A Contrast between Franchises and Network Marketing Opportunities - Term Paper Example

Business opportunities are available in plenty in the face of globalization and multinationals penetrating foreign markets. Service is the essence ofmarketing today and companies attempt to maximize this through agents or a network of people. Traditional marketing has been replaced by different methods of marketing and two innovative models of businesses are – franchising and direct marketing or network marketing or multi-level marketing. Both these forms of business allow for self-employment and small business opportunities and both have a contractual relationship but they vary in different ways. Direct selling has been defined as “face-to-face selling away from a fixed retail location” (Peterson & Wotruba, 1996 cited by Muncy, 2004). Not all direct selling is multilevel marketing but there is a common type of compensation plan used by the companies. In the direct selling models, the marketers recruit and train new distributors or independent sales distributors (ISD) who are members in the network marketing company (Mathews, Manalel & Zacharias, 2007). The sellers are compensated not only for the goods they sell but also for the goods sold by their recruits. Hence a multilevel chain of the recruits is formed. This chain is formed through personal networking and hence the name network marketing. Today network marketing is a global industry that accounted for sales over ninety billion dollars by 2001. Network marketing is hence described as a direct selling channel focusing heavily on the compensation plans. A network marketing organization is defined as “those organizations that depend heavily or exclusively on personal selling, and that reward sales agents for (a) buying products, (b) selling products, and (c) finding other agents to buy and sell products” (Coughlan & Grayson,1998 cited by Mathews, Manalel & Zacharias, 2007). A typical example of a company that has succeeded in network marketing is Amway. Network marketing represents an industry that provides useful economic and business function. Through this concept marketers can reach significant amount of information to the customers that is not possible through traditional advertising or even retail distribution (Muncy, 2004). Network marketing fills the gap in communication felt by marketers in traditional advertising. Franchising on the other hand is a contractual vertical marketing relationship between a franchisor and one or more franchisees (Grunhagen & Dorsch, 2003). Franchising is a form of business arrangement that originated in France and means “granting of right" or "an exemption" (Inma, 2005). The franchisor in exchange for a fee provides a proven method of operation, support and advice in setting up the system and guarantees continued support. The fast food industry appoints franchisees and McDonalds is a typical where 70% of their restaurants worldwide are owned and operated by independent local men and women. The start up costs for network marketing is very low while the initial capital investment to be a franchisee is very steep and with high risks involved in it. Network marketing is usually run by the self while a franchisee has to engage employees. This in turn means compliance with various labor laws and regulations. Network marketing can be started along side with existing job and once it picks up, the ISD can take a decision whether to take it up full time as a career but a franchisee would necessarily have to engage in the business full time (MLM Magazine, 2007). Cash-flow has to be maintained and capital reserves have to be handled. Network marketing requires no rentals or any other overhead costs but a franchisee would have to deal with high overheads. An ISD usually is allotted a mentor or the sponsor who guides him at every step. A franchisee is involved in the business day and night with little time for family or relaxation. Network marketing also provides opportunities for the successful ones to travel to annual conventions, which are offered as incentives to the ISDs. As a franchisee travel has to be at one’s own cost and this is difficult until one has established in the business. In network marketing full ongoing support is provided while a franchisee receives training and support only initially. An ISD has an opportunity for personal growth through regular use of self-development material and monetary benefits stretch beyond his own immediate sales. In network marketing every ISD is allowed to appoint or sponsor another marketer but a franchisee cannot duplicate his business. According to resource scarcity theory, franchising helps the company to raise capital and gain knowledge of local markets while reducing managerial constraint apart from transferring part of the risk to the franchisee (Inma, 2005). Small firms with managerial constraints use franchising as a means to gain human capital. Most franchisees are knowledgeable about the local market conditions and trends. In both cases, high employee monitoring costs can be reduced substantially. Whether the franchisee makes money or looses, the franchisor always gets paid his fees but in the case of network marketing, the ISD can choose to withdraw at any time. The motivation to be a franchisee or an agent is that just for a fee he gains the expertise and simply manages the outlet featuring the corporate strategy of the franchisor. The franchisees have to operate under regimented system of contractual agreements (Clarkin & Peter, 2005) while the ISD is not bound by company rules and regulations. Anyone can become an ISD for a minimum capital and maintain autonomy (Bloch, 1996). The ISD does have to follow a suggested pattern of marketing to obtain sales but is not governed by any other regulations. The franchisee