In this episode, Grace explains the differences between 10 popular business models,  the four types of organizational vulnerabilities, and which 6 principles of influence can be used (for good or for bad).

WWB 005: Which Business Models are Predatory [Podcast]

05/14/2020 – 27 minutes 49 seconds

Highlights and Take-Aways

In this episode, we cover:

• The 10 Kinds of Business Models and what makes each one unique,
• Four organizational vulnerability that can result in damage, and
• The six principles of influence, and how these can cause harm.

Good and Bad Business Models

There are at least 10 models that business owners use to deliver value to customers.

1. Brick-and-Mortar

A physical location where customers get products or services in person; the downside is high overhead costs, and low foot traffic.

2. Brick-and-Click

This combines the benefits of a physical store with an online presence and added tools like a smartphone beacon and in-store pickup. Downsides include high overhead and online platform setup and integration.

3. Brick, Click, and Flip

Integrating the physical location and online purchasing with tangible marketing materials (mailer, catalog, Shock-and-Awe package), this option provides a variety of options to buyers. Main downsides include both #1 and #2, as well as costs of design and printing.

4. Home-Based Service Business

This is either an owner-operator, sole proprietor (with or without employees), or a solo professional practitioner. Cuts down on  overhead costs, but requires high organizational skills and marketing skills to stay competitive.

5. Online Business

All shopping is done through a website. This type of owner needs to attract traffic through Search Engine Optimization (SEO) and by creating relationships with buyers through a customer acquisition process, as well as a funnel system to move customers through purchase gates.

6. Franchise

This is an established, systematized, proven business that requires a certain way of conducting all processes. The franchisee pays for startup, build-out, royalty payments, advertising, and marketing; and the latitude of creativity is fairly low.

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In addition to these “typical” business models, there are four additional ones that have some problems.

7. Pyramid Scheme

This is not a legal business and is outlawed in many countries. It exists because this model takes advantage of human nature: the need to feel included, to be heard, and to get ahead. We all have a fear of missing out if we miss a great opportunity; but this fear actually drives us to make decisions that are not risk intelligent.

In this business model, initial investors are told they will receive a substantial return on an opportunity and that it carries very low risk. But in reality, the more money they give, the more they will lose. This is called sunk cost bias: a commitment to doing something with the belief that it will result in a positive outcome, even when the investment is obviously not going to pay off. This behavior is common among the victims of Multi-Level Marketing and Pyramid Schemes.

A lot of TV shows discuss the effects of pyramid schemes, including NBC’s American Greed and Showtime’s On Becoming a God In Central Florida.

The Federal Trade Commission is cracking down on both Pyramid and Ponzi Schemes, and on Multi-Level Marketing companies which make unfounded health and earnings claims including

• Arbonne International
• doTerra
• Modere
• Pruvit Ventures
• Total Life Changes
• IDLife
• It Works Marketing
• Rodan & Fields
• Zurvita

(You can read more about this here.)

The US Securities and Exchange Commission (SEC) warns consumers about the strong possibility of losing money and compares MLM to pyramid schemes if they have these characteristics:

• The company emphasizes recruiting people to join, rather than just selling products;
• The company promises significant earnings very quickly; and
• The company tells recruits they can “be your own boss” and “work from home” with minimal effort or investment.

8. Direct Sales

In the past, this model was very common; it was also known as door-to-door sales and involved face-to-face interaction with a commission earned from each sale. It can be divided into two groups: single level (products sold directly to the end consumer) and multi-level (earnings come by sponsoring new sellers).

Most direct sales companies have adopted the multi-level approach, replacing the original model almost completely. When I was growing up, we often saw salespeople from Encyclopedia Britannica, Tupperware, Kirby Vacuums, Avon, and others. Many of these transitioned into a home party sales model, where the host invites their friends and family to sample products and any sales resulted in “free products” for the host.

Direct sales can be successful; but each salesperson needs to have an assigned territory or geographic area to avoid competition with others in the same company. MLMs have completely done away with this, and the stiff competition between reps often leads to aggressive behavior and ruined relationships. Since they compete with so many others in the same territory, only a few MLM reps can make enough money to sustain the cost of running the “business.”

9. Affiliate Marketing

This model is promoted as a quick and easy way to generate money online. I find that it can be very damaging for people who aren’t familiar with online sales. They can be fooled into purchasing services that are promised to generate a lot of money, when the actual value is negligible.

Affiliate sales involves a partnership with an established company, where the rep is paid a commission based on the volume of traffic they drive to the company’s website. The higher the volume of referrals, the higher the revenue; and in large quantities, this can become a passive income streams.

Unfortunately, this model only works with a very complex formula and IT knowledge. People who generate millions of dollars a year from an affiliate system have expertise that the average person does not possess. Be wary of “advisors” who promise to share their secrets by creating a website that will generate passive income. Most of the time, this is just a sham and won’t result in any real value.

Affiliate systems are not the same as a Search Engine Optimization (SEO) expert, who can set up your website to attract actual buyers by driving traffic to your website.

