Direct sales companies and "pyramid schemes" are both rapidly expanding types of interpersonal sales networks. What is the difference? How can one differentiate between legitimate sales operations and deceptive traps?
According to statistics of the Fair Trade Commission (FTC), there are currently 548 direct sales companies registered in Taiwan. However, because of the intensity of the competition, perhaps only 210 or so are active.
Last year total turnover in the direct sales industry reached more than NT$44 billion, showing rapid growth. The variety of products involved is dazzling-people are hawking everything from computerized toilets, health check-up membership cards, and adjustable underwear to products using ingredients like fungus, pollen, and aloe.
Given the bewildering variety of products and various incentive schemes offered, consumers who may wish to purchase products or even enter the ranks of the sellers should bear in mind a few principles, to avoid having their dreams of wealth end in disappointment or even bankruptcy.
1. Two words: quality and price.
"Product" is at the core of any sales enterprise. Honestly-run direct sales companies invariably establish incentive systems in which the individual seller or the members of a sales network are given awards for achieving certain levels of sales. Those companies which de-emphasize product sales and give awards only for "attracting new members" are quite possibly "pyramid schemes." (In these schemes, products are never really sold to consumers, but rather are just passed along to lower levels of middlemen who can only profit by finding more middlemen below them until the pyramid collapses when there are no more people to be drawn in at the bottom.)
A typical honestly-run company manufactures its own products, guarantees consumer satisfaction with these products, and encourages those who wish to join its ranks to first use the products themselves. When selling, these companies ask only that salespeople plainly state how they have benefited from the product, without adding wild claims. So customers beware: Be sure you know the real quality of a company's products.
One must also pay attention to the sales price of the products. The original motivation for establishment of a direct sales network is to avoid the costs associated with retail sales-profits skimmed off by middlemen and retailers, costs of advertising and storefront rental, and employee salaries. Savings can then be passed on to the consumer to attract buyers. However, when a direct sales company's organization balloons to a large size, award payments to the various layers become astounding. In the 1995 fiscal year, for example, companies paid out more than NT$20 billion in awards, or more than 46% of total sales revenue!
At present in Taiwan, direct sales products are generally more expensive than in retailers. For instance, a tube of fungus- based toothpaste costs NT$180, and a jar of aloe facial cream goes for NT$2000 through direct sales. However, salespeople that ask such prices will claim that their products have special ingredients or efficacy, that they are more environmentally friendly, and so on, and the FTC is unable to monitor them.
If the price is too high, it is obviously going to be hard to sell the product. Take for example the so-called "health bed," which goes for over NT$1 million and cannot be returned once the packaging is opened. How hard it must be to find people to sell such items, so both those who would buy and those who might join in the sales network should beware.
2. "Entry fees" should not be high.
Honestly-run direct sales companies do not require those who would join to purchase a huge amount of goods right away, or to pay a large fee to join. Of the 210 direct sales companies surveyed by the FTC, 99 require the purchase of a "start-up information package" (costing between NT$50 and NT$1800). Meanwhile, 48 companies require new members to purchase a stock of products (at costs ranging from NT$1000 to NT$100,000).
Honestly-run direct sales companies have regulations designed to prevent problems. For example, some individuals might buy up large stocks to falsely build up impressive sales records. Or people might purchase large amounts of products (to become large brokers and skim profits off of secondary sales) but-unable to sell them all-have to dump them back on the headquarters. One such regulation to avoid problems like these is the "70% rule," which requires members to sell off 70% of their current items before they can replenish their stock.
3. Start as a sideline, with free entry and exit.
Consumers should have the right to return products after purchase if they are not satisfied. A small number of larger companies will even accept returns of opened items.
More importantly, warns the FTC, people should not have dreams of earning vast sums through direct sales. One should not be dazzled by the amounts of the incentive awards or promises of overseas trips and higher rank, while overlooking an escape route for the future.
Because those who join direct sales companies are considered "independent operators," with no employment relationship to the company, companies may not try to prevent members from leaving. When leaving a company, ordered products can be returned, and refunded money cannot be less than 90% of the original payment to join (though awards already paid by the company to the seller can be deducted). Thus, if members decide not to continue, even if they cannot get every penny back, at least they can minimize their losses.
One must beware of companies that promise "rapid wealth" or "an easy million per month" to attract people. This is the most effective-and most misleading-form of seduction. In fact, direct sales takes hard work, and requires a complete commitment of one's whole person (intellectual, physical, and emotional), time, and maybe even family (with parents and siblings brought into the sales network). Results are only likely to be visible after three to five years, and it's a one-in-a-million shot that one can grit one's teeth and hang in until becoming a big player.
FTC statistics show that last year 580,000-plus people in Taiwan received award payments from companies, at an average of NT$35,000 per person for the whole year. This is not only not great wealth, it isn't even enough to get by. Thus honestly- run companies encourage those who wish to join to see direct sales as a "sideline" to earn pocket money. Avoid those who say you should quit your job to join them!
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(drawing by Tsai Chih-pen)
