Bulletin of the Transilvania University of Braşov • Vol.

2 (51) - 2009
Series V: Economic Sciences

MULTI-LEVEL MARKETING - A TOOL

OF RELATIONSHIP MARKETING

Cristinel CONSTANTIN1

Abstract: This paper aims to analyse the opportunity of using multi-level

marketing (MLM) as a tool of relationship marketing. The research is firstly
based on an analysis regarding the issues about the legality of MLM
techniques in the context of EU and US regulation systems. The outcomes of
this research stress the main characteristics of legal network marketing and
how a person which wants to become independent distributor could avoid the
cooperation with an illegal pyramid scheme. The second research is based on
a case study at the level of an insurance broker, which emphasizes the
benefits that all parties involved in a transaction (broker, distributor and
customer) could obtain by using an MLM scheme.

Key words: multi-level marketing, relationship marketing, insurance sector.

1. Introduction research being to find better tools of

This paper is about a part of our research relationship marketing. Among these tools,
done in order to find powerful tools that direct sales and its particular case “Multi-
can strengthen the marketing activities of Level Marketing” use the best techniques
companies. In our previous research meant to establish long-term and profitable
studies we found that the importance of relationships in spite of higher criticisms
relationship marketing for the successful from many authorities. The research is
business is accepted on a large scale in the based on a case study of the distribution
specialty literature. The need to adopt system established by certain insurance
relationship marketing comes as a result of brokers in Romania.
diversification in customers’ requirements,
the companies being forced to establish 2. Literature Review
strong relationships with their customers, Relationship marketing is defined as
to maintain them and to create a basis of building, developing and maintaining
mutual cooperation in the long term. strong relationships with customers and
Relationship marketing can be other stakeholders in order to obtain a high
implemented in multiple ways through an profitability (Berry, 1983, Grönroos, 1989,
active involvement of all marketing 1994, 1996, Hunt, 1994, 1997, Mattsson,
activities, from the links with the 1997). The motivation of consumers for
environment factors to a rethinking of all engaging in relational exchanges is the
policies and strategies related to the perception that the benefits of engaging in
marketing mix. relational exchange with particular firms
Starting from these considerations, we exceed the costs incurred. Morgan and
focused on the distribution system used by Hunt(1994) identify “relationship benefits”
an enterprise, the main objective of our as a key antecedent for the kind of
1
Dept. of Marketing, Turism, Services and International Transactions, Transilvania University of Braşov.
32 Bulletin of the Transilvania University of Braşov • Vol. 2 (51) - 2009 • Series V

relationship commitment that characterizes members under him (B and C or Right and
consumers who engage in relational Left). He can invite further members, but
exchanges. Furthermore, consumers desire they have to be put under B or C. Thus, the
relationship partners that they can trust. distributor A is forced to help the downline
They do so because a trusted partner while expanding his own business
reduces the risks associated with relational (Sreekumar, 2007). The network develops
exchange, because trust is associated with in a binomial system (see fig. 1).
a partner’s reliability, integrity, and
competence (Hunt, Madhavaram, Arnett
2006). All of these are reasons of customer
satisfaction that generate additional
benefits at the level of companies, which
can also trust their customers and the H I J K L M
achievement of their objectives.
When we speak about multi-level Fig.1. Example of a downline
marketing (MLM), it can be observed that in binomial system
its techniques are proper for establishing
strong relationships inside the distribution In other types of scheme there is no
channels of a named company. Multi-level restriction regarding the number of
marketing (also called network marketing) distributors placed on the next level under
is a form of direct sales in which a named individual. Nevertheless, in order
independent distributors sell products, to be promoted on the hierarchical scale, a
usually in their customers' home or by distributor must have a fixed number (2 or
telephone. In theory, distributors can make 3) of direct members placed at a maximum
money not only from their own sales but of 2 levels below on the named scale.
also from those of the people they recruit Thus, the promotion is related both to the
(Barett, 2008). individual and downline performance.
The parent company promotes its Distributors earn a commission based on
products directly to consumers by means the sales efforts of their organization,
of relationship referrals and direct selling. which includes their independent sale
The distributors undertake both selling and efforts as well as the leveraged sales
promotional activities, so that the company efforts of their downline. This arrangement
very much cuts its costs dedicated to is similar to franchise arrangements where
promotional activities. royalties are paid from the sales of
Independent distributors develop an individual franchise operations to the
active customer base, which buys the franchiser, as well as to an area or region
company’s products, in order to earn a manager. Commissions are paid to
commission or the difference between the multi-level marketing distributors
wholesale and retail price. Additionally, according to the company’s compensation
distributors build their own downline of plan. There can be multiple levels of
independent distributors who also build a people receiving royalties from one
customer base, thereby expanding the person's sales (Gonzales, 2008).
overall organization (Gonzales, 2008). Many distributors fail thinking they can
Typically the downline network of a earn rapid profits from their downline,
member grows in a pyramid fashion. In without high investment or hard work. In
some schemes there is a restriction that one this respect, Maloney (2006) wrote in its
member A can directly appoint only two “Business Tips” that “if you are trying to
Constantin, C.: Multi-level Marketing –a Tool of Relationship Marketing 33

