Multi-level marketing in the Russian economy
Порожняк Н. Ф., Лопаткина Е. А. Multi-level marketing in the Russian economy // Молодой ученый. 2015. №11. С. 948-950.
«Multilevel marketing is a special kind of distribution of goods used in modern business activities». [1, p. 236] That marketing system allows consumers to become distributors and create new levels — networks. In such a case, all the networks are involved in making profits of its network and the underlying network. This system was created in the United States and it is known as MLM. Multi-level marketing is a unique kind of business, as there is minimum investment with maximum returns. It appears in savings in production, on maintaining of the premises and staff. That is why such kind of business becomes popular and receives its active development in the current economic environment.
In 1989 the first MLM-company appeared in the Russian history. The name of the company was «Herbalife». That company sold teas for weight loss. The company's products spread quickly through the country, but just as quickly as a negative image of multilevel marketing began to spread.
Multi-level marketing remained in Russia and despite on its poor start managed to win the market. The reason for it was that those units that have not left the business began to earn money. Subsequently, such facilities as training centers and educational literature have appeared in our country.
The second largest company which appeared on the Russian market was Save-Invest. It sold Swiss insurance policies. After that, there began to spread world-famous companies selling cosmetics and kitchenware. Some of them are AVON, Oriflame, MaryKay and Zepter.
in 1999 one million of people worked as distributors in Moscow and 3 million of people worked as distributors across Russia.
Currently, the Russian MLM-companies offer a great variety of goods and services. Among them are cosmetics, vitamins, various additives, things for home and others. There is a tendency for the development of multi-level marketing in the Russian banking sector. While most of the banks all over the world develop and strengthen international relations, local banks with a small branch network use multi-level marketing tactics. Perhaps wishing to save on advertising campaigns and staff, they hire freelance workers ready to attract new customers for the bank.
Such marketing activities are not strange even for modern large Russian banks. For example, in 2008 OTP Bank began selling deposits and loans through the agents. The same policies were taken by «Renaissance Credit» and Flexinvest Bank. The first offers anyone who signed up a contract to receive a percentage of the deposit given by depositor to the bank.
Advertising seeking for freelancers are published on sites whose audience consists of representatives of the financial sector. Banks are not opposed to the investors and managers were led by their clients. For example, Flexinvest Bank invites the loan brokers on its website.
The inherent attribute of the Uralsib Bank is that this bank uses multi-level marketing tactics in its work. The size of its remuneration depends on the amount of attracted borrowers. Also agents issued a fixed amount of money for each card activated by invited customers. «SKB bank» is acting the same way. It means that the reward to freelance is fixed in this organization. As for Flexinvest Bank it gives a percentage of issued loan amount.
Everyone who applies to Moscomprivatbank for a credit card may become a bank agent. Remuneration is obtained in the case of attracting not only customers but also new freelancers. There is a social network of distributors on the bank's website where everybody can learn about a program in more details.
Hiring freelancers looks cost-effective measure. Many bankers are ready to follow the leader of the competitors. But there are real risks associated with multi-level marketing in banking sphere. In addition, unskilled sellers often ruin the reputation of the bank. But while some banks are skeptical about the benefits of MLM, companies which use it, successfully promote its banking products.
It is important to note that there appeared a scientific and information base in multi-level business in Russia. Many magazines and newspapers are published about MLM-companies («MLM-perspective», «Good news»). A huge number of books are written by successful businessmen who talk about how to achieve success in that sphere. Training courses, seminars and conferences are arranged to study potential distributors how to sell the product. Economics departments in universities teach the basics of multi-level marketing and it means that MLM has found its place in a large economic space.
During the first 9 months of 2013 the companies of multi-level marketing in Russia increased its revenue by 21 % compared to 2012 (110,610 billions of rubles / 91,116 billions of rubles). Annual revenue of the same companies in 2012 was 128.752 billion of rubles. Total monthly turnover of the twenty largest companies operating in Russia was about 20–30 million of dollars.
It must be noted that the growth of multi-level marketing surpasses the dynamics of the traditional retail trade in Russia, whose turnover for the first 9 months of 2013 increased by 3.8 %.
64 % of the products sold by multi-level marketing, relates to personal care (cosmetics, household chemicals, etc.). This is undoubtedly the largest segment of MLM, although compared with 2012 its share declined for about 4 %. The products for a healthy lifestyle increased their share of approximately 14.79 % as against 10.52 % a year earlier.
