What This Shanghai-Based Lawyer Wants American MLMs to Know About China

Is Your China Strategy Too Reckless? Too Timid? Nonexistent?

There’s good money in selling to Chinese consumers but the People’s Republic of China restricted direct sales to single-level sales commissions.

The Chinese economy is growing. Consumerism is on the rise. Word of mouth marketing is king in China. Are you going after this market?

Maybe you’re staying out of China entirely. Maybe you’re operating in China with a single-level compensation plan. Maybe you’ve been quietly selling your products into China with cross-border e-commerce—without making any changes to your compensation plan—and you’re looking the other way while distributors do whatever they do onshore. Is there a better way?

We reached out to MLM.com contributor Mark Schaub to find out. Mark is a lawyer who lives and works in Shanghai. On this episode of the MLM.com Podcast, Mark discusses the strategies he’s used to successfully navigate PRC law for MLM clients.

Listen in to learn:

  • Does the single-level route—used by Herbalife China and Amway China—make sense for smaller brands?
  • How safe is the popular offshore e-commerce strategy?
  • What were the real objectives behind Chinese MLM law?
  • Is there a way to navigate MLM Law and pay Chinese sales leaders for their work while operating onshore?

Full Transcript

Nancy Tobler: Welcome to MLM.com Podcast. This is Nancy Tobler. I’m guest hosting for Kenny Rawlins.

Today our guest is Mark Schaub. He has worked as a lawyer in Shanghai since 1993. He specializes in foreign direct investment and restructuring in China. He has advised on foreign investment projects in all major sectors in China, with a cumulative value exceeding USD $20 billion. He’s familiar with China issues faced by companies of all sizes and is a trusted advisor to many companies ranging from family-owned businesses to Fortune 500 companies. He is also the global co-head of King and Wood Mallesons consumer practice.

So, welcome, Mark!

Mark Schaub: Thanks, Nancy.

Nancy Tobler: So, we’re so excited to have you on the call. We get a lot of reader response when we talk about China and how to do business in China. I think, perhaps, the very first question that needs to be cleared up is that there’s a difference in how direct selling or network marketing, multi-level marketing occurs in China. Would you talk about that difference?

Mark Schaub: Sure. I think we’ll talk a bit later about the opportunity in China. Multi-level marketing or network marketing has a very big presence in China and it’s growing quickly. And I think it also really gels with Chinese culture. There’s a large domestic presence. But American companies do dominate the multi-level marketing. And they basically have three different ways they do it.

Single-Level Direct Sales—How MLM Titans Enter China

Mark Schaub: Perhaps the most traditional way is the direct sales model—so, companies like Amway or Herbalife, these kind of guys. They will actually get a direct license—a direct sales license. That’s the PRC (People’s Republic of China) alternative to traditional network marketing structures. The PRC has a total ban on having anything more than one level of commission. So, you need to have a direct sales license. For many companies it really has stopped them entering the Chinese market because the requirements to do it are very high.

So, you have to put in a security deposit of about three million U.S. dollars and this has to be adjusted to include about 15 percent of sales revenue each month. You have to hire the direct sales people directly. And the remuneration has to be paid monthly.

So, it takes away a lot of the flexibility which is attractive to a lot of people in network marketing.

And then you need a direct sales license which requires a minimum capital of about 12 million U.S. dollars. And there are a slew of other requirements…

But I think for many companies, unless they’re very big and they’re very confident about the Chinese model…

And it also doesn’t encompass all types of goods. It’s mostly for cosmetics companies, supplements, household type appliances. So, I guess it is a model, but it is quite inflexible and quite expensive. So, do you have any questions about the direct sales model?

How Growth in the Chinese Economy Dovetails with Direct Sales

Nancy Tobler: Maybe talk just a little bit more about what kind of growth they’ve seen in the Chinese market in the last 10-15 years. Has it been 15 years?

Mark Schaub: I mean, the economy itself would have grown probably five times in the last 15 years. Supplements and cosmetics, they’re still the biggest part of MLM companies in China. And these are two of the hottest things growing at the moment.

So, even though the Chinese economy has slowed down to 6.5% [growth], supplements are still growing at a rate of about 12% to 20% and cosmetics are growing around 15%. There’s a lot of demand. And I’d say that China’s really the largest market for cosmetics. It’s not the largest one yet for supplements. But it’s a big market that’s still growing far faster than anywhere else. Also, I think direct sales is roughly growing at about 20%.

