Redistribution of the business risk the profit and job salary between Entrepreneurs and Workers.
Entrepreneur risk. The stakeholder evolution.
In the social classes1 we can identify an elite of entrepreneurs and big executives with substantial business income, their standard of living and their business make headlines in the newspapers. Like entrepreneurs they undertake profitable business ventures.
Several employees work in the organization of this new company, when it grow this allow the generation of a profit’s leverage effect.
Now we can add another class of small entrepreneurs who run their small business and normally they do not make any headlines.
Any case, we have the classic figure of the entrepreneur who assumes all the business risks and enjoying the profits once they have paid the expenses and the salaries of workers.
The vast majority of the working population is in the class of employees they have a permanent job contract and in cases of workers for medium and large enterprises they also enjoy a few risks regarding to a possible reduction of the salary or job loss for breach of contract.
In the last years especially the youngest workers they begin their professional experience with a temporary job contract and for this reason they have in addition also a job contract renewal uncertainty.
In countries like Italy or Spain and others with similar labor legislation in the last twenty years we have seen the spread of different forms of compensation to the workers that are also partially variables. Basically we have a sharing of some business risk with the workers that previously they had just employment income and almost zero business risk.
The worker begins to take charge more and more of something that before was almost unknown. Any case the employment contract preserves among other things a percentage of the total remuneration that is fixed.
The last serious subprime financial crisis erupted in 2008 is expected to have a long periods of recession and high unemployment in many countries.
One of the most serious consequences of this crisis is a considerable credit shrink from the bank and the financial system to the businesses and this is leading more and more financially weak companies to fail.
Everything is spilling so violently the business risk negative effects on workers. So they have an unexpected necessity to find a new job in a labor market that now shrinks more and more. This leads to a worsening of the situation with higher unemployment and for the most vulnerable to a permanent exclusion from the labor market.
It’s a particular distribution channel of products and services to the market (go-to-market channel) which has spread after World War II as an alternative to the classic business of firms like for example Esselunga, Mercadona, El Corte Ingles, Carrefour with their classical stores for the FMCG sector.
The Network marketing is based on the powerful and widespread phenomenon of our word of mouth of consumers and customers between us because we constantly talk with our friends and family about the products and services purchased about their use and our satisfaction or on the other side our disappointment or disapproval.
In general we enjoy greater credibility with regard to the traditional advertising and other forms of promotion that expensively the firm can undertake.
And from our friends and family we can obviously enjoy even more credibility and all that with the spread of social media like Facebook etc. will lead more and more to a strengthening of word of mouth at the expense of traditional mass communication network.
The Network Marketing or Multi-level marketing (i.e. MLM) is different from Pyramid schemes that are illegal in so many countries. There are so different borderline cases that stay in a gray area and for this reason so many people so many time they confuse them2.
The Federal Trade Commission advises that multi-level organizations with a compensation plan with a greater incentives for recruitment than product sales margins are treated skeptically.
In reference to this proposition we have several companies that have a situation not so clear and for this reason more and more persons and organizations they request a better and continuous check by the FTC.
For example we can have also an unclear situation of possible fraud in cases where you can have organizations that fix the price over the market and for this reason the Distributors substantially they have to offer an important product sale discounts that reduce close to zero their sale margin. So in this case you have an important and official out-of-reach margin. For this reason they try to avoid to lose money every months and their only chance to make profit is from recruitment incentives3.
We can find these companies in the gray area because they can have indirectly an important exit rate of distributors mostly due to their compensation politics.
Then it is better to check and choose carefully that the company is not a borderline case in a gray area and that it has also recognized quality products and a competitive economic proposals.
The firms that adopt this go-to-market distribution channel enjoy several advantages:
Relationship more profitable and less competitive with their industry distribution partners.
Greater negotiating power towards the downstream sector of the Independent Distributors in comparison with the enterprises of traditional distribution channels.
Rapid and widespread diffusion of the commercial proposal with sales rates 2-digit growth even in recession period like this. Any case the most sustained and long-term growth for companies offering a competitive economic proposals and a products of outstanding quality as well as companies that offer the most lucrative compensation plans for independent distributors.
The independent distributors of these companies will promote actively the Product and the Business opportunity affiliated. This leads to an almost total disappearance of the considerable cost of Communication and Promotion. This important sa
In the next weeks I post the 2nd part the Benefits for nascent entrepreneurs.
Share with us your opinion. What you think about this business model?
Ing. Lanfranco Colella
O’Donnell Jayne Feb 10, 2011 “Multilevel marketing or ‘pyramid?’ Sales people find it hard to earn much” USAToday
«Multilevel Marketing Plans». FTC Consumer Alert (November 1996). Consultado el 07-05-2008. Forbes: Why The FTC Won’t Take Bill Ackman’s Advice To Prosecute Herbalife (Even Though It Should).
The author: Ing Lanfranco Colella @salud2bienestar
He is a Digital marketing manager and he is working also with salud2bienestar.com, with interests in the Internet market, the social media and Word-of-Mouth Marketing.
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