URL: http://www.entrepreneur.com/magazine/businessstartupsmagazine/2000/july/29100.html

Three years ago, Cynthia Marshall of San Antonio, Texas, was looking for a business opportunity. She'd recently signed up for pre-paid Internet access with FlashNet Communications, based in Fort Worth, Texas, and was happy with the price and service. "I was thinking, 'I wish a real company like FlashNet would try network marketing,' " Marshall says.

Marshall had tried her hand at selling diet pills and Tupperware but hadn't managed to build what's needed for success: a "downline" of people she'd recruited into the business. Then she received an e-mail: FlashNet was launching a new division, FlashNet Marketing Inc., to sell its services directly to consumers through a network of independent sales representatives. Marshall attended the first opportunity meeting in San Antonio in July 1997 and signed up immediately.

Since then, Marshall has personally signed up more than 100 customers, who pay $17.95 per month or $129.95 per year for Internet access and the seasonal promotions to buy electronics at a discount. By recruiting friends and family members into the business, who in turn have recruited others, she's built a downline of 360 representatives serving 3,200 customers. As with other distributors in network marketing (also called multilevel marketing, or MLM), she receives overrides on the sales generated by everyone in her group. Soon she cut back to part time at her airline job to focus on her burgeoning business.

Like other independent representatives and distributors in the industry, Marshall has found that the Internet is a valuable tool in building her business. She has a customized Web page linked to the official company site, which her customers use as a portal to the Internet. She places classified ads on various Web sites to attract potential recruits. She uses Internet technology to keep track of sales generated by her group. But she knows she can't simply rely on the Net alone. "The Internet is just a tool, just like the classified ads," she says. "Once you establish contact, you have to spend a lot of time building relationships."

It's partly because of the Internet that the MLM industry is growing so fast all over the world. The Direct Selling Association estimates that retail sales in the U.S. direct-selling industry (consisting almost entirely of network marketing companies) grew steadily from nearly $13 billion in 1991 to more than $23.17 billion in 1998. During the same time period, the U.S. sales force, of which 90 percent work part time, grew from 5.1 million people to 9.7 million. The Internet—which allows distributors to get information out quickly, keep track of their organizations, stay in touch with other distributors and meet people they wouldn't otherwise meet—is largely responsible for that growth.

However, the Net also poses a threat to the very people it helps. "Just because an MLM distributor puts up a Web site doesn't mean it will generate queries on its own," says Dr. P.K. Kannan, a marketing professor at the Robert H. Smith School of Business at the University of Maryland in College Park. "It's basically word-of-mouth. People are not going to compare Web pages and join."

"A Web site won't help you with training new recruits on how to get started," nor will it necessarily bring in the right people for your business, adds Jerry Vitale, director of sales for Enviro-Tech International Inc. of Las Vegas, a network marketing company that sells waterless cleaning products, personal care products and food supplements. "People become obsessed with some guy in Germany, while ignoring the guy two doors down who's praying for the right business opportunity."

Just ask 31-year-old Corey Baker, a Dacula, Georgia, independent distributor for EcoQuest International Inc. of Greeneville, Tennessee. Baker, a former computer analyst and account manager, first took an interest in MLM after attending an EcoQuest meeting with his brother, Scott, and his entrepreneurial father, J.K. Baker. They all liked what they saw and became distributors, selling air cleaners and water purifiers made by Alpine Industries (also based in Greeneville) by placing them in people's homes. Corey was soon earning up to $15,000 a month from EcoQuest, working part time. After a year, he left his corporate job; he now has 3,000 distributors in his downline and has averaged $150,000 per year over four years. "I absolutely love it," says Corey. "I love telling people about things I like."

Corey built his network the old-fashioned way: with meetings and information packets. But now the Internet helps Corey work more efficiently. Instead of conducting meetings all the time and spending eight to 10 hours on the phone every day, he refers prospects to his Web site and encourages them to send in questions via e-mail. Three times a week, he sends out e-mail updates to all his distributors. "We can be more effective using the Internet, as long as we don't abuse it," he says. "Some people use it as their only tool-it's so impersonal."

Michael Jackson, president of EcoQuest, goes a step beyond that. "The Internet is creating great havoc in the network marketing business," he says. As in any industry, upstart companies can go online and sell products at a very low cost, then go out of business. Maverick distributors can easily undercut other distributors with predatory pricing. An EcoQuest distributor, for instance, might take an air cleaner into someone's house for a three-day trial and convince the customer to purchase one. "Then the customer says 'Let me go on the Internet and see what price I can get,' " Jackson says. "The Internet dealer gets to sell one for practically nothing, because he didn't have to go through the process of the three-day trial."