So, it is a very buoyant thing and when people look at the 6% or 7% growth that we’re seeing in China, it doesn’t really impact the retail sales. So, the Chinese government’s trying to push domestic consumption, and there’s a much bigger consumer base than maybe five years ago. So, now is probably the right time to come.

The Popular Offshore E-commerce Strategy

Mark Schaub: And maybe that would be a way to segue to the second model, which is a bit of a gray area, and it’s basically an offshore e-commerce model. And I’d say this only came about maybe five years ago, and it kind of shows you how new the Chinese consumer class is and how quickly it grew.

So, companies like Alibaba, Taobao, Tencent… all these companies really have grown a lot in the last five years through e-commerce. So, China has about 880 million Internet users. They do buy a lot online and e-commerce is basically where… say a US company will be operating offshore and then they will bring the products into China via cross-border e-commerce. And then they basically operate the business like they do in the States—having more than one level of commission.

And typically these businesses grow very very quickly.

We have seen a number of MLM clients where China was a secondary or third market or even a fourth market—wasn’t very interesting—but within a year, it grew bigger in the domestic market for them.

When you’re small, people won’t notice. But the problem is once you get larger, this e-commerce model—because it really is directly in breach of the Chinese regulations in respect of multi-levels of commission—it’s inherently fragile.

So, a lot of these companies might be deemed to be illegal pyramid schemes. This will perhaps damage the reputation at home. But it will definitely interrupt the operations in China. And, you know, the Chinese authorities can do all kinds of things. They can arrest your affiliates. They might block the marketing channels like your website, your WeChat account. And we’ve also seen cases where company executives get arrested once they get into China. And then the argument that, “Oh, we’re offshore” won’t really hold much water because They’ll say, “You might be offshore, but you’re operating in China in an illegal way.”

So, I think this is a very prevalent model in China, but I think it’s like building a castle on sand. You know, once the castle gets too big, it might fall apart.

Nancy Tobler: Yeah. An interesting model. And I think you’re right. I think there are a lot of companies that have gone that way.

A Better Way to Navigate Chinese MLM Law

Mark Schaub: So, what we’ve done recently is we’ve come up with a compliant model which we call the SOSO (sales offshore, service onshore) model. And, “so so” (at least in Chinese English) means, “not bad.” But it is a bit of a middle ground type thing where it combines the benefits of the offshore e-commerce model and the direct sales model.

So, we had a client that had tried the offshore e-commerce model, got into trouble, came to us. And then we had to put out the fires. But they still wanted to continue the business in China. And so, we came up with a more compliant model which was based on cross-border e-commerce but having the downline or the affiliates in China actually owning service companies and then being paid based on the number of people they service.

This model stood the test of at least 12 months.

Prior to instituting it, the client was having major problems with the Chinese authorities on a monthly basis, people being arrested, etc. And now we actually have not had any issues since we did that.

Yes, You Can Pay Chinese Sales Leaders Without Breaking the Law

Nancy Tobler: I think that the SOSO model, as you call it, is very interesting. So, people are paid to provide service on products that have been sold rather than being paid down many levels. They’re just paid for additional activities beyond the actual sale of the product.

Mark Schaub: Some of the MLM companies who are doing it more like a distributor basis. So, the more you buy, the cheaper the products. This actually isn’t that way, structured. So, basically the affiliates will have their own companies. So that’s another layer of protection for the MLM company.

Nancy Tobler: Right.

Mark Schaub: And the concept is, the more people you have in your downstream the more services you provide. So, there’s things like the social media aspect, providing these people with education on how to do it…

And, you know, we had devised a way that there would be perhaps… if you have more people in the downstream, and then they have people in the downstream, it could be argued that you would also have to provide services to those people.

But that actually has not arisen. So, in practice it actually has stuck at one level of commission. And the affiliates… I mean, this was not like a brand-new thing. What we had was a client that—obviously I won’t say who the company was—but the really bad day was in 2013, where the police came, raided a rally, arrested 53 people and put most of them in jail, seized all the computers. There what we had to do was stop the bleeding. We had to get a PR firm to help with reputational damage. And then we had to recalibrate the model.

So, it’s not easy.

They had a very big business in China. They had a lot of affiliates who were working that way, were familiar with the business. And, you know, we were able to implement this new model and that was back in 2013. Now, 2019, it’s actually been running for six years without any hiccups. And even the affiliates seem very happy.

