Saturday, April 22, 2006

Internet Marketing dos and don'ts: Network Marketing, really?

The link under the title of this article you will find a link to Eric Scheibeler's Merchants of Deception site. He provides very interesting material about the business methods of Amway and Quixtar, and the fact that those businesses are not at all what they seem. Whatever they are - and I've always thought that any money made in Amway was made on motivational and promotional seminars and tapes, not products - they are, I think, one example of a business who simply exported their existing business methods to the net, realizing some advantages, and in this case, among other things, brilliantly avoiding the estate tax by having the heirs to the Amway fortune launch Quixtar and cannibalize the Amway business. However they are not examples of Internet marketing in pure form, in which business concepts are not exported from the brick and mortar world, but conceived from the outset with the Internet reality in mind. The tenets of Eric Scheibeler's book coincide with my exposure to the phenomena of Amway and Quixtar, which have always seemed very cult-like to me, and not even good examples of what MLM could be or should be. There are plenty of good examples however, which may include Avon, Mary Kay, Tupperware, Creative Memories, Prepaid Legal, Primerica, and many other companies with legitimate products, services and marketing plans. In saying that, I am not concerned with legalities. Amway has always managed to stay clear of the law, and validate its business methods against legal challenge. That is different from saying they represent a sensible business opportunity. But I'm not going to attempt a history of MLM here.

On the Internet, things are different. Many companies have moved their presence to the Internet, including most MLM companies of old, and they naturally have realized some benefits and efficiencies in doing so. But few true Internet plays have proven viable. Personally, I would consider even Amazon a questionable case nowadays. To say the least, the jury is still out on them. It is proving more and more dubious if their wild expansion into everything including kitchen sinks, is going to provide the payoff for their technology investments, with which they have justified their infrastructure spending.

However if we look at successful marketing launches, we notice that the "network effect," is alive and well on the Internet, and has been the driving force that made many companies what they are today. Paypal offered referral fees for opening accounts with them, and they became an overnight success. INGDirect did the same, though less successfully so. AllAdvantage, Google, Skype, MySpace, and most portals somehow or other leveraged the network effect, and a few reinforced the network effect through incentives, referral fees, and sometimes multi-level compensation. The results are visible in inflated stockmarket evaluations of some companies which are temporarily deemed successful, but the question remains how well they serve all stakeholders, not just shareholders. MySpace and Google are examples where the "value creation" accrues entirely to the founders and shareholders, and not to the users except through the functionality of their services, which are paid for with advertising, and to some degree the sacrifice of privacy, not hard cash. I liken this part to the early days of television, and network TV, which became all paid for by advertising.

In TV, the development is perhaps further along than on the Internet in that some clear winners of pay TV seem to have emerged, while commercial TV is losing the battle on all fronts both against pay channels on cable, and against the Tivo on the hardware front. Consumers are sending a clear message: they want the content, but preferably without the ads. To assume that the Internet will be any different is naive. Users want the functionality, not the ads. Therefore superior functionality in some form or other will warrant payment. seems to be an example, and there are others. In spite of the apparent successes of Google, the ad-supported model therefore may peak at some point if people switch to ad-free pay-services in massive numbers. Right now Johnny-come-latelies like Microsoft are getting more and more into the ad-supported model, which again is going to do nothing but depress advertising rates, and undermine the value of on-line advertising, which, as it becomes ubiquitous, becomes as boring and annoying as TV commercials. So right now the ad-supported model is most likely in a "bubble" mode, and overdue for a correction.

On the software front meanwhile, the revolution that is going on is that of "Open Source" vs. the proprietary software model. Here one of the most central themes is control, but there is another stakeholder issue, which is sometimes overlooked. If I submit an improvement to Microsoft, they own my improvement, and I get charged for the privilege with their next upgrade. The only benefit these stakeholders get is the functionality of the software which they pay for. User frustration therefore sets in if "upgrades" do not match their perceptions of what they need, and merely force them to acquire more powerful computers, to little actual benefit in the long run.

To get back to the MLM discussion, MLM is annoying when the economic incentive gets people to push products or services I don't want, just as much as advertising is annoying when it pushes products or services I don't want. But if I found a superior product due to a good ad, then I accept the ad, since it did me a service. Successful advertising therefore needs to be entertaining, engaging, and helpful.

