December 7, 2004

RIP

Billionaire Jay Van Andel, co-founder of the controversial Amway - which spawned the direct-sales industry niche known as network marketing now used by dozens of companies to sell a variety of products via networks of customers who also serve as independent marketing reps in exchange for a share of the profits - died today at his home near Grand Rapids, Michigan, at the age of 80. Van Andel was a major philanthropist in the Grand Rapids area and a major donor to conservative political causes and the Republican Party.

Van Andel's resume reflected his conservative business and social philosophies. He chaired the U.S. Chamber of Commerce and was a trustee of the Heritage Foundation, Hudson Institute, Hillsdale College and the Advisory Council for American Private Education. The Family Owned Business Institute, on Grand Valley State University's downtown Grand Rapids campus, was founded in part with $301,000 raised in a 1999 tribute to Van Andel and DeVos. A member of MENSA, Van Andel founded the nonprofit Van Andel Institute, comprising two facilities dedicated to medical research and the educational process. He spent $60 million to build its headquarters in Grand Rapids, covered its annual budget and planned to pledge most of his taxable estate to it.

UPDATE: This post prompted a discussion in the comments about whether the Amway business is legit or a scam. My take on it is, network marketing is a legitimate and smart way to market products if you offer good value (value being a combination of quality and price), but that the Amway business (which, in North America, morphed into an online business renamed "Quixtar" a few years ago) has been corrupted not by the corporation but by a few of the big distributors who found they could make more money by selling their "downline" distributors motivational tapes and tickets to motivational seminars. While many big corporations offer training and motivational programs for their sales reps, there are problems with the way it works in the A/Q business as I see it. The motivational tapes and seminars offered in the A/Q business promote ... buying more motivational tapes and seminar tickets.

The A/Q corporation has seemingly done little to stop the offenders, and so they are complicit in the abuses.

Spurred on by Van Andel's death, I ran a Google search and ran across a few blogs that do a good job exposing the abuses by the big independent reps. Quixtar Blog is a good starting place. It had very interesting post about how Quixtar is using a web of faux blogs and other online PR efforts including "Google-bombing" to counter the impact of websites and blogs critical of the company and its practices - in short, to boost the Google search results rankings of pro-A/Q sites.

Another is LawBlawg. Just click and scroll and read this post for sure. And FormerDiamond is a blog by a former A/Q distributor who actually made big money - but now is an A/Q critic and whistleblower.

The abuses by the A/Q distributors tend to color any discussion about network marketing itself. My analysis of network marketing as a business concept is that it has some strong points to recommend it. Network marketing is built around word-of-mouth advertising, which is generally accepted as the most powerful form of marketing. If you buy a new sweater, and a co-worker compliments it and says "where did you get it?" and you say "Nordstroms.com," and they go online and order one, you have engaged in network marketing. You just have not been paid for it.

Network marketing companies simply are paying their customers to refer their products or services to new customers.

Last week I called a national lawn care service to set up that service for my yard. I mentioned that I was referred by my neighbor - he'll get a one-time credit on his bill for the referral. That's a form of network marketing. If that lawn care service were to offer its customers an ongoing 5% commission on all future purchases by new customers they refer, it would be employing network marketing to even greater effect.

Amazon.com's affiliate program - whereby websites such as this one can post a link to Amazon.com and even to specific products and get a commission if those links generate business for Amazon - is a good example of network marketing. Amazon, in effect, has more than 900,000 independent sales reps that it pays if they generate a sale. (Amazon's compensation plan is single-level - I can't make money off your sales if I recruit you to become an Amazon affiliate. Don't confuse the terms "network marketing" and "multi-level marketing" as they are different. Network marketing refers to the use of word-of-mouth and relational networks to market products, MLM refers to the multi-tiered compensation plans in which sales reps can earn profits off the sales of other sales reps they recruit. Amazon.com is not an MLM, nor it is a network-marketing company - it is an online retailer that promotes via a variety of methods including its affiliate program, which takes advantage of network-marketing.)

The best part about network marketing is that the company only pays for it if it works. Network marketing companies only pay their independent sales reps after products are sold, rather than spend money on TV or print ads and hope that the adds drive business. Various network marketing companies offer various compensation plans, some better than other. Structured right, such compensation plans can allow an independent sales rep a chance to build a sustainable business - while allowing the company to maximize its marketing effectiveness.

If I was starting a company to produce and sell a repeat-consumable product (something a consumer buys, uses up and purchases again like, say, shampoo), I'd seriously consider marketing the product via network marketing, though with a few important features. The products would be sold online and shipped direct to the end-consumer, and made available to customers who were not sales reps at the same price as that paid by the sales reps. There would be no cost to become a sales rep. All training and training materials would be made available online for free, and reps would be charged only at-cost for such things as product brochures (or they would be permitted to download the files and have them printed locally).