Nancy Tobler: Yeah. That’s fascinating. I think our listeners will be very interested to know of this different approach and they certainly, I assume, can contact you if they want more information.

Three Powerful Reasons Why Network Marketing Thrives in China

Nancy Tobler: You talked just a little bit about this in your in your opening, but let’s talk just a little bit about culture and why direct selling does so well in China.

Mark Schaub: At the moment, the Chinese consumers—especially for anything you ingest or put on your skin—there’s still quite a large preference or a strong preference for imported goods. So, you know, typically, most of the MLM goods are either imported or they may be just the packaging or the bottling of the cosmetic companies like the last stage of it. So, I think that’s one cultural thing that people may not be aware of is that there’s a lot of cachet in having imported goods.

Secondly, I think the Chinese social system, now over many generations, is a relatively low trust society. People have a network of their friends, their family, and, you know, it’s interlinked communities. And people really trust each other rather than perhaps, outside sources. So, I think if somebody was going to buy something, it’s not that they would go on and check a consumer choice magazine and the ratings. They will ask people they know what they think of the product. We call it “guanxi.” It’s connection. And so, I think this is something which has been culturally there for a long time. They like to have these communities and reach out within their networks.

And I guess the other thing, which is not really a cultural thing—well, it’s a new cultural thing—is how the Internet and mobile devices have exploded here. And so, I’m spending a little bit more time overseas now and so I’ve come up across this “WhatsApp.” In China, everybody uses WeChat. And the only thing I have to say about WeChat is it’s 100 times better than WhatsApp. So, you know, it’s the statistics on it are crazy. WeChat is basically… you communicate, text people, you do 100 different things on WeChat. And there’s 880 million people using it. And I think the average hours of use per day—and you’ve got to think, “Well, this can’t be right,” but it is—6.5 hours.

Nancy Tobler: Wow.

Mark Schaub: So, people are constantly on their WeChat. And so, WeChat has just instituted this WeChat sells, which is an application that allows users to sell via WeChat with a commission base. So, I think these are the three things. Firstly, having a network and using your network is a very normal thing in China. Secondly, the fact that people want imported goods. And then thirdly, this ability to connect to more people quicker.

Nancy Tobler: People trust that social media, WeChat? Is that working in their favor?

Mark Schaub: Well, I think the thing is they probably don’t trust talking heads. Even though KOLs are very important—key opinion leaders are important—they’re probably less important than in the west.

So, I think very often, people will have focus groups… So, we had one client that was targeting pregnant women or women who just gave birth—supplements for women who just had given birth. And there it was more important to them to actually have mothers who were actually just experiencing it. So, I think the real experience is more important.

Nancy Tobler: Yeah. That’s fascinating.

Lost in Translation—the Objectives Behind Chinese MLM Laws

Nancy Tobler: I’d love for you to talk about the crackdown that happened in 2017. And maybe you’ve really already discussed it, but what kinds of things got companies in trouble in 2017? And is that sort of waning now and not happening as much? What’s your opinion on that?

Mark Schaub: That 2017 crackdown was a total… was totally unrelated to US MLM companies. You know, the media picked it up. And it did affect some of these MLM companies’ share prices. But it was actually very unfair.

What it was targeting was that these Chinese [MLMs]—and I would use the term MLM very loosely. They were more like cults. And they were doing things that were absolutely illegal, much more Illegal than just pyramid schemes. They were basically kidnapping people, sleep depriving them, and making them sell product this way.

It really was something totally beyond, you know, even perhaps the most vehement opponent of MLM. Nobody would actually categorize what they were doing as “being MLM.” They were basically criminal gangs.

And so, I think the western media either knowingly—or just didn’t understand the context—misunderstood what the crackdown was about. So, I don’t think it was really something that was directed at foreign MLM companies at all.

Nancy Tobler: Okay, great. Well, I think that’s—that will clear it up a lot. In fact, I still see, periodically, a news article that will talk about the crackdown on pyramid schemes. That’s usually what they call it. But people in the US equate pyramid schemes with MLMs a lot. Whether or not that’s… It’s not a good comparison obviously.

Mark Schaub: Well, I think that’s not fair.

Nancy Tobler: Yeah. It’s not fair.