What sets aside the Internet as a medium is among other things the ease with which the network effect can manifest, AND the ease with which economic drivers can be tracked and rewarded, which can in turn reinforce that network effect. Therefore the Internet and a network model of payments is potentially an optimal combination, since it offers the potential of engaging more of the stakeholders more fully, in particular extending the benefits of growth from the network effects to the users who create it. Doing so will not prevent a bad product or service from tanking eventually however. And that, among other things is the reason why scams ultimately flame out, quite aside from legal and regulatory challenge, which merely serve to hasten the crash of the deserving. Therefore in general it will also be helpful to speak of network marketing as a category, in lieu of the particular pay structures, such as mlm-, matrix-, or pyramid- which have become labels that confuse more than they explain, and in the realization that the economic effect of the network is the natural ally of would-be "network marketing" programs, and that conversely if the economic potential of a product, application or service are not well aligned, they are always doomed.

Further, once we properly understand the tremendous power of the network effect, in conjunction with efficient and effective economic incentives, it becomes very easy to see why a private company like Kanosis could easily outcompete a traditional business that is publicly financed. More start-ups bit the dust who were done in both by a combinaition of the high cost of capital, and the tremendous cost of sales and marketing, which might constitute as much as 80% of the runrate in the early years. To pay for (word-of-mouth) marketing from revenues, at a predictable 70% as is the case in this particular example, is positively a bargain by comparison, and a model of economic efficiency.

As a cautionary note meanwhile, it should also be noted that while this type of a company launch is by and large easier because of lower startup costs, it is also harder because the execution is much more demanding. Namely if the reputation of your product or service is directly linked with your user constituency as it is in this case, if relations between the company and its user base break down, that breakdown will happen that much more quickly, and it takes truly extraordinary management talent to maintain the social compact between the company and all of its stakeholders, because feedback is very fast. Better have a LeMans driver at the helm then...

A lot of confusion stems from the fact that many people have lost money in non-viable MLM companies, or in various Internet scams, or they have loved ones who have done so, and then they come to the erroneous conclusion that all MLM is bad, in an obvious confusion of ends and means. I'm seeing this phenomenon in respect of my involvement with Kanosis. Many people have a priori notions which prevent them from examining the actual business model, due to a prejudice against MLM, pyramid schemes, or matrix pay-outs, when they don't even understand the actual definitions of those concepts, or much less are able to distinguish right from wrong in any meaningful way from either a business or a legal standpoint.

On the level of functionality I tend to think that Kanosis represents a value which can be easily justified, and compares favorably with some other pay services, since it offers a level of integration and convenience that is not otherwise available. I have obviously arrived at the conclusion that Kanosis is a winner, and decided to market it. Only time will tell if my analysis was correct. However, if it is, many otherwise intelligent people who opted against it only because of an irrational prejudice against MLM, will regret their short-sightedness, and at some point it should become evident that prejudice is not a good substitute for business analysis.

Leaving aside therefore for a moment the consideration if Kanosis itself will succeed, there can be no question that in consumer marketing in particular, and of products and services with a strong network effect (like the collaboration features in Kanosis), network-type compensation plans will be increasingly popular in order to engage the users as the best qualified sales people. That logic is impeccable. After all what does any buyer do? Ask for references! I routinely ask drivers of a car I want to buy how they like it, etc.

It should be noted also that Kanosis is developing an interesting hybrid model, and will set a precedent by developing a professional, certified salesforce for their corporate services, which will be released starting three months after the consumer service, and they will have a profit sharing mechanism for their regular consumer users, on the strength of the theory that it is the popular use of the service which will help promote corporate adoption. This will be the vindication of word-of-mouth advertising and the network effect. This innovation alone is likely to be a brilliant marketing vision.

While all of this analysis remains to be proven for the historians, I'm not waiting for the history to be written, and in the interim I've put my money where my mouth is. Further, by publishing this analysis here, I'm on the record, and I will be duly curious myself what the outcome will be, even while I'm obviously banking on being right about it.

Copyright © 2006 Rogier F. van Vlissingen. All rights reserved.


Anonymous said...

Well written and thought provoking Rogier. Thanks

Ken C

Anonymous said...

Great info for folks that are negative towards network marketing.

Joey Fris

1:50 PM

Anonymous said...

Very well written! As a person that is associated with Pre-Paid Legal and Primerica, I must say that I understand what you are trying to say to the community. It does not take a business person to understand where you are coming from. But anyone who has been associated with a company mlm company and had to "buy a lot and let it rot", has had to buy new software, pay for updated software, or even purchase a new computer because their existing computer would not support the updates can and should understand the benefits of Kanosis.

ollie said...

i still dont understand why anyone would want to pay for what they can get for free. The internet was made just for that reason, kanosis is a throw back to the beging when we had to dial up to a specific server ie. aol, sierra, compuserve. why pay for an internet provider (which also gives you the same services kanosis does) and then pay for kanosis. I just dont get it.

Anonymous said...

I dont understand why more people do not jump at the chance to earn extra income, while having fun!