Multilevel Marketing - Marketing Essay Example
The multilevel marketing (MLM) system seems tailor-made for developed countries. While Multilevel marketing often are not fully developed in the smaller countries (Anderson 1996). Access to data can be a problem. So you have to decide whether to market in a larger or smaller country.
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MLM in Asia uses the same organizational formula as in the West: a sales force of independent distributors who sell products openly to consumers and earn commissions from the form of the difference between the distributor’s cost as well as the selling price, plus income from a portion of the commissions earned by other distributors they recruit. However, given that MLM bypasses the retail chain, it would seem not suited for rural areas and remote suburbs.
The company who tries MLM targets the same market. All have priced their products in the premium slot.
Oriflame’s and Avon’s cosmetics are amongst the most expensive products in their genres, and Amway and Modi Care’s products are in the top fifth of the price range in each category. Can the market support so many players with so many similar products at the same high price points?
MLM marketers in Asia are making the same supposition that has served them quite adversely in more affluent economies as the real customer for MLM is not one of the minuscule 600,000 wealthy consumers who is usually the target for premium-priced products. Instead, it is distributors who are the main customers of their own products.
Distributors of MLM companies in the United States sell, on average, only 19 percent of their products to new customers. Asian MLM marketers calculate that their percentage will decline (Cravens 1995).
When Citibank decided to start on its credit card in India, its biggest problem was that its offices were confined to a few select cities—hardly enough to make a nationwide splash. Citibank did not try to set up an intricate marketing chain, but instead contracted local direct-marketing firms to sell the card. The card carved a niche for itself in a shorter span of time, at a lower cost, and with fewer headaches.
Other companies—Sterling Holiday Resorts, and Hutchison Max amongst them—have also tapped specialized direct marketers to support and sell their services.
Thus, the application of MLM activity to the services industry has resulted in a mushrooming of direct marketing firms—over 150 such ventures were in operation at the end of 1996. The industry was worth Rs 20 crore ($5.71 million) in 1995, and its proponents project that it will multiply two to three times each year up to the year 2000.
Perhaps so. But it cannot be argued that the strongest attraction of MLM is its penetration/cost-efficiency. In marketing a product in India today, a company should budget upward of Rs 75 lakh ($215,000) to just set up a full-fledged marketing cell devoted to the product—and more on running it. If the company turns to a direct marketer, all it should part with is a 21 percent commission for every item sold. MLM firms can survive on such modest commissions as they handle many products. Their overheads are so low that a new MLM firm needs startup capital of only concerning Rs 5 lakh ($14,285).
Cost-effectiveness is not the simply factor to MLM. With cut-throat competition replacing the cosseted environment in the Asian market, companies find it hard to retain their market share as they concurrently try to break into new areas. Multinationals like British Airways, Leo Mattel, Bank of America, and Fujitsu all realized that they needed local market knowledge that sometimes MLM companies could give better than ad firms.
Moreover, Ad agencies themselves recognize that with so many new services and concepts invading with exceptional speed, Asia’s market has revealed certain limitations to traditional advertising. The market is so crowded with new products that there is severe competition for shelf space—shelf space in the heads of consumers as well as Asia’s myriad of tiny shops (Ingram LaForge, and Schwepker 1997).
Moreover, traditional advertising is not as effective with services as it is with products. An advertising target can create awareness, but a distant sales spiel over the radio or television does not communicate how an apparently complex service in reality makes accomplishing a need very simple. Pagers and cell phones have been made familiar by ads, but getting past the intricacies of their use to the convenience they represent is best done individually.
MLM firms generally offer a mix of resource databases, technology for sorting information, and (typically) a 50- to 250-person sales team relying greatly on interactivity and one-on-one parleys. When a MLM firm is hired, it shortlists its target customers on the basis of income, tastes, and earlier spending patterns, using its database in consultation with the client company.
Once the promotional strategy is recognized, sales teams approach target groups to describe the product or service, record the response, and influence to buy.
Although most of the MLM activity is currently in product industries, major moves are estimated in the service sector when more multinationals enter with their new consumer services. Foreign insurance companies have long since made quiet agreements waiting the day when that sector is liberalized.
For most multinationals, the key asset of a MLM provider is its knowledge of the audiences to be embattled. Qualified MLM companies maintain large databases of potential customers of different products and services. MLMs tap diverse sources to replenish their databases, some of which can not be as solid as others (Brooksbank 1995). Confidence in the nature of a MLM’s resource base is of extreme importance to any client before contracting for their services.
There are non- MLM companies that focus in targeting and acquiring just this sort of database. Hence, any client of a MLM must know whether the MLM has acquired its information first- or second-hand. While acquired first-hand, MLM information can be as good as the often more costly established-market-research firm data. It is these data which will set the tone of a client’s marketing strategy, and hence due thoroughness must be done to independently validate a MLM’s database claims.
There is no end of wrangling between MLM providers and advertisers as to whose information works best. MLMs assert that a face with a person attached is remembered better than a televised face followed by another televised face. That is half-true. The more appropriate Indian marketing truism is that MLMs excel on the ground while ad agencies excel over the air.
Though if we see china independently, it is a difficult market, yet MLM is beginning to surface there. Lists from foreign-owned catalog and book club publishers have now come onto the market and they have “selects” available. One problem is the current disinclination of list owners to release their lists for independent merge-purge, but this could soon change.
American magazines are making inroads with Chinese language versions. One product that had been effectively marketed in China is McCall’s pattern books, which are easily manufactured and have very little text.
Payment is mostly through postal giro (a means of transferring funds directly from a bank account via the post office) and debit card charge, but more and more MLM merchandisers are effectively using Cash-On-Delivery. The market continues to be very price-sensitive and most products are sourced locally.
James Thornton, Managing Director of MLA Global Lists Specialists, explains that China is not a country for inexperienced marketers—though now would be a good time to begin the necessary research. Direct sellers such as Avon have been successful in China. Now, more and better quality databases are coming onto the market, including email databases. The Chinese post office provides services for direct marketers. But this is still not a country for the faint of heart, or those on a tight budget, or those who require seeing a quick return on their investment.
China requires a local presence or local partner. It’s difficult to get things done, when you’re outside of the country (Churchill Ford, and Walker 1993).
In 1995, Japan became one of the hottest catalog markets in the world. Shopping by catalog spread through the country like wildfire. Entire new cultures are being built around it. Japanese women are forming “buying circles” to merge their orders and save on freight and ordering charges. Some U.S. retailers in Japan have actually become little more than catalog showrooms. Customers go into the stores, try on merchandising they like, and then order from the catalog, which is typically a less expensive option than buying retail. And catalog clubs are being formed which offer discounted prices and help in placing orders to the United States.
Doug Sacks points out those now, seven years later, and the factors leading to this have changed…but not completely. In 1995, there was a positive exchange rate for the yen. This is no longer the case. Also, traditionally, to make their goods more attractive for export, Japanese companies have lowered their prices in foreign markets. Japanese consumers, of who as many as 60 percent travel internationally, saw that prices for their own goods at home were higher than in foreign cities. So ordering from catalogs became attractive financially. Creatively, U.S. catalogs, which often devote a full page to an item (depending on the product), were more striking than in the telephone directory style of many Japanese catalogs.
With a weaker Yen, and a long-running recession, Japan is no longer the dream market for many foreign “consumer” items. Yet there is a huge prospective in the business-to-business segment. Many U.S. catalogers and retailers have pulled out of the market. Doug Sacks also states that, “Japan’s desire for and perception of the quality of many foreign goods remains high. But the Japanese consumer is much more particular than his American counterpart. And what’s worse, when a Japanese consumer is dissatisfied, they rarely complain, they just disappear. As the continued recession is troubling, and major economic changes will require to be implemented (some of them drastic), Japan is still a very rich country.
Here are some of the major points to remember while MLM to Japan:
Japanese customers do not typically use personal checks. Most often, they pay by credit card, and sometimes by postal money order.
Be sure that your database is modified to hold Japanese addresses, which can run up to seven lines.
Sizes should be converted to the metric system.
Consumers will get their first impression of your company from the back cover of your catalog, as Japanese books and magazines open the contradictory way from ours.
Catalog copy can be in English, but you must include detailed ordering instructions in Japanese, including how to contact your company.
Be sure to state return policies clearly in Japanese. Most Japanese consumers are not used to returning items. Some stores in Japan do not even accept returns.
Think establishing a call center in Japan. Set up a customer service base where consumers can call and speak in Japanese to order items and ask questions. One such company, Tokyo-based Prestige International, has a computer-telephone system linked openly to its U.S. clients so that Japanese customers can get instantaneous product and pricing information from the United States. The company has about 60 bilingual operators (speaking English and Japanese). Costs are high for this service. There is a large setup fee, depending on the size of the company and the number of products being sold, a monthly management fee, and a $2 to $7 charge per call.
Countries within Southeast Asia region are easier to reach and go through than China. Good regional (and some local) lists are extensively available. It is not necessary to have a local presence in any one local market unless and until it has been established to be particularly responsive (Cravens 1995).
Indonesia and Thailand respond well, generally. Hong Kong and Singapore perform well for financial and information offers. Response rates in Malaysia are down. Roll-outs in Japan, Taiwan and Indonesia must be in local language, and there are severe limitations on mailing within Korea due to data protection laws.
Discounted first-class bulk mail rates out of Hong Kong and Singapore and low production costs in Asia are leading numerous international mailers towards using Asia as a “gateway” into global markets. Both Australia and the Middle East can be reached cost-efficiently from Hong Kong or Singapore.
While Asia offers large populations, simply countries with the best economies should be targeted for MLM. However, response rates and average order values tend to be higher than in Europe.
Though, it cannot be denied that business press sees MLM as a quick, cost-effective channel for distributing products to customers, bypassing the logistics of Asia’s warehouse-depot distributor/retailers. This is not news. These analysts as well see some sharp downsides to MLM in the Asia ground.
For one, the MLM product profile is constricted: fast-moving consumer goods targeted at niche markets such as specialist cosmetics or premium fragrances. None of the main players distributes products that need to be demonstrated—hand-held vacuum cleaners or illustrated books, for instance—which gain from the personal interaction between customer and salesperson. Analysts regard MLM as a niche for Asian distributors who cannot easily get shelf space as a staid misreading of the true market—everyday garments and education-related items being two examples of missed opportunities.
They also have mixed feelings concerning the MLM method of presenting only one product line. To them the biggest merit of conformist retailing is that the consumer has so many options. Unless the MLM product is a novelty or the customer has developed a close relationship with the brand, analysts expect MLM to compete sturdily against similar retail products only in areas where the retail products are hard to get to.
The strategy of selling many same-branded products concurrently also does not cut much ice with Asian business analysts. Amway’s MLM distributors, for instance, try to sell an array of floor-care, glass-care, and car-care products; laundry detergents and fabric softeners; and personal care products—all with the name Amway on them. Not that there is anything wrong with Amway—but it isn’t Modi Care.
Modi Care plans to attack Amway’s identity gap by flooding its distribution chain with its ten visually familiar (and scent-familiar) product lines from its portfolio of over 1,000 products, including the same array of detergent powders, fabric-stiffening iron-aids, multipurpose cleaners, shampoos, toothpastes, mouth-fresheners, and beauty soap (Ingram 1996).
The term “scent-familiar” must be broadened to include “shape-familiar” and “size-familiar.” The concept “superjumbo=good deal” is new territory for Asian consumers. In a climate where spoilage is often linked with overbuying, there is a long-established aesthetic of just-enough which corresponds roughly to the Japanese mentality about just-in-time. The Indian housewife habitually purchases only as many vegetables as she needs for the next meal. They can well rot in the bin at the market stall, but they are not going to rot in her kitchen.
It will be interesting to see what marketing analysts have to say while enough sales data are in to compare Amway’s size mentality against Modi Care’s just-enough mentality. Product definition considerations aside, analysts are as well asking whether today’s product range is inevitably the only good one for MLM. Picking their way through the virtues and limitations of MLM, analysts have come up with some dos and don’ts for would-be MLMers:
• Products priced too low or too high will not proffer the sense of good value at the heart of the MLM buying experience.
• The conjecture that MLM works well only for consumer nondurables has never been tested with numerous other nondurable product categories.
• Nor has the postulation been tested that MLM will not work with high-value durables that usually involve testing rival brands—no one has put five televisions, five wet-dry vacuum cleaners, and a petrol generator on the back of a pickup before.
• Innovative products where there are few brands to select from can most easily broaden their customer base through MLM.
• Existing MLM marketers are exceptional candidates to introduce new products from noncompeting manufacturers to the marketplace.
Analysts also see some downsides to MLM at other levels than distribution:
• Matching manufacturing volumes to sales can be filled with dangers since the MLM method’s simply forecasting tool is the number of its distributors.
• Too successful an MLM effort demands either big inventories to make certain that there is no supply shortfall or customer-alienating delays in delivery.
• There is little viewpoint for strong equity for the brand; absence of advertising limits brand responsiveness to only customers who distributors really call on.
• With prices and discounts often being arbitrarily extensive by the distributor to meet personal volume targets, the value statement of the brand is never certain.
• The MLM parent company is never in touch with its real consumers; hence it is vulnerable to the “see no evil, hear no evil” state of mind of overly optimistic distributors.
• Tracking customer tastes, checking their perceptions, and monitoring satisfaction levels is not possible.
• There is an ever-present prospect that the MLM chain will break down due to distributors jumping ship or not selling enough to convene their income expectations and giving up.
• So long as distributors are also principal customers, corrosion of the first will result in loss of the second.
Hence the conventional understanding in Asia is that companies which invest only in MLM, without the back-up of a retail network, run substantial risks. The MLM-dependent company, never having built bridges with its customers, risks losing buyers unless its distributors are continually happy. Hence MLM will remain a niche channel like direct-mail catalogs or TV home shopping and will work best for well-funded major players. Its greatest opportunities lie in products to which the system has not been traditionally applied. This, however, means a considerably capitalized learning curve (Smith and Owens. 1995).
Moreover, successful marketing in Asia needs recognizing the balance between the old and new markets. Despite its “Westernization,” Asian consumers persist to be more heavily influenced by tradition and culture than American consumers. Companies require being able to balance the impact of traditional and cultural values of the family with the influence of television, films, and other aspects of global culture.
Companies require spending more time in understanding these twin old-and-new streams in Japan than in other parts of the world where the market has undergone a slower evolution. As with the scenes in Asian countries of automobiles sharing the road with ox carts, the rapid transitions in Asia mean that the old and new are more probable to be found side by side than in parts of the world such as the United States, where this development from producer-driven to customer-driven economy occurred over a longer period of time. The firmness of these changes found throughout in Asia means that the old has had far less time to move to the new throughout conversion or attrition.
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