Mark Schaub: I would say that’s not fair. But, I think, you know, legitimate network marketing companies in America, I think the short of it is, as far as I know, none of the major ones who were here were involved in the crackdown or suffered. And I think their share prices recovered quite well. So, I think it was misinformation, misunderstood.

Nancy Tobler: Yeah.

Yes, You Can Operate Your MLM in China Without Breaking the Law

Mark Schaub: I think legitimate MLM companies, they just have to realize it’s a different system in China, and you’ve got to work out how you want to act in a compliant fashion. Because otherwise you might do great business here but someone might destroy it very quickly. So you probably want a compliant, long-term business rather than something that just won’t work, you know, in the long term.

Nancy Tobler: Well, I want to thank you for spending some time with us this morning. Well, it’s afternoon there, but it’s morning for us still. I haven’t had enough caffeine yet, really. Anything else you want to share with us this morning?

Mark Schaub: No… China is a big opportunity. But I think most of the risks can be mitigated with just some commonsense measures. And, we’re very happy with any of your listeners… we’re happy to have a chat or send them some information. You know we just want to make people… demystify China and let them think about it. And they may decide not to come here or not to come right now. But, you know, it’s probably better to have an informed decision rather than rely on media or other reports which may you know paint a, you know, inaccurate situation.

Nancy Tobler: Good. Well, I think you’ve dispelled a couple of myths today as well as enhanced our understanding. I think your SOSO model is very interesting. I think our listeners will be very interested in how you’ve put together this, as you say, sort of a middle approach. And again, thank you for your expertise. We appreciate you and we appreciate your articles, there are a couple of them on MLM.com and we look forward to future work with you.

Mark Schaub: Right. Well, thanks very much!

Nancy Tobler: All right. Thank you so much. Goodbye.

Mark Schaub: Thanks Nancy. Bye!

Nancy Tobler: This has been the MLM.com Podcast. Today’s guest has been Mark Schaub. His offices are in London and he works in China. And he has explained to us some fascinating things about culture there as well as the legal climate and their model and how they approach direct selling in China. And it’s been a fascinating lesson. I hope you enjoyed it. If you like what you hear here we want you to share it. And we’d love to have you comment. And we’d love to know topics that you’d be interested in. We’ll try to find an expert to interview. Thanks again for joining us at MLM.com Podcast.


Did we get to the topics you wanted to hear about? If you have questions you’d like us to ask Mark—or his colleagues—in a later episode, please let us know!

The post What This Shanghai-Based Lawyer Wants American MLMs to Know About China appeared first on MLM.com.

Where in the World is Direct Selling?

Is your company in multiple markets? Do you want to be? Direct selling is a worldwide business model. Many direct selling companies do business in multiple countries. If you run an MLM, chances are you’re operating—or want to operate—in more than one country.

When you’re looking to expand internationally, you need to do your homework. Before you move into any country, you need to study that country—study their culture, their sales numbers, their economic realities, and their regulations. Mark Rawlins wrote an in-depth guide on these considerations.

Today let’s take a close look at the latest worldwide network marketing facts and statistics from the World Federation of Direct Selling Associations (WFDSA). The WFDSA represents 63 national direct selling associations and provides a wealth of information about direct selling and multilevel marketing around the world. The most recent worldwide MLM statistics comes from 2017.

Note: All monetary data included throughout this article is adjusted to USD.

Regional network marketing statistics

2017 worldwide industry sales were $189.6 billion—up 1.6% (adjusted to 2017 USD). That sales data breaks down into four regions:

Asia and the Pacific generate most direct sales worldwide, followed by the Americas and Europe.

  • Asia & Pacific $85.4B (46%)
  • Americas $64B (33%)
  • Europe $38.5B (20%)
  • Africa & Middle East $1.8B (1%)

Although Africa and the Middle East (represented in WFDSA data as one region) produced the least sales, they showed the greatest amount of growth in 2016—up 9.9%. Wondering what products sell in these growing markets? Check out this Africa-based MLM, Solar Sister.

Although Africa and the Middle East saw the most growth, other regions grew in 2017 as well. Europe grew 3.5%, and Asia & Pacific grew 1.8%.

On the other hand, the Americas sales numbers decreased but only by 0.1%. I don’t imagine this decline comes as a surprise to many of our readers. It seems like a lot of folks are nervous about the trend and that this is part of the drive toward international business models. But the sales numbers for the Americas are still high. In 2018, Allan Pollard of PayQuicker came on our podcast to argue that the dip is a natural part of the sales channel’s lifecycle—that the US is a maturing market for network marketing and that the business is in an evolutionary step.

