As the Stock markets search to find a direction, before the elimination of forward trading,  Investors are forced to look around for alternate avenues to park funds. Over the years, Indian Middle class society has explored many areas often without success. Some of the misadventures from which life savings of many families were wiped out were several commodity investment schemes such as “Teak Wood Schemes”, Milk Schemes”, “Rice Scheme”,  “Horticulture schemes“ etc. 

Now, in the days of globalization yet another investment product is hitting the markets in India and is likely to attract mass hysteria. They are the investments in the “Network Marketing Schemes”. Amway was perhaps the pioneer, which started at an investment level of around Rs 4600/-. The latest has been the Commemorative Gold Coin scheme of Gold Quest with an investment of Rs 40,000/-. 

Judging the enthusiastic initial response of the public for such schemes, it appears that soon there will be Network Marketing Agents knocking at your doors for selling many types of products. The return prospects will appear so attractive that investors may be tempted to sell their Infosys and Wipro shares or take the VRS money and invest in these schemes.

The Amway scheme consisted of investing some money in return of which a set of consumable products were given. The investor would then be expected to market the scheme to others and earn “Commission” on sales. The membership money was obviously much more than the economic value of the goods exchanged and hence the scheme assumed the character of an investment. Those investors who were unable to re-market the scheme actually lost their investments. However since the investment was not high, people absorbed the losses without a murmur.

The Gold quest scheme however deals with “Gold” products in the form of Commemorative coins. The investment requirements are nearly 10 times the Amway scheme. The natural attraction of Gold will ensure the scheme could become a major hurricane sweeping the investible surplus of most of our middleclass homes.

To be fair, let us admit that the principal of Network Marketing is noble and very innovative. But it may be suitable only for certain types of investors who are also good marketers. Since an average middle class investor is not a skillful marketer, the scheme may not be compatible to them.

Presently, there is no regulatory control over the scheme. It is likely that the regulators may keep quite for the time being and precipitate a crisis in future as they did in the case of Teakwood schemes. At that time investors who have not recouped their investments would be caught, while the early entrants may escape. But by that time the network would have grown far and wide and the consequences would assume the dimensions of a scam.

In order to prevent such happening, let’s briefly identify the real return prospects of a Network Marketing Scheme (NMS). Let me clarify that this is no reflection on either Amway or Goldquest in particular and is aimed at making investors think before taking a plunge into some thing new so that they donot have to regret later.

The essence of NMS is that you buy a product and in turn also try to market it to your friends. You get commission on the sales subject to certain minimum sales targets being achieved.  The catch is that if you fail to market upto a minimum level, you may not earn returns. You may just end up buying a product for which you donot have an economic use and in a way the return on your investment would be lost.

For example, let’s say that in a scheme, you get commission only if you achieve a sale of products. If you achieve 9 sales, you may not get any commission and if you achieve 19 sales, you may get commission for only 10 sales.

While looking at the investments in NMS therefore, you should ask yourself the following questions.

1. Will I be able to market the scheme upto the required minimum level?
2. Do I need this product ? at the price that is being offered?

If the answers to the above are in the affirmative, then consider entering into the investment. But do not factor in the possible commissions into your decision prematurely.

For every 100 entrants, hardly one or two may succeed in reaching the commission-earning target.  Remember that if you are one of those 98 or 99, you may only end up as a buyer of the product, which you may or may not need. 

It is also necessary to keep a watch on the quality of the product. If it deteriorates over time, there is danger ahead. Even if you have already recovered your investment, those who have bought the product from you would come in search of you and hold you responsible for their losses. 

Lastly, if you are not a seasoned marketer, stay away from all Network Marketing Schemes that require you to invest upfront. Remember that it is not an investment in the usual sense even if it appears to be so. It is more like taking up a marketing job for which you pay a security deposit.

Naavi
June 2, 2001