10. Multi-Level Marketing (MLM)

Finally, the MLM model is a brilliant way to sell something. It relies on building lot of buzz about a product that may or may not live up to expectations, but also incentivizing people to recruit others into becoming distributors. The multi-level structure means the only way to earn money back from the high-cost products is to recruit others into joining the team. The more people who sign up under you, the more money you’ll make and the more successful the venture will be.

The MLM model has been proven, again and again, to not work for the vast majority of people. Those who actually manage to earn more than $1000 a year is actually enjoying the work of hundreds of people who pay into the system under them. Those who make the most (positioned at the top of the pyramid) rely on reps who often go into significant debt to afford the “opportunity” to grow their business month after month.

You can find more articles about MLMs here.

Most MLM reps focus on demonstrations, home parties, networking events, online parties, pop-up shops and other events. They provide commissions and earnings bonus based on the number of sales and total team sales.

Read more about each of these in What’s the Difference Between Brick-and-Mortar, Franchise, Direct Sales, and MLM?

4 Possible Vulnerabilities in a Business

Now that you know about the 10 types of business models, I want to explain the 4 ways organizations are most vulnerable.

Vulnerability is “the state of being exposed to the possibility of attack, harm, or damage.” It comes from the Latin vulnus, which means “wound”. There are 4 ways this can happen in a company.

1. Waste – Actions that cause ruin or consuming something in a destructive way. Most companies have a lot of waste, in ways that aren’t always obvious: over-spending, spending on the wrong things, over-use of resources, or over-use of time on actions that don’t result in profitability.
2. Loss – Actions that deprive and irreversibly reduce an asset’s value. This can happen through customer refunds and exchanges, diminishing resource value, or theft.
3. Fraud – Actions which deceive intentionally to gain value, inflict harm, or gain an unfair advantage. Examples are: employees who mishandle customer communication, or customers who take advantage of your generosity, or stakeholders who damage your reputation.
4. Abuse – Actions that injure. Inappropriate behavior that diminishes safety or value. No owner wants to be accused of abuse, but it can be common through bullying, intimidation, and emotional abuse through leaders’ blind spots.

These are the possibilities of harm or damage that can occur in a company. Examining each of these will help you identify situations when an organization is predatory: when owners take advantage of consumers or employees by actively looking for ways to cause damage, or passively create harm through a system that can harm others.

How Does a Predatory Company Attract Buyers?

There are six principles of influence that were developed by Dr. Robert Cialdini in his book Influence: The Psychology of Persuasion. This book is still applicable today.

Let’s take a look at the 6 types of influence, and then I’ll talk about how they are common in predatory companies.

1. Reciprocity (desire to return then favor when a customer receives a small gift)
2. Commitment (desire to not change our minds after we’ve agreed to do something)
3. Social Proof (desire to imitate the actions of people we admire)
4. Liking (desire to follow people who are similar or see the world similarly)
5. Authority (desire to trust what “experts” say, such as someone who wears a lab coat), and
6. Scarcity (desire to get something when there aren’t many left, or there’s limited time before the deal runs out).

 

Final Thoughts

You have heard the 10 different types of business models and why four of them (Pyramid Schemes, Direct Sales, Affiliate Sales, and Multi-Level Marketing) have the potential to harm others.

We’ve also discussed the 4 situations where organizations have the potential for harm occurring (waste, loss, fraud, and abuse). Each of these needs to be identified and quantified (measured) in order to avoid damage to the company.

It’s important to design your company in a way that minimizes exposure to vulnerability, but also to provide the highest amount of value to customers. By mixing these together with strategic risk intelligence, you can look ahead to future opportunities and also protect your company from bad decisions. (Read more about how LaConte Consulting does that here)

Finally, you learned about how to persuade people into buying without them even knowing they are being influenced. Each of these can be misused by companies that take advantage of people who are vulnerable.

Nobody wants to be left out of joining a great opportunity or using a product that everybody else has. We want to be included; this is one of the things that makes us human, and it’s part of Maslow’s Hierarchy of Needs — a sense of Belonging. We want to be accepted and held in high esteem. All of these are twisted by business owners whose model takes advantage by persuading people who are in a difficult financial or emotional situation.

To avoid taking advantage of people, you can set up a system of examining how your company may be vulnerable and which questions to ask in order to foresee the threats and mitigate those risks… rather than experiencing loss.

 

That’s it for this episode! Do you have a question you’d like answered on an upcoming show? Record your message at https://anchor.fm/laconteconsulting/message

 

Interested in discussing your company’s difficulties with staff turnover? Find out more here.

 

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Grace LaConte is a business strategist, writer, and workplace equity advocate whose risk management graphics are used around the globe. She specializes in finding hidden threats and opportunities in organizations that employ working parents. Grace is the host of the What’s Wrong with Your Business? Podcast, which provides tools to adapt in a rapidly changing market.

Find more at laconteconsulting.com, or connect with her on Instagram and Twitter @lacontestrategy.