Let’s take a minute to talk about distributors.

The total number of distributors increased from 103.3 million to 116.7 million. Proportions of distributors in each region follow the same order as sales numbers (largest to smallest) but they don’t line up in size. Let’s look at a comparison of the two:

In one region, the total sales might be greater and the sales effort each distributor needs to do might also be greater.

Africa and the Middle East offer a standout example of the disparity between sales and distributors. Together these regions produce 1% of worldwide sales, but they are home to 3% of worldwide distributors. It makes sense if you think about it.

I mentioned Solar Sister above. Their business model is selling small, solar electronics to poor consumers in rural Africa. If the product is for poor consumers, the price point is going to be very low. If the average price point is lower than in other regions, it will take a larger number of distributors to make the same amount of sales.

On the other end of the spectrum, the highest sales region, Asia and the Pacific produce 46% of all sales, but 56% of all distributors live there. Again, more distributors producing lower dollar amounts.

In both examples, individual distributors contribute less sales on average than their American and European counterparts.

Let’s look at a visual representation of the sales per distributor for each region:

  • Asia & Pacific: $1,310.31
  • Americas: $1932.43
  • Europe: $2,553.00
  • Africa & Middle East: $519.89

Note that this is a mean, not a median. In other words, it’s very likely that high-end distributors are skewing the numbers. Mean isn’t the most accurate measurement of what the “typical” distributor makes. But it’s a much easier number to come by and it’s still an interesting number to look at.

While Asia and the Pacific are racing ahead in total sales numbers, their sales per distributor are lagging behind the Americas. The Americas, in turn, are behind Europe. Asia’s collective buying power is greater, but on an individual level they have less buying power.

If you take your products from Europe to Asia, you might need to rethink pricing, packaging, or even the product itself to maximize your potential in those markets. In one region, the total sales might be greater and the sales effort each distributor needs to do might also be greater.

And it might go without saying, but if you want to sell in the Middle East and Africa, the most competitive product might be completely different.

By the way, that’s not a caution against entering those markets. You must tailor your strategy but if it makes sense for you to do that, do it! Individuals in Africa and the Middle East might have the least buying power, but the non-monetary benefit of operating there can be substantial. Remember the work that Solar Sister is doing selling low-end solar tech in Africa. Sure, they’re making less per-sale than they would selling high-end solar tech in the US. But that’s not what matters most to their business.

Network marketing statistics by country

Let’s look at how direct sales data breaks down by country. 79% of all direct sales take place in the top 10 countries:

  • United States $34.9B (18%)
  • China $34.3B (18%)
  • Korea $17.2B (9%)
  • Germany $16.7B (9%)
  • Japan $15.3B (8%)
  • Brazil $11.9B (11.9%)
  • Mexico $5.9B (3%)
  • France $5B (3%)
  • Malaysia $4.7B (2%)
  • Taiwan $3.9B (2%)

The United States and China are neck and neck—both generating 18% of worldwide sales. The US still has an edge of about $600M.

Several countries outside the top ten grew dramatically in 2017. Indonesia, Kazakhstan, Philippines, United Arab Emirates, Argentina, Romania, Slovenia, Norway, Russia, and Turkey all had double-digit increases in retail sales.

Very few countries saw a substantial decrease. Only the Netherlands and Belgium had double-digit drops in sales.

The WFDSA also shows us the number of distributors in each country. Unlike the regional numbers we looked at above, these numbers don’t track the sales numbers for each of the top 10 countries.

While these ten countries produce nearly 80% of the sales, they comprise less than half of all worldwide distributors. This is a powerful visual representation of an important lesson:

Not all distributors will be able to generate the same sales numbers. And some of that disparity has to do with the practical circumstances surrounding distributor lives.

Again, let’s look at total sales per distributor for each top ten country. (You can of course go through the full data on the WFDSA report to do the same analysis of any country we didn’t look at here.)

German distributors are so far ahead, it seems like an error. (We triple checked our math.) China, France, and Japan also have what I would consider high per-distributor sales.

Another issue you need to look at when expanding into a country is the average income of a person living in that country. There are different kinds of averages that you can look at. Again, median income provides a more accurate picture of the average person’s salary, but up-to-date data on mean income (specifically gross national income per capita) around the globe is easier to come by. Let’s look at those numbers for the top ten countries—excluding Taiwan for which there is no reported GNI.

