[비즈한국] Companies sometimes make decisions that are difficult to explain by money alone. Understanding the laws or systems hidden within them can provide a deeper insight into the inner workings. "Useful Business Laws (BizTips)" introduces clues to help understand business flows.
Multi-level marketing (MLM) is an object of caution. Industry insiders are well aware of this, which is why they use terms like "direct selling" or "network marketing" instead of "multi-level." MLM is subject to strict regulations. The problematic aspects of the MLM model are its speculative nature and downward expansion. In general product distribution, competition is based on quality and price, and profits are derived from margins generated by product sales. However, in MLM, because profits can be earned solely through the operation and management of a sales organization, there is a tendency to focus obsessively on recruiting lower-level salespeople. This leads to various problems, such as stimulating speculative instincts or triggering inventory hoarding.
Given this, it is justifiable that MLM is under strong regulation. The Door-to-Door Sales Act strictly defines prohibited acts for multi-level distributors, and enforcement is carried out overlap by the Fair Trade Commission, local governments, and the Special Judicial Police. In densely populated areas with significant economic power, such as the Seoul metropolitan area, the intensity of enforcement is even higher. From my perspective, there seems to be no incentive to start an MLM business in the metropolitan area.
As seen in previous columns, the MLM industry is stuck in a slump due to factors such as the aging of the active population, the shift to online distribution, and competition from unregistered multi-level operations. With things as they are, is there any need to take an interest in MLM? Nevertheless, for an entrepreneur, it is worth considering at least once.
MLM uses a powerful incentive mechanism. Self-employed individuals and professionals work hard day and night because they earn profits based on their performance. Because MLM calculates performance not only for the individual but also for the sales organization unit, it can sometimes lead to enormous profits. The multi-level structure is both the basis for regulation and the driving force that keeps MLM alive.
Online sales sites, and even financial institutions, sometimes offer benefits for entering a referral code. In a broad sense, this is no different from expanding a sales organization. Although not always apparent on the surface, the underlying referral or sponsorship structure is often a multi-level model. It is common knowledge that providing incentives for expanding a sales organization helps with distribution, and it is a method that will not disappear in the retail industry.
For small-scale startups, MLM can be an effective option. A general distribution structure flows from manufacturer to wholesaler, to retailer, and finally to the consumer. However, in MLM, because salespeople affiliated with the headquarters sell directly to consumers, there is no need to build a complex distribution structure, and advertising and marketing costs can be saved. Furthermore, since products are manufactured only as much as the quantity ordered by salespeople, there is no inventory burden, and if the sales organization is maintained stably, it is akin to securing loyal customers, which can lead to long-term sales.
Attempts to reduce costs and risks in the distribution process are not unusual. A manufacturer designating a general distributor instead of handling distribution directly, or recruiting franchisees under the name of a franchise, are essentially attempts to reduce distribution costs and transfer risks within the distribution process.
If so, one could envision an organization composed of 4–5 partners: an executive who handles finance, accounting, HR, and labor issues while responding to government regulations; a planner who develops creative products that catch people's attention; an investor who can place initial orders and provide working capital for at least one year; and an MLM expert who can respond to the demanding needs of salespeople and reasonably calculate sponsorship allowances essential for maintaining the sales organization.
Product manufacturing, IT development, and legal affairs are also important fields. However, as these tasks are usually outsourced, it is rare for experts in these fields to join as partners or founders. Additionally, securing 3–4 staff members to handle office/lecture hall leasing, customer service, calculation and payment of sponsorship allowances, and product shipping would complete the material and human requirements for the business.
Based on various cases, if you can secure 300 to 400 million won in initial capital and maintain an annual turnover of about 10 billion won, there is no problem in operating the business stably. This is because, compared to general sales methods, MLM does not require building a traditional distribution organization. As long as you have a sales organization and creative planning to keep the organization cohesive, you can generate sales.
Anyone who has started and run a company knows well: in South Korea, where every industry has become oligopolistic due to the advancement of the economic structure, starting a business with the aforementioned costs and personnel is nearly impossible. Given that small-scale startups are possible by saving on distribution costs, MLM can be a valid option for entrepreneurs. A significant number of established companies have a history of distributing products through MLM in the past.
Therefore, companies entering the market as newcomers or those needing to secure sales in a short period of time due to various circumstances are bound to take an interest in MLM. For this reason, even if the industry is stagnant, there are cases where investment attraction is constantly successful, and MLM corporations are always being traded.
Ultimately, the sales organization becomes the source of an MLM company's competitiveness and revenue generation. How does the industry attract and manage sales organizations? The Door-to-Door Sales Act caps the sponsorship allowance rate at 35% and imposes severe penalties for exceeding it, so there is a limit to direct payments. Therefore, companies often appoint top-tier members of the sales organization as company executives or heads of divisions to provide high salaries, or outsource important company tasks to them, effectively sharing revenue.
The issues and disputes of the MLM industry are concentrated here. MLM operators try to recruit high-performing sales organizations, while government authorities seek to regulate the speculative nature that arises in that process. In turn, MLM operators find various ways to circumvent these regulations. The government officials in charge of regulation, corporate operators, and business owners managing sales organizations all explain their positions from different perspectives. This landscape is one of the joys of observing the MLM industry from the sidelines.