operates within a mechanistic organization centered on cost-effective production with little or no innovation or creativity. An ISD on the other hand can introduce his own creative ideas to market the product and also has leverage on the margins or discounts that he can offer to the customer. The decision-making process to start franchisee operations takes up six to twelve months as investments and place are involved. Network marketing however does not require any office space to operate and can be done from the convenience of the home. The franchisor has access to capital at lower risk, can share the costs with the franchisee; rapid market penetration is possible at a comparatively lower cost than establishing one’s own distribution system (Hoffman & Preble, 2003). It thus results in economies of scale with a motivated workforce and reduced monitoring and control costs. In network marketing the principal does not have any benefit of cost sharing but the franchisee and the ISD receive management assistance in all respects. Network marketing is easy to start and grows very fast. All it requires is selling skills and a thick skin to absorb humiliation and rejection (Bloch, 1996). In franchising as well as in network marketing, the independent owner receives the right to use company logo, advertising material, literature, or even the entire business format and legal advice (Grunhagen & Dorsch, 2003). Again, in both cases the relationship represents a partnership conducted as a form of relational exchange. However, in franchising, the franchisor shares the benefits and the costs whereas in network marketing the ISD merely shares the earnings by way of commissions. The franchisee as well as the independent sales distributor has the right to terminate the contract or discontinue selling the goods or services of the principals. The quantity of benefits and costs shared by the franchisor and the franchisee can result in either cooperation or conflict but in the case of the ISD, the percentage of earning at all levels is fixed and specified in the contract. Conflicts between a franchisor and the franchisee include territorial encroachment, geographic scope of advertising campaigns, and vertical price restraints (Grunhagen & Dorsch, 2003). Franchisees share the cost of advertising and are most often not satisfied with the returns whereas the independent sales distributor does not share in the advertising costs. The franchisor and the franchisee may be involved in divergent business activities leading to the termination of the franchisee agreement. The franchisee has invested time and capital which he stands to lose but as ISD has no such high risks involved. Dropout rates are very high in network marketing against franchising. In network marketing the independent sales persons earn from their personal sales of goods and services but additionally they also earn from the sales affected by those sponsored or recruited by them in their own network, generally known as their down-lines. The sales volume and consequently the earnings of the network marketing distributors keep going up as they keep adding new recruits to their network (Mathews, Manalel & Zacharias, 2007). This multiplying effect in network marketing multiplies the earnings as well. For those in network marketing for less than two years, the reason is additional income generation while those in this business for over years, it has become a profession. They have taken it up as a career. Products like home water filtration equipments were distributed or sold through network marketing as selling such items through regular stores would not convince the customers (Muncy, 2004). This requires a demonstration to be given at their residence as it is a single time purchase item significant for health. When they were convinced of the particles that could be filtered out, the customers purchased the home water filters. Hence such innovative products are better sold through network marketing. Products that require great deal of information like nutritional supplements often use this method of marketing. In the field of network marketing a lot of illegitimate business is thriving where the members get paid just for recruiting other members under them (Muncy, 2004). There is no product or service to be sold to actual customers but this gap does not exist in the case of the franchising business opportunity. Nevertheless, personal selling requires a lot of coercion and to succeed one must push on despite insults and discouragement of friends and relatives (Bloch, 1996). In network marketing there are three types of costs involved (Muncy, 2004). Network marketing requires a registration fee to get involved. This covers the administrative expenses and the literature necessary to become involved in the business. Even a franchisee requires paying a fee initially and even ongoing royalty apart from sharing the advertising fees (Grunhagen & Dorsch, 2003) but in network marketing the agent pays just one time registration fee. Some companies even want the new recruits to purchase inventory initially and special rates are offered for bulk purchase (Muncy). These network marketing distributors can use the goods purchased at wholesale prices for personal consumption or sell it to others at a margin. Since they are independent contractors, the companies also charge a fee for training them on the products and the sales techniques unique to the company. Network marketing may fetch huge returns but the initial work is strenuous. Significant up-front work is required to develop long-term income but it is possible and people have done it. The ISD of Amway and similar companies have come under heavy criticism as the earnings in proportion to the involvement and labor is very little. Since they involve their close knit group of