additional participants into the scheme, rather than from the sales of products. According to WFDSA (2003), pyramid schemes are not commercially substainable because they have no real trading in viable goods or services: « Early pyramid were readily identified and successfully proscribed because of their lack of tangible products. Subsequent fraudulent schemes have attempted to deceive the public and avoid prosecution by asserting that they are genuine businesses operating a multi-level marketing plan since they « sell » goods and services.

According to WFDSA, the factors that differentiate illegal pyramids from lawful DS businesses are : 1)Legitimate DS companies offer business based on the sale of quality products to comsumers, offer satisfaction guarantees, cancellation rights. 2)Legitimate DS companies discourage overstocking inventories, possibility to return unused products. 3)Minimal start-up costs and little or no inventory, modest entry fees 4)The sales and marketing plans of legal DS companies are based on the progressive recognition and reward of DSellers for the development of customers.

People’s perception of legitimate DS companies and pyramid Selling companies Pyramide schemes often attempted to pass themselves off as legitimate DS businesses Making people unable to distinguish Bad image of all the industry ¾ people in the US would not choose this industry as an occupation (1997)

DS industry has still a bad image and regarded by many consumers as inherenttly dishonest (1995) 2 main reasons for bad image according Chan (1993) : - Illegal and unethical practices of pyramid scheme - False claims from distributors

In April 1998, the chinese government issued the SAIC doc. N°46 China banned the industry in order: -to protect the rights of consumers -to promote fair competition -to protect the economic order of the market and social stability. Many « chun xiao » firms sell smugled, inferior, counterfeit products, upon which no tax was paid and sold at anormal prices. These firms used such products to cheat people. Their business practices promoted unfair treatment and caused social damage to consumers and enterprises.

Chinese legislation on DS after 1998 The administrative authorities : - had investigated over 2528 cases of illegal chuan xiao operations - issued RMB 100 million of fines - found over RMB million worth of illegal chuan xiao products - banned 577 unlicenced chuan xiao companies The government imposed a complete et immediate ban on DS companies including foreign companies, which started from October 31, 1998.

Conversion regulation MOFTEC 455 Foreign companies were allowed to operate in China under the new law: -A company employing (not permanent) salespersons -A company that earned commission through the promotion and selling of the products without employing salespersons.  Other conditions  Amway China followed the regulation. Its sales ↓ from RMB 1,500 million in 1997 to RMB 320 million in 1998.

The role of recruitment The process of recruiting new distributor is regarded as the key to success in network marketing. 2 benefits: -Distributor earns more commission from recruiting downlines, who may contribute sales to the network -Newly recruits contribute to increase sales and enable the network of the whole company to grow at a faster rate.

Training does not directly lead to improve sales but is very important. is important as are supervision and motivation gives proper guidelines on what to present and how it should be presented. Helps salepeople to be ethical and upright when they sell Enable salepeople to present the features and benefits of the products they offer Instructs distributors about product knowledge and sale know-how Ensure distributors to be aware of their ethical responsabilities

Analytical overview of recruitment and training Recruitment approach used in network marketing: « union building » Others way of recruiting : - One-to-one: used in labor union. It uses trained and volunteer members to persuade a non member, outside the office, to join an organization - Word-of-mouth: according a study, firms with less than 50 employees regard this method as the best method as it allowed them to reduce the recruitment budget and achieve high level of effectiveness - Like-recruits-like: people recruit into an union other people with similar qualities who are usually in the same demographic group or have similar occupational identity

Recruitment methods in network marketing According to Scott:According to Scott: - 3 basic forms :  One-to-one presentation  Home gatherings  Large presentations According to Nichols:According to Nichols: - 7 different forms  One-to-one  Two-to-one  Group presentation or opportunity meetings  Audio or video presentations  Teleconferencing  24-hour information lines  Fax-on-demand

Training program in network marketing Training programs include:  Product knowledge  Analysis, selection and follow-up of prospective distributors  Training of trainers

Conclusion and future research This article provides more understanding of the DS industry and reveals the characteristics of a network marketing organization. Recruitment and training are 2 important functions for the survival and expansion of a company.