get rich quick, perhaps the lottery would to the product [6].
give better odds; MLM takes real work to Multi-level marketing was also subject to
be successful”. debates at the level of the European Union,
the European Commission being sponsor
3. Issues Regarding MLM of some research programs with the aim to
Some debates according to many study whether and to what extent it is
similarities between MLM and Pyramid necessary to have European rules on multi-
schemes generated issues at the level of level marketing. One of these studies
European Union and USA regulatory emphasized that MLM techniques have
systems. been, and still are, criticised for containing
Many companies which develop MLM elements of the well-known, but usually
networks promise higher profits to their banned, “pyramid and snowball systems”.
distributors based on the extra-commission This is because multi-level marketing
earned from their downline. Other firms do allows, at least in theory, for the erection of
not provide all the information about their an endless ladder of marketing levels [5].
products to their customers and According to the same study, pyramid and
distributors, or give false information. All snowball systems allow the members of the
these practices are considered unethical, distribution chain to receive bonuses for
being classified as “misleading commercial recruiting new members of the network or a
practice”. part of the initial investment made by the
A commercial practice is misleading new members. There are included in the
when it contains false information or omits same category those systems in which a
information that the average consumer member earns commissions only related to
needs, according to the context, to take an the continuous purchases of the new
informed transactional decision and members introduced by him into the
thereby causes or is likely to cause the network.
average consumer to take a transactional The regulation of illegal pyramid
decision that he would not have taken schemes received special attention from
otherwise [6]. USA authorities as well. According to the
Other criticisms consider MLM as being Federal Trade Commission, in a pyramid
an aggressive practice, as far as the scheme participants hope to reap financial
distributors visit the consumers at their rewards well in excess of their investment,
home and try, in various ways, to convince based primarily on the fees paid by
them to buy products that they do not really members of their “downlines”.
need. On the other hand, some companies Other private organizations proposed
force the distributors to buy high quantities various guides for customers, which try to
of goods without any possibility for the make better distinction between a
latter to return the unsold products. Thus, legitimate MLM plan and a dangerous
the distributors are forced to buy the
pyramid scheme. Such a guide is presented
products for themselves [4].
A commercial practice shall be regarded by the USA National Consumer League
as aggressive if, by harassment, coercion, (NCL), which was established to protect
including the use of physical force, or and promote social and economic justice
undue influence, it significantly impairs or for consumers and workers in the United
is likely to significantly impair the average States and abroad (see Table 1).
consumer’s freedom of choice with regard
34 Bulletin of the Transilvania University of Braşov • Vol. 2 (51) - 2009 • Series V