One challenge for network marketing companies is how the company Web site should be related to those of each independent distributor. If customers are allowed to purchase products online directly from the company, are the distributors bypassed? What if people get confused and are unable to tell if a Web site is the official company site or one put up by a distributor? What if a distributor decided to make a bunch of outrageous claims on his or her Web site, marring the image of the whole company?

The best solution seems to be connected sites. At EcoQuest, the company has a well-designed site with full audio and video. Each dealer has a Web page linked to the main site, which becomes the point of access for distributors' own customers. The company controls the content, which dealers are allowed to customize. They may not put up independent Web sites. "We have the world's largest police force—our dealers are on the lookout [for nonconforming sites]," says Jackson. "When we find a maverick site, the dealer is asked to leave the company."

FlashNet has a similar setup, giving new distributors the software for a connected Web page to customize. When there's a new product, the company can update everyone's Web pages at once. However, nearly 500 distributors choose to create and maintain their own separate sites, and the company doesn't plan to prohibit that. "The Internet is an independent culture-we want to embrace that," Frey says. "We make an effort to honor the entrepreneurial spirit of those early adopters who created their own sites." About once a month, a company employee monitors all these sites to make sure they're not misleading.

Many companies now use the Net to streamline orders, revise forms (which distributors then print and duplicate) and communicate product information, all in the interest of increasing efficiency and reducing costs. Because many distributors still aren't online, though, that means running dual systems—which can actually increase the costs. That soon won't be a problem at FlashNet. "We're going to require reps to be online," Frey says, contending that a dual system is just not effective. "For those who aren't—we ask if this is really the business he or she wants to be in." It isn't that easy for companies dealing in more traditional products, where some distributors have been with the company for years but resist new technology.

"The Internet has excellent, awesome applications," Vitale says. Young people are catching on to that fact with MLM, lured by the prospect of earning $60,000 a year working at home. "Younger people are Internet-savvy, and they want to work with a company that's tech-savvy," he says. "We're teaching people about free enterprise."

Network marketing may be easier now that the Internet provides so many business-building tools, but is it right for you? That depends on your personality. MLM companies are different from each other in many ways, but they all involve either selling products or services to people you know or finding new prospects. If you find these concepts distasteful, don't bother investigating further. On the other hand, many distributors contend that the recruiting part is just like recommending a favorite movie or restaurant. Here are some questions to consider:

Is it a legitimate business or a pyramid scheme? Pyramids and ponzi schemes have each newcomer give a pile of money to someone higher up in the structure, then recruit others to do the same. Eventually, everyone involved is supposed to reach the payoff level and get rich—but there are only so many suckers in the world, and eventually the pyramid collapses. These schemes are illegal. Legitimate network marketing companies require a low initial investment and very little risk. Income is based on retail sales, not how many people you recruit.

Do you like the products? Would you buy them?

Does this company emphasize sales or recruiting? Some companies focus on presenting the products, letting interested customers ask about career opportunities. Others focus more on the money you can make by recruiting more distributors. Some companies ask you to buy a lot of products for your own use rather than sell them to others. Be sure you're comfortable with the expectations.

Party plan, person-to-person or opportunity meeting? Are you more comfortable demonstrating products to groups of people, doing in-home trials one on one, recommending products from a catalog or taking people to opportunity meetings?

What's the compensation plan? Do you have to recruit a certain number of people before you can start earning money? Does your unit "break away" at a certain level? Are people paid directly?

How good is the company itself? Make sure it's adequately capitalized, has a track record of at least two years, and has a computer system that can track sales and make sure everyone gets paid. Check out the Web site and which sales tools you'd have at your disposal. Make sure that there's a strong service department to deliver merchandise promptly and that you can get a refund on unsold merchandise.

New Attitude

Love the idea of network marketing but hate the idea of selling skin cream? Two old-time network marketing companies have launched Internet subsidiaries that are attracting a new demographic: young, tech-savvy entrepreneurs eager to make their fortunes from the Internet.

• Last September, Amway Corp., the granddaddy of network marketing companies, launched a separate e-commerce site called Quixtar Inc. Both companies are based in Michigan, and both attract distributors through opportunity meetings that promise financial freedom to those willing to buy most of their household goods through the company and persuade others to do the same. But while Amway relies on catalogs, Quixtar provides an interactive Internet portal with a wide range of company products plus links to roughly 100 "partner" e-tailers.
• Meanwhile, Nu Skin Enterprises Inc. of Provo, Utah, which has built a global MLM company with its personal care and nutritional products, has launched a network marketing company called Big Planet Inc. The primary product is an Internet access device called the iPhone, a telephone and Internet device in one that provides customers with Internet access at the touch of its screen—but always through Big Planet's portal, which sells a wide range of other technological equipment. "Of every 10 presentations, six adopt it," says Scott Schwerdt, COO of Big Planet. "Most people keep it in their kitchen."

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Jane Easter Bahls writes freelance magazine articles from her home in Columbus, Ohio.