It should be noted that the legal framework which controls activities of the multi-level firms are still not registered, many of them hide their real business, income and location (according to the Federal Tax Police Service of the Russian Federation). According to statistics, almost 95 percent of the multilevel companies break down after a year of existence.
Multi-level marketing has become more successful over the past three years in Russia. This is one of the few areas which benefited from the economic crisis of 2008–2009. During the crisis there was an increase of interest in multi-level business. People were not confident, in fact, that their jobs were safe.
In the spring of 2010, the possibility of introducing multi-level business and its distribution in order to eliminate unemployment was presented at a meeting of the State Duma of the Russian Federation. The meeting entitled «Multi-Level Marketing as an alternative way to implement the employment potential of the citizens». The conference participants proposed the establishment of information centers for potential distributors and making some changes in the legal acts regulating activities of MLM- companies.
The activities of MLM-companies are much debated. As a consequence of the disputes, there appear critical factors in information sources. Criticism mainly based on the following aspects:
1. Similarity of multi-level marketing with fraudulent pyramid schemes;
2. Charges of price collusion (fixed price for offered products);
3. Actual coercion for novice distributors to unproductive expenditure in the initial phase (fee-paying seminars, trainings and other activities, learning materials, etc.);
«Activities of MLM-companies often go beyond the legal field. The goods are not taken back or exchanged, as it required by law of the consumer’s rights.
Multilevel marketing is often compared to a pyramid scheme, but it is not the truth as the distributors receive income primarily from the sales of a particular product to particular people. At least, it is the way of work for such legal companies as Amway, the Ada, AL Williams, etc.)». [2, p. 8]
Despite the difficulties in the development of multi-level marketing in our country we can say that the industry of MLM occupied a significant place in the Russian economy.
Without a proper understanding of the prospects in the development of multi-level marketing it is impossible to understand why it is became so much successful. Rhode Nicolas (author, consultant, distributor and lecturer on multi-level marketing) writes: «In the near future multi-level marketing is going to be the most preferred method of selling products and services. In order to open your full MLM-business it does not required any investment, which automatically reduces the potential risk of loss to a minimum. It is permissible to open your virtual home office and conduct business from the comfort of home. Networks are also giving opportunities to secure a stable growing income without any restrictions, the growth rate of which depends only on the entrepreneur». [3, p. 186]
Prospects of multi-level marketing are very alluring with its stunning temptation. This type of selling goods and services received a high growth, as it is convenient for the producer and the consumer. According to the concept of multi-level marketing, the manufacturer with help of its distributor is able to reach consumers in the direct way, offering them products and providing high quality consultations. Is it convenient for the customer? Certainly. Is it profitable for the manufacturer? Yes, it is.
At the moment multi-level marketing has a huge spread in the industry of sale of goods, but it should be noted that it also continues to develop in terms of various services. «MLM is being actively implemented in the financial market, beauty services, travel, restaurant business and so on. The service is the other point of the multi-level marketing development». [4, p. 64]
In order to show the future development of multi-level marketing as a business we want to provide statistics of the World Federation Trade Associations, which calculated the figures of MLM-industry:
1. there are more than 3000 MLM-companies that operate in 80 countries;
2. global turnover of MLM-companies is close to the mark of 100 billion dollars a year;
3. annual increase in turnover is about 20–30 %;
4. the number of distributors in the world is about 58 million people.
Thus, we can conclude that the multi-level marketing industry has a huge prospect, as it is convenient for all parties of the market process. This type of sales has already got its development in the world and, of course, it is going to build a momentum in the Russian Federation. We must recognize that despite on some criticism multi-level marketing is a rather promising business, and in this way we can make economic forecast that multi-level marketing will get its widest dissemination and will be one of the leading types of sales on the market.
1. L. Clements. Multilevel Marketing inside. Publisher «Fair-Pres», 2002. p. 236.
2. Xenia Gagay. An article «Tangled by one network», the newspaper «News», 16th of October,2008, p.8.
3. Rhode Nicholas. The future of the multilevel marketing. Publisher «Eksmo», 2007. p.186.
4. Ekaterina Bokitko. School of multilevel marketing. Publisher «SINAMATI», 2006. p.64.