Comparisons between MLM and Pyramid schemes Table 1

Multi-Level Marketing plan Pyramid
Business focus Sales of products and services to end-users Recruiting new members.
(NOT other distributors)
Profits Primarily based on the sales of products and Primarily membership fees paid by new
services by the distributor. Perhaps some recruits or “bonuses” for meeting recruitment
percentage of income from sales by goals.
downline recruits.
Products or Household goods or services that consumers Often a thinly-veiled and poorly-made
services for sale typically use in everyday life. Goods and “miracle” product or service that few
services are priced competitively with consumers want or need. Merchandise is
traditional retail outlets. typically priced well above comparable
products sold in retail stores.
Start-up costs Low or none at all. Often involving recurring “membership” fees
or expensive “educational,” “training,” or
“advertising” materials that can easily be
found free of charge elsewhere.
Support system Low-pressure, eager to answer questions High pressure, with a constant focus on
about the business and provide detailed recruiting new members of the scheme. Hard
information in writing upon request, such as to reach when questions arise.
a business and marketing plan
Employee/ Eager to provide references who provide Unwilling or unable to provide references or
customer honest evaluations of the viability of the only provides references who themselves
references MLM plan and the work necessary to attempt to recruit a caller.
succeed.
Sales pitch Provides detailed information about the Involves promises of large profits with
work involved. Offers no promise of easy minimal work, often in high-pressure seminar
riches. Does not use high-pressure sales environments. Uses phrases like “limited time
tactics. offer,” “can’t miss opportunity,” and
“guaranteed income.”
Info available? Has a good report with the consumer Not registered with the local Chamber of
protection agencies and is registered with Commerce. Information about the company
the local Chamber of Commerce. is scarce or limited to a Web site.
Getting out of Easily accomplished and accompanied by a Difficult, with high-pressure tactics used to
the business reasonable merchandise buy-back program keep participants in the scheme, possibly
accompanied by pitches to spend more
money on “training” to improve
performance.
How long the Sustainable, based on repeat sales of Doomed to collapse
business will last products and services
How likely you’ll Profits are based on time and effort devoted The vast majority of participants lose money.
profit to selling goods or services to consumers.
The bottom line It’s a legal business opportunity that may It’s illegal. Don’t waste your money.
or may not be a good fit for you.
Source: www.fraud.org – A guide from NCL’s Fraud Center

In conclusion, beyond the issues regarding that those plans managed according to
the legality of MLM networks, both at the business ethics and respect regarding
level of the USA and the EU it is recognised customers and members of the distribution
Constantin, C.: Multi-level Marketing –a Tool of Relationship Marketing 35

network could be considered correct and legal order to buy an insurance policy”. In this
commercial practices. context, the insurer agent has to contact the
4. Applications of MLM on the Insurance potential customers, to identify their
Market necessities and to offer them insurance
Our research is based on a case study of the programs that better fit their needs. Thus, a
distribution system established by several strong relationship is developed between the
Romanian brokers that operate in the agent and customer, which often exists before
insurance sector. The main objective of this the transaction, as the insurance sellers seek
research was to identify the importance of their prospects firstly among their
MLM schemes for brokerage activities and acquaintances and relatives.
their influences on the implementation of Taking into consideration the above
relationship marketing. mentioned particularities, many brokerage
Insurance products are in essence special companies that deal in the insurance sector
services regarding the risk transfer from the establish multi-level marketing networks that
service beneficiary towards an insurance expand very fast and cover a large part of the
company, in exchange for an amount of national territory.
money, called insurance premium. In Romania, there are insurance brokers that
Due to the fact that such services, as the record high turnovers using MLM as the main
majority of services, are not tangible and distribution system. Such companies, like
particularly involve a significant money Kundenbroker, Eurobrokers Group, Destine
investment that is usually not recovered if the Broker, MaxyGo are situated among the
risk does not happen, the process of selling biggest brokers on the local market. Their
insurance services is quite difficult. networks contain 10-12 levels with specific
There is a well known joke among tasks inside the sale process. Such a network
insurance sellers, which states that “nobody is presented in Fig. 2.
goes to a supermarket (or other shops) in
Level 10
(70%)

Level 9 Level 9 Level 9

(65%) (65%) (65%)

Level 8 Level 8 Level 8 Level 8 Level 8 Level 8 Level 8 Level 8 Level 8

(60%) (60%) (60%) (60%) (60%) (60%) (60%) (60%) (60%)

