Posted in Marketing and Strategy Terms, Total Reads: 631
Definition: Inventory Loading
When a Multi-level marketing (MLM) company forces or requires its agents or consultants to buy a large amount of inventory which cannot be resold and/or used within a reasonable amount of time, just to retain their agent or consultant status, is known as inventory loading.
This inventory loading increases the sales and overall profits of the main manufacturer company. But it leads to heavy losses to the agent. Sometimes, the agents or consultants purposefully do inventory loading, if the company gives some rewards for it or if the company is a very renowned firm and association with this company would then lead to benefits to the agent in some or the other way. The Federal Trade commission (FTC) takes care to avoid this practice. In 1999, it filed a case against Equinox, since, Equinox was burdening its new recruits with an inventory of 5000$ and guaranteed a managerial role in return.
MLM marketing is also known as a pyramid scheme where, the people at the base of the pyramid are likely to be loaded by unnecessary inventory.
There are a few different ways to determine if a direct selling company is following ethical practices or is just obtaining profits by inventory loading:
a. Promotions where the business opportunity is a ‘product’- The Company does not actually sell any form of a physical product or service. It only sells the business opportunity.
b. Products sold at very high prices- Sometimes, the company overprices the product. Thus, leading to no or less sale of the product in the retail market. This also overburdens the agent.
c. Programs that require unnecessarily extra inventory to be bought- Often, the company lays regulations that the individual has to buy an unnecessary extra-large amount of inventory, in order to start the agency or get the Franchisee.
d. Huge- cash investments needed- Sometimes, a company selling even a normal product with an average price, requires very high cash investments. This could also be a form of inventory loading. The agent might need to buy products over a period of time, till he achieves a breakeven to his initial investment.
e. Programs that require purchase of costly machinery or peripherals- Some companies do not overload the agent with actual product. But they demand that the agent should buy some costly peripherals or machinery or accessories or services in order to get an ‘Agent’ status. This costly side-products could be called a ‘start-up kit’ which again requires training or demonstration