friends and family members, the life revolves around social meetings and parties (Bhattacharya & Mehta, 2000). They refer to their down-line and up-line as their own family members. Amway has also been referred to as a “cult” where the leaders of the group use manipulative or destructive means of control (COCS, 2003). This disrupts an individual’s identity which includes beliefs, behavior, thinking and emotions. When this is done without an informed consent, then the results are devastating. The individual experiences loss of critical thinking. A franchisee does not experience such situation. While franchisee has higher stakes, an ISD has minimal capital involvement but then higher the risks, higher the returns. The franchisee would be putting in more effort in gaining success than an ISD as his stakes are negligible. A network marketing organization cannot have control over the ISDs that work for them nor can they insist on the quality standards but franchisors like McDonalds insist that their franchisees reflect the same quality of standards as McDonalds at each of their locations worldwide. Creativity is suppressed in network marketing organizations as has been in the case of Amway where the down-lines have to follow the trodden path. Franchising allows an individual to use his creativity and innovation in building and marketing. In network marketing the relationships are exploited as people persuade their relatives and friends to join their network. The method of recruiting people as ISD is socially and psychologically unacceptable to most people in the society (Bloch, 1996). The process of network marketing gives rise to certain situations, attitudes and type of behavior that are highly problematic. The concept of selling to friends and family through developing a network like the approach adopted by Tupperware, Avon, Amway have become ethically and socially become in most countries of the world. It is basically exploitation of friendship for profit. The basic nature of recruitment is unsatisfactory as implicit pressure is applied. There is lack of openness and frank disclosure, which means the independent distributors are in the dark of what is being proposed to them. The benefits in network marketing are enjoyed by the manufacturers or the producers who receive sales through coercive selling. Besides, the distribution costs are borne by the ISDs or the self-employed distributors. The company sells its products through a pyramid or multilevel channel and at the bottom of the channel are the distributors who fail at their own financial cost. In both franchising and network marketing, the failure of the ISD or the franchisee does not translate into loss for the principals. In fact, in case of network marketing, if an ISD withdraws, the company may still gain from the network already created by him. Thus, it can be seen that both are new methods of approaching the consumers. Network marketing allows for greater information dissemination which is not possible through traditional forms of marketing. There is low investment required in this and one can start selling immediately. All it requires is exploiting direct contacts which include the family and friends. Franchising on the other hand requires huge investment and the franchisee has to abide by the regulations laid down by the franchisor. Standards of quality in service have to be maintained in franchising but the entrepreneur is independent in his own business. In network marketing the individual is not independent but is involved in the fold of multilevel chain as a member. His identity and individual attitudes and beliefs undergo a change which is not the case in franchising. The risks in franchising are offloaded to the franchisor and this method also provides easy access to capital. In network marketing the capital raised is only initial fee but in franchising most often there is an annual royalty based on sales to be paid to the franchisor. The concept of network marketing has come under heavy criticism as it exploits contacts and destroys creativity. Franchising creates a new entrepreneur who can start up a business with the knowledge and support of another company. References: Bhattacharya, P., & Mehta. K. K., (2000), "Socialization in network marketing organizations: is it cult behavior?." The Journal of Socio-Economics 29.4 (July 2000): 361. British Council Journals Database. Gale. 18 Jan. 2008 Bloch, B., (1996), "Multilevel marketing: whats the catch?." Journal of Consumer Marketing 13.n4 (Fall 1996): 18(9). British Council Journals Database. Gale. 17 Jan. 2008 Clarkin, J. E., & Peter, J. R., (2005), "Entrepreneurial teams within franchise firms." International Small Business Journal 23.3 (June 2005): 303(32). British Council Journals Database. Gale. 17 Jan. 2008 COCS (2003), Is Amway a Cult? An Analysis, 18 Jan 2008 Grunhagen, M., & Dorsch, M., (2003), Does the franchisor provide value to the franchisee? Journal of Small Business Management, 41 (4) pp. 366-384 Hoffman, R. C., & Preble, J. F., (2003), Convert to compete: Competitive Advantage Through Conversion Franchising, Journal of Small Business Management, 41 (2) pp. 187-204 Inma, C., (2005), "Purposeful franchising: re-thinking of the franchising rationale." Singapore Management Review 27.1 (Jan-June 2005): 27(22). British Council Journals Database. Gale. 17 Jan. 2008 Mathews, G. K., Manalel, J., & Zacharias, S., (2007), Network Marketing: Exploitation of relationships – Myth or Reality? International Marketing Conference on Marketing & Society, 8-10 April, 2007, IIMK MLM Magazine (2007), MLM versus franchising & traditional business, 17 Jan 2008 Muncy, J. A., (2004), ETHICAL ISSUES IN MULTILEVEL MARKETING: IS IT A LEGITIMATE BUSINESS OR JUST ANOTHER PYRAMID SCHEME? Marketing Education Review, Volume 14, Number 3 Read More