L2 L2 L2 L2 L2 L2 L2

L1 L1 L1 L1 L1 L1 L1 L1 L1 L1 L1 L1 L1 L1 L1 L1 L1 L1 L1 L1 L1

Fig.2. An example of MLM network used by insurance brokers

In order to be promoted to a higher level and to develop his downline so as to have at
inside such a network, a distributor must have least 3 direct members at a maximum of 2
at least 3 direct distributors on the next level levels below him. As presented in Fig. 2, the
below. In addition, all his downline should distributors situated on the 9th level could be
account for a specified number of points promoted to the 10th level, on condition they
according to the total sales of insurance have enough points accumulated from
policies. Thus, a distributor has to work in insurance sales.
order to keep all the time a high level of sales
36 Bulletin of the Transilvania University of Braşov • Vol. 2 (51) - 2009 • Series V

The earning of every distributor has two One of the most important reasons to join
components: a direct commission from his an MLM network is that firstly the distributor
direct sales and an extra-commission from the likes the products that are going to sell.
Additionally, the product has to be
sales made by his downline. The commission consumable and with a good quality-price
rate depends on the level of network, being ratio as prerequisites for customers to make
calculated as a ratio from the total income repeated purchases. We can find such a case
collected by the broker for the insurance sold in the insurance sector, where the
by a downline structure. For instance, a representatives of brokers could offer to their
distributor situated on the 10th level earns 70% customers the best solution for their needs,
of the total commission paid by the insurer for taking into account both the price and the
main characteristics of the insurance. This
the sales made by himself and his downline. situation is possible as a result of the
This commission is cashed entirely for his cooperation between the broker and more
personal sales and from his downline, the insurance companies.
distributor is entitled to receive the difference Taking into consideration all the above
between the levels’ ratio. In this respect, a mentioned, MLM could be considered a
member of the network from the 10th level powerful tool of relationship marketing.
will receive 5% of all the commission
References
generated by one of his direct distributors from
the 9th level together with his entire downline. 1. Gonzales, Al.: Network Marketing:
A distributor situated on the 10th level could Viable Alternative During Economic
not receive an extra-commission from a direct Down Trends. Available at:
distributor promoted on the same level, but he www.prlog.org/ 10115002 – network -
can receive a bonus according to the total marketing - viable - alternative-during-
sales of that downline. economic-down-trends. Accessed 8-04-
Such a network grows very fast, 2009.
requiring a huge effort to manage all the 2. Hunt, S, Arnett, D.: For dynamic
structures and the entire selling process. relationship marketing theory: a reply to
For example, a distributor from the 10th Rese. In: Journal of Business & Industrial
level, which has a downline with only 3 Marketing 21 (2006) No. 1, pp. 92-93.
direct members at every level below, 3. Hunt, S., Arnett, D., Madhavaram, S.: The
records 31+32+33+…+39=29523 members in its explanatory foundations of relationship
own structure. In order to keep this amount of marketing theory. In: Journal of Business &
people under control, every distributor which has Industrial Marketing 21 (2006) No. 2, p. 72-87.
a downline is in charge with the management of 4. Maloney, D. - MLM Because so many
their direct and indirect distributors, being entitled people join MLMs. In: Business Tips,
to receive the extra-commission for these efforts. Angelo State University.
5. Micklitz, H., Monazzahian, B. et al.:
5. Conclusions Outline of a possible approach to
As a tool of relationship marketing, the regulation. A study commissioned by the
development of a downline for every member European Commission, 1999.
of the distribution channel leads to a rapid 6. *** Directive 2005/29/EC of the European
expansion into the market, with high profits for Parliament and of the Council of 11 May
the promotional activity. The company should 2005, concerning unfair business - to -
invest almost nothing in promotional campaigns, consumer commercial practices in the
its products being promoted using a “word of internal Market. In: Official Journal of the
mouth” technique. This technique generates a European Union L149 (2005) pp. 22-39
high level of confidence among consumers as
the promoters are their friends or relatives.