Multi Level Marketing Programs vs. Refer-a-Friend Programs

September 26, 2011

Multi-leveling Marketing (MLM) based businesses have gotten a lot of bad press over the years. They have been called scams and pyramid schemes. The Federal Trade Commission warns that MLMs “…sometimes promise commissions or rewards that never materialize.”

A casual glance at them tells you why: they charge people to “pay to play”. That is, a company contracts with you as an independent agent to sell their product or service, however, you must pay a fee, typicaly several hundred dollars. The money is paid, in part, to others who are higher up in the organization. The more sales people they recruit, the more money those at the top can make. So, new recruits wanting to work their way to the top must constantly recruit new members —who ultimately compete against them. In some cases, company profit is overwhelmingly driven by recruiting-fee income instead of product sales.

It sounds like a quick and easy way to make a pile of money even though most MLMs tell prospective members that 97% will never realize big profits and that many will lose money on the bargain. Some critics have likened MLMs to cults because people who risk investing substantial amounts of money on this kind of organization also invest substantial amounts of time, faith, and emotion believing that they can join that 3% profit club.

This isn’t to say that MLMs are bad, but they are troublesome business structures. Two large Texas Retail Electricity Providers, Ambit and Stream (including Stream’s marketing arm, Ignite) are being sued as of July, 2011 under the Racketeer Influenced Corrupt Organizations Act (RICO) as pyramid schemes: Stream case. Ambit case.

Some elements of the MLM model have been borrowed to use in the emerging social networking market. One of these is the popular “Refer-a-Friend” program structure. The structure seems superficially similar but with big differences: no pay-to-play fee and a bill credit is extended towards a good or service that the new member is purchasing. This means that the company competes and profits from selling it’s goods or services rather than from taking recruiting fees. It also means you don’t need to commit to it like a second job.

So, what does all this look like in the wild world of Texas deregulated electricity? Let’s look over a few programs.

First up are Stream and Ignite. Ignite is Stream’s MLM arm. To save money on your electric bill with them, they want you to become an an independent agent (not an employee) to sell their energy plans. That means paying $299.00 for the Ignite Services Program and $29.00 a month for a website. Ignite’s compensation program kicks in when you have enrolled 4 personal energy accounts within the first 30 days. You also get a $100 bonus. When you personaly sponsor another Independent Associate (IA) who brings in 4 new energy accounts in their first 30 days, you are promoted to Qualified Director and get a $100 bonus. The more people you sponsor who successfully sell personal energy accounts, the higher up the chain you can go and the more bonuses you collect. Residual income builds by building customers and maintaining their energy accounts and the accounts that your sponsored IA’s have enrolled. The more customers you have and the more layers of IA’s you have working under you, the more money you can make.

Of course, this means that you will need to work very hard at selling successfully to everyone you meet. You’ll also need to recruit new IA’s and make sure they are maintaining their sales and recruiting as well. When you’re done selling to your friends and family and colleagues, its easy to get stumped about who to sell to next. Plus, what do you do when a friend or family member decides they want out of your buisness? How does that affect your relationship with that person? You’ll need to replace them and recruit more. You may need to spend $2,000 of your own money pitching your Stream/Ignite business to a hotel conference room of 200 people and only bring in 5 new IAs. Plus, your all your IA’s are your potential competitors. It’s hard, risky business you have to dedicate yourself to succeed in.

Ambit also has an MLM program. However, it offers its Texas electricity customers a lite-verison of its MLM program. Ambit says:

“So here’s the deal: when you refer a minimum of 15 paying customers, you’ll receive a credit on your Ambit Energy bill equal to the average amount of their payments. And that’s not just for one month, either. That credit applies every month as long as you maintain a minimum of 15 referred customers who pay their bills. If the average of your referred customers’ monthly payments is equal to, or more than, your energy usage for the month, you pay nothing for your energy! Nada!”

Great! No pay-to-play fee. But to earn the bill credit you first need to sign up 15 NEW customers. Then, the bill credit equals the AVERAGE of their bills. Now, that’s fine if you and your 15 friends all have exactly the same homes and usage habits. If you are all using 1500 kWh, then you can expect to have your electricity paid that month. Unfortunately, everyone’s electricity use is different, so there will be wide variation in the amount you might be credited with from month to month. In August, that could be $180 but in October that average could fall to $50. Besides, you need to keep the minimum of 15 customers EVERY MONTH. If any one of your recruited customers decides to switch, you will need to replace them quickly or lose your bill credit that month.

“Refer-a-Friend” programs, meanwhile, are all together different animals. They are designed with the idea that you are just buying a good or servce and are not interested in building a career around that product. When Paypal strated up in the late 1990’s, it was one of the first to use the idea by offering a $10 billing credit to those who got their friends to sign up. One of the best right now in Texas is Bounce Energy’s “Refer-a-Friend” Program. When you sign up, you get a code to share with your friends and family. Each time one of them signs up for Bounce Energy, you both get a $50 bill credit. Since it’s a billing credit, it stays on your account until it’s all used up.

How does this differ from MLM plans? No pay-to-play fee. No minimal number of new customers. No maintaining a new customer base. Sure, there are some drawbacks: the bill credit is paid just once after the referred friend has been a paying customer for 60 days. However, there are no restrictions with how you share your RAF code. You can put it on your website, blog, Facebook page, and Twitter page. You can print it out on cards and hand it out to people at cookouts, concerts, and baseball games.

That means no sales presentations. No hotel conference rooms to rent. No riding hard on friends and family to stay with Bounce Energy. No awkward moments and bad feelings at family get-togethers (well, no new ones). It’s just a once-’n-done deal done each time.

Not only do you get a great rate with Bounce Energy’s electricity plans, but if you get 2 friends to sign up, that’s a $100 credit. Sign up 4, that’s a $200 credit. Sign up 15, that’s…uh…a lot of savings on your electric bill.

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