[비즈한국] Companies sometimes make decisions that are difficult to explain by money alone. Understanding the laws or systems hidden behind these decisions helps provide a clearer picture of the inner workings. "Business Law Insights (Al-Sseul-Bi-Beop)" introduces clues to help understand the flow of business.
Since I began my practice as a solo attorney, I have represented various network marketing companies and professionals. Consequently, I am well-versed in the current state of network marketing and the difficulties faced in the field. In this article, I would like to discuss issues that the network marketing industry must overcome or address.
Some readers may have suffered direct or indirect financial loss or mental distress due to network marketing. I approach the discussion of this subject with caution, but I would like to clarify that this article is not written to encourage illegal or evasive activities, nor to advocate for avoiding regulations.
In terms of regulatory compliance, network marketing can be categorized as follows: 1) Quasi-deposit taking aimed solely at collecting funds without any actual business; 2) Unregistered multi-level marketing that performs multi-level sales without proper registration; 3) Cases registered as relatively lightly regulated door-to-door sales (sponsorship sales) but actually operating as multi-level marketing; and 4) Legitimate multi-level marketing that complies with all statutory regulations.
Categories 1 and 2 are subject to criminal penalties for violating the law. Category 3 is judged differently based on specific circumstances, while Category 4 is unlikely to be deemed illegal as a business itself, regardless of individual actions. Therefore, if you are invited to invest in or join a business, it is essential to determine which category it falls under. In this article, "network marketing" refers to category 4.
In my opinion, network marketing has enough inherent advantages that while the industry may shrink, it is unlikely to disappear. Here is why: Currently, South Korea is in a state of overproduction and oversupply. Products and services are abundant, and their quality is largely similar. To survive this competition, massive amounts of money must be poured into advertising and sales, which is difficult for small and medium-sized enterprises (SMEs), unlike large conglomerates.
For example, to hire a celebrity well-known to the general public as an advertising model, a company must pay hundreds of millions of won in modeling fees, even for a one-off advertisement. Advertising costs across all media, both online and offline, are rising every day, yet the effectiveness is uncertain. This is a difficult environment for SMEs to operate using the strategies of large corporations.
However, selling through network marketing does not require significant costs. Ideally, since the consumer becomes the salesperson, costs are minimal. Furthermore, if you secure a capable sales organization, the sales effect is certain. Such organizations are maintained through sponsorship commissions, which are calculated based on performance. As long as the calculation criteria are established correctly, companies can effectively reward capable and passionate salespeople and motivate them to give their all.
Observing small network marketing firms, they spend heavily on IT infrastructure, initial product orders, and hiring management at launch, but once established, operating costs are relatively low. Working capital is also predictable. Even as a lawyer, I can estimate what revenue is needed monthly to maintain the business, provided there is a stable supply of products. As those who have run businesses know, this is a massive advantage.
According to recent announcements by the Korea Fair Trade Commission, the number of salespeople and the revenue of network marketing firms are consistently declining. Given that inflation is persistent, the fact that even maintaining current levels is considered a "step backward" indicates that the industry is in a severe recession.
As a result, it is becoming common to see top-tier network marketing firms label themselves as consumer goods companies, supplying products to both online and offline retail channels and advertising on TV, subways, and electronic billboards. Theoretically, network marketing saves costs by bypassing traditional distribution, using those funds for commissions. A top firm supplying traditional retail or using mass media advertising is a self-contradiction inconsistent with the essence of network marketing, but such cases are emerging due to the industry's downturn.
Despite the advantages of network marketing, why are companies struggling? First, while the retail trend has shifted from offline to online, domestic network marketing—which began with cosmetics door-to-door sales—still relies on face-to-face interaction, inevitably leading to a shrinking market.
Second, as the industry fails to attract new talent, the product lines are limited to cosmetics and health supplements, the workforce is aging, and there is a lack of innovation in sourcing or marketing. The MZ generation, in particular, detests emotional labor, and network marketing is the "ultimate" in emotional labor, making it very difficult to recruit new people.
Third, workers often perceive regulations as overly strict, which has led to the prevalence of illegal or makeshift practices such as bypassing commission limits, window-dressing, and maintaining dual accounting systems.
Nevertheless, what needs to be improved for network marketing to succeed and become a "unicorn"? I believe the following points are necessary:
First, companies must adapt to and utilize online media and environments. Relying on face-to-face sales as they do now has limits. While it is difficult to disclose specific methods here, exploring ways to sell through social media and calculating commissions based on such digital performance is worth investigating. For instance, many financial apps provide a space to enter a referrer code when signing up for a product. This is a case where recommendations and referrals occur routinely in the online sales process.
Second, companies should not rely solely on their sales organization but must research and develop new products and services. In the food industry, various items like honeycomb ice cream, jumbo castella, mala tang, tanghulu, and yogurt ice cream are frequently launched, but such attempts are rare in network marketing.
Looking at the current cosmetics industry, the share of the top one or two companies has declined, and with OEM/ODM manufacturing becoming standardized, the differences between brands are minimal, leading to the saying that planning ability dictates sales. Given this, the slow pace of new brand or product launches in the network marketing cosmetics market is puzzling.
This is not just my personal view. These attempts have been made, but most were abandoned midway due to realistic problems such as opposition from existing sales organizations and unfair advertising regulations. However, as I mentioned earlier, network marketing itself will not disappear, so I believe that one day, an enterprising and creative entrepreneur will bring vitality back to the industry by making a fresh attempt.