China’s Multi-Level Marketing ban: a workaround?
Multi-Level Marketing (MLM), a type of Direct Selling System, is a marketing strategy where the company’s sales force is highly dependent on the salesmen they have hired in different tiers of selling.
This is a marketing strategy in which the sales force is compensated not only for sales they generate, but also for the sales of the other salespeople that they recruit. This recruited sales force is referred to as the participant’s “down-line”, and can provide multiple levels of compensation.
This type of organisational structure can be quite enticing as it has the opportunity to build up a big networking distribution without investing a considerable and consistent amount of money.
The main features followed by Multi-Level Marketing organisations are:
- Organisers, or operators, who take in new members calculate and pay salaries to a member on a different level according to the number of new members they have introduced either directly or indirectly, as well as the sales performance of the member.
- Organisers request new members to hand in a sum of money as a precondition to joining.
- The organisers, or the operators, encourage members to invite more people join, forming a multi-level relationship.
- The salaries of members at a certain level are based on the sales of members at a lower level.
The main factors that needed to be taken into account before setting up any networking and marketing plan for an enterprise are the size of the market, high quality products to sell and efficient internal training. The base concept of these activities is that the salesman’s gain is in proportion to the quantity and quality of the products that he, or she, is able to sell to potential clients.
However, with the MLM Pyramidal Structure, the highest position always gets a percentage of the sales from those who are in the bottom positions. Some companies that wish to set up this type of structure want to incorporate a five or more level system.
From our experience, a large number of foreign companies have expressed interest in entering into the Chinese market through this Multi-Level Marketing structure. However, they are going to be disappointed. In 2005, Chinese Government enacted a law called “Regulation of Direct Sales and Regulation on Prohibition of Chuanxiao” (where Chuanxiao stands for MLM). With this regulation China makes clear that while Direct Sales is permitted in the mainland, Multi-Level Marketing is not.
Even if allowed, Direct Sales must follow several rules. The company is required to: have a business license, can only pay out one level of commission, the sellers have to follow an advanced training course offered by the company and by the end of the course they have to get a license and the direct sellers must wear a badge to prove their status.
In addition, the personal seller’s commission it set at 30 per cent of the sales, including bonuses, commission, and other benefits. Because of the multi-level payment structure, the organisers and the members at top level obtain interest illegally and, according to the Chinese Government, disturb normal economic order, and affect social stability.
On the contrary, in Taiwan and Hong Kong MLM is legal. It is common to see salesmen from these regions selling in the mainland using Taiwanese or Hong Kong addresses and banks to become sales reps in these jurisdictions while at all times living and working in China. The legality of this is questionable.
Even after the application of “Regulation of Direct Sales and Regulation on Prohibition of Chuanxiao”, many companies are still operating under the MLM structure and this does not seem to be changing. Nu Skin Enterprise, for example, was under investigation for its illegal pyramid scheme. They were accused of relying more on signing up new salespeople than actually selling products to customers. Nonetheless they still play an important role in China’s marketplace.
They are not the only company who is following this sales model, other such enterprises all act within the Chinese market with MLM structures.
* Stephen O’Regan, is associate, international business advisory with Dezan Shira & Associates, Guangzhou.
** Asia Briefing is a subsidiary of Dezan Shira & Associates, a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in China, Hong Kong, India, Vietnam, Singapore and the rest of ASEAN. For further information, please email [email protected] or visit www.dezshira.com.