A few things stand out here.

Income isn’t a strong predictor of whether direct sales will do well in a given country.  From left to right, these countries are graphed from greatest total sales to least sales. Their per capita incomes are all over the place.

That said, all the top ten countries (the ones that reported GNI anyway) have a per capita income greater than $8000 USD. Which makes sense if you think about it. Most (though not all) MLM products are “luxury” goods. They’re typically things consumers want more than they need. In countries where people are struggling to survive, they’re not likely to buy luxury goods.

Income also isn’t a strong predictor of average sales per distributor. The US has the highest per capita income ($58,270), but it’s among the lowest in average sales per distributor ($1,876).

The take away from these numbers seems to be that when you’re deciding if a country would be worth entering, you can’t look at the numbers alone and think you’ve done your homework. You have to learn more about the people you’ll be selling to than their income and buying power. You have to know who they are. In other words, culture—interest in and compatibility with direct selling—accounts for the prevalence of the sales model.

The post Where in the World is Direct Selling? appeared first on MLM.com.

International Expansion for Network Marketing Companies

These days, a lot of network marketing companies are in a rush to expand internationally. Markets outside the U.S. are gathering steam and technology is making the leap easier and easier.

My first experience working with an MLM company that was going international was nearly thirty years ago. Back in those days, companies were slower to expand overseas. Most companies waited until they were doing $50–60 million dollars a year in business and until they had been in business for several years.

Now, we have clients that have been in business less than a year moving to open two or more international offices almost immediately. In the last three decades, the international landscape has changed dramatically.

The process of opening an international market used to take a year of planning and preparation. Now companies are turning it around in mere months.

Is this a good thing?

I don’t know. But it is a reality.

There’s a wild west mentality about international network marketing—a follow-the-business mindset. Distributors expect you to go where they can sell. It’s their business, and it had better go where they want it to go. Sound familiar?

It’s true, you need happy distributors and—to be happy—your distributors need to sell. But you need to remember you have skin in the game. You also need to remember that what’s best for that one squeaky-wheel distributor might not be best for your entire field.

How do you do what’s best for the most people?

You have to balance the demands of your distributors with the economic, legal, and practical realities specific to opening each market. Don’t get me wrong. There are good things happening in this “wild west.”If opening a market makes sense for your company, do it! But, if you’re rushing in before you’ve done your research and carefully considered all of the issues surrounding a market, you don’t know if what you’re doing makes sense.

Let’s get into some of the issues you’ll face as you expand your company’s reach internationally.

Where are network marketers making sales?

Do the math. Make sure a market will be worth the trouble it takes to break in. Don’t pass up the value of the markets you’re already in to chase after less lucrative markets overseas. If California were a separate country (and sometimes it seems they are), it would be in the top 5 largest economies in the world. If you’re in the US, you’re in California. Are you selling there? Could you sell there?

This is something that a you must keep in mind as you plan to take your company into the international marketplace.

People see that network marketing sales numbers are rising in other parts of the world and they forget the fact that the US is still holding down first place. Instead of listening to the talk, look at the numbers.

According to WFDSA, in 2017, direct sellers’ world retail sales numbers reached over $189.6B (in U.S. dollars). Almost 80% of the revenue came from the top 10 countries in which direct sales take place:

  • United States $34.9B
  • China $34.3B
  • South Korea $17.2B
  • Germany $16.7B
  • Japan $15.3B
  • Brazil $11.9B
  • Mexico $5.9B,
  • France $5B
  • Malaysia $4.7B
  • Taiwan $3.9B

Here’s the deal. You don’t have to avoid smaller markets. You do need to educate yourself as to why some countries do better than others. Many factors influence how well an MLM will perform in a country—laws, technology, distribution systems, and social networks. Do your homework.

We see MLM companies opening offices in 10, 20, even 50 different countries. This is a very expensive way to do business. Each different country has different laws. The labeling requirements for products are different. You have to deal with each country’s equivalent of the Food and Drug Administration (or whichever organization regulates your product). That’s a lot of work and its only part of what goes in to opening an office in a new country.

You might be thinking, you’ve gotta spend money to make money. Well sure, but you can also spend a lot of money without getting any return. Remember, almost all the direct sales business in the world is conducted in 10 countries. Be choosy! Don’t set up base in every country possible—set up in the countries that show true promise for your company.

What legal issues will you face in new markets?

When you open multiple international offices you create new legal issues for yourself. Although there are some ways to get around labeling and product approval laws, you still need to plan for different legal environments and regulations in each country.

For example, the “Not for Resale” business model allows people in other countries to buy product directly from a U.S. based company, as long as they don’t resell the product to people in that country. The company ships directly to them and thus bypasses the labeling, import, and product approval laws. But this strategy isn’t legal in all countries.

China restricts network marketing commissions to a single level. Multi-level marketing is unlawful in China. And, on-the-ground direct sellers in China can only sell certain types of products. But China’s economic power has been growing steadily. And as I already mentioned, their network marketing sales are second only to the United States. Some MLM companies work around the restrictions on direct sales by selling to Chinese consumers through cross-border ecommerce. Of course, this method doesn’t allow distributors to build lucrative downlines on the mainland.

Although changes have been (and are being) made, Korea strictly regulates the total percentage a company may pay out in commissions; a company cannot pay more than 38% of the wholesale price paid. This is a vigorously enforced law. So any company that enters the Korean Market that pays more than 38% must change their commission plan to meet this requirement.

How average income impacts your company’s viability

In different marketplaces, the way direct sellers do business is very, very different. One of the biggest reasons for that difference is the income of the average customer.

Let’s look at the top two countries in the list above: The United States and China. The per capita income of the United States is around $60,000 per year. In China, it’s less than $9,000 (USD). (Of course, you’ll have to adapt to more than the average income, if you want to sell in China.) In some countries popular among direct selling companies—like Peru, Thailand, and Columbia—the average per capita income is closer to $6,000 per year.

You must adapt your business model with this in mind. You might have to change the product, it’s price point, or (if it’s a consumable good) the size of its packaging. On the other hand, your product might not be viable at all—even if adapted—in a low-income country. You might also have to change your distribution method.

Income differences can be especially problematic for the commission plan. A plan that works well in the U.S. won’t work well in Argentina (per capita income: approximately $13,000). And it may not work at all in Peru. Why? The qualifications for personal volume, group volume, and organizational volume are all designed around the consumer buying patterns of a country with an income of $60,000.

If you try to use a commission plan with roughly the same qualifications in Peru and the United States, your Peruvian distributors must sell to ten times the number of customers just to meet the qualifications!

But there’s more to meeting the needs of distributors who are living on $6,000 a year. The basic needs of these distributors are totally different from those of distributors in the U.S. Here, the distributor may be in the business to make some extra money each month—”mad money” that is outside of their family budget. On the other end, a distributor may be in the business to make a living and replace their entire yearly income! These are meaningful differences. If you’re not taking them into account, you’re not doing right by your field.

Forget worldwide commissions—think worldwide downline

In the last 15 years, the standard in the industry has been for companies and distributors to push for seamless, worldwide commission plans. Companies bragged about their worldwide plans, and distributors demanded them.

Hopefully, I’ve dispelled the idea that one compensation plan could serve the needs of every market in the world. The same commission plan will not work everywhere. Instead of a seamless commission plan, I’d argue that the real goal for companies should be a seamless worldwide downline. What do I mean by that?

With a worldwide downline, your distributors can sponsor new recruits anywhere that the company is doing business. You then pay commissions based on the commission plan of the country in which the sale was made, rather than where the commission recipient lives. So, Charlie lives in the United States, but he goes overseas to build a new team in Malaysia.  Here’s his organization:

For the volume generate by Charlie’s U.S. team, you’ll calculate his commissions using the rules of the U.S. compensation plan. For volume generated by his Malaysian team, you’ll calculate commissions using the Malaysian compensation plan.

This allows a company to make changes in the commission plan for each country’s specific needs, but still allows the distributors to sponsor whomever they want.

By the way, the adaptations you make to your commission can be small. Your new plan can stay as close to the original plan as is reasonable given the new market. In most companies, the different commission plans will still be recognizable from country to country. The different permutations of your plan will most likely be based on the same general ideas.

 

Making the transition takes patience and maturity and a good hard look at the issues that will come up in each country. I’ve detailed what some of those issues are. But it is a big and ever-changing world. I can’t warn you about every problem you’ll run into. My hope is to put you on course to ask the right questions and commit to finding the answers. Best of luck as you expand your company into international markets!

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