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Network marketing is booming in the crisis-hit economy

  • 2011-04-21
  • By Linas Jegelevicius

CARTEL: Linas Simonis says multi-level marketing is profitable for those at the top of the chain, while some on the bottom have good results by not paying taxes.

KLAIPEDA - You work whenever you feel up to it. You earn as much as you want.  If the sales are great, you may be rewarded with a solid gift for your splendid performance. Most importantly, you can be your own boss. Does this sound to you like the work of your dreams? If you scour through advertisements in the back pages of a daily, you will likely come across this kind of ad. Even at the peak of the crisis, these ads did not disappear, instead luring thousands of desperate, jobless people in.

“Independent Distributor” – this is how being “your own boss” could be translated. No labor agreement ties, no hassles, no crabby boss around - be a distributor of multi-level marketing, or otherwise known as network marketing. “Because of these qualities, many are lured into the network. However, earning the fabulous commissions and successfully expanding your ‘business’ is not that easy. From my experience, parents on maternity or paternity leaves often take advantage of the free labor relations. Besides, since the products are being bought supposedly for your own use, there is no danger of losing social benefits, as formally you are not engaged in any business activity,” Vaidas, a Klaipeda resident and father of two, who is still on paternity leave, pointed out to The Baltic Times.

“Since offering products, walking from one door to another, is prohibited in our company, in order to work successfully, it is a must to know a large circle of acquaintances who may buy your item. Otherwise, you are doomed to being on the lowest rung of the marketing ladder. As a rule, if you want to move up and get larger commissions, you have to collect product orders for 1,500 litas (434 euros) at least, with the minimum order being 175 litas,” Gitana, a distributor from Vilnius, acknowledged. According to her, a rookie network marketer earns 15 percent of the total of sold goods. The math is simple: if you collect the minimum order of 175 litas, your earnings total is roughly 26 litas.

“You can hike up the 15 percent mark-up on your own. However, it does not mean you can’t slash it again. In addition, you have to consider the expenses for phone and gas, as, most of the time, the distributors deliver the goods to their buyers’ doorstep,” the network marketer revealed. Having provided all her family members and friends with the products, she feels she has exhausted her potential as a network marketer – no one needs her stuff anymore.

Proponents of this kind of business likely would disagree, arguing that the boundaries for expansion are unlimited – one distributor can register new players, raking it in from their commissions. “No doubt, once you are on the top of the marketing chain, you can make really good money. However, those on the bottom make up single digits, adding up some extra cash to their regular jobs. However, the whole thing – multi-level marketing – teeters on the brink of legality. The entire structure of the business has been built likewise as the most notorious drug cartels. Certainly, if the whole thing was illegal, the criminal justice would have cracked down on it a long time ago. As a rule, the goods’ importers on the top, no doubt, handle their business impeccably. However, when it comes to the lower rungs, a sheer majority of the distributors evade paying taxes. Therefore, we speak of relatively high profits in the network, ” Linas Simonis, a prominent market consultant, maintained to The Baltic Times.

The scheme of the network is very simple: a provider of certain products sells them to all wishing to make money in sale commissions. Those on the top of the scheme rake in the largest bulk, as they generate commissions from all the sellers on the lower rungs, while those on the bottom earn only from their own sales. “It is hard to say how many network marketing companies are in the country today. Many of them officially show another business activity. Without hesitation, I would put the number at five dozen, or even up to one hundred. Having in mind that running such companies does not require large operational costs, such businesses are on the rise,” Simonis maintained.

However, another prominent Lithuanian business consultant, Algirdas Karalius, claims that network marketing is democracy. “Mankind has not yet come up with a more democratic form of business. When it comes to network marketing, each can participate in it; however, only the most tenacious and motivated people can achieve the best results,” Karalius says. He stresses that having the will to be engaged in the business is not enough, as basic business training is necessary to succeed. “One has to agree that a very effective training system exists in the network. First, the [businessperson] obtains some knowledge in the field of finance and receives some business basics. Second, he or she goes through an ideal lesson of leadership and motivation. Third, and what is very important, is that the network business, as a rule, has a very good impact on a family’s mutual relationships. Why so? Usually entire families distribute products, making the activity an excellent way of spending time together and communicating,” the business consultant emphasized.

He denies the popular belief that network marketers usually perform their sales while knocking on the door of religious-sect-members-preaching-the-word-and-potato-seller-weary residents. “Quite the contrary, the distributors are not allowed to assume the door-knocking approach. Marketers can sell their goods only in organized presentations and by keeping in touch with their clients, or spreading the information about the products through the network of their family members, friends and acquaintances,” Vytautas Petrauskas, a multi-level marketer, said of the business.

However, it is often tarnished with dishonest distributors offering not original goods, but counterfeits. Though even serious economists agree this kind of marketing as an occupational activity has many advantages, some caution that the chance of crashing is high, as many lower-level distributors can withdraw from the chain any time they want to. Also, what cannot be disregarded, for the beginning of the entrepreneurship, is that some capital is needed, at least to pay for the first order.
Jurijus Clavas considers himself to be a successful businessperson who has built his business empire on the grounds of multi-level marketing. “Having started out as an initial-rung marketer, I have succeeded in climbing rapidly up the ladder, until I reached the level where I wanted to take on new businesses. Thus, I have launched an International Investment and Business School, reaching out to students as far away as China. Besides, I run a Healthy Lifestyle School focusing on physical and mental wellbeing,” Clavas revealed to The Baltic Times.

He calls network marketing “a relatively new kind of business” in Lithuania. “Since people are generally rather prejudiced and swindler-savvy, the novelty has been shrouded with different gossip and myths. Network marketing has been known for quite a while in Western Europe, mostly called ‘direct sales,’” Clavas explained.
He stressed that network marketing is often wrongly identified as a pyramid-structure sales, which, according to him, is not true. “There are no goods movements in the pyramid-type sales scheme, which is a must thing in a multi-level marketing company. Moreover, in the pyramids, in the beginning of their creation, large commissions exceeding the incomes for fictional goods are being paid out. This is impossible in a network marketing company,” the businessman emphasized. He was quick to point out to other differences between the two as well.

Clavas related that until recently, only foreign-owned network marketing companies carried out this business activity in Lithuania. However, according to him, the trend is about to change. “Lately, Lithuanian-capital multi-level marketing companies are emerging. Obviously, there is still a niche for this kind of business. If we take a look globally, recently even such large auto-makers as Saab and Volvo have been taking on this kind of marketing, which could be summarized in the following way: little investment but a strong word-of-mouth advertising effect. The marketing has been particularly on the rise since the crisis, as it does not require big costs, while giving larger expansion opportunities,” Clavas pointed out.

To The Baltic Times’ query about tax infringements regarding the trade in Klaipeda County, Andrej Cukanov, deputy head of Klaipeda County Revenue Service Inspectorate, replied that, throughout January and March 2011, over 1,000 business certificates allowing them to assume this kind of business activity, except for food sales, have been issued. According to him, last year, 113 tax infringement cases arising from the certificate-less activity, or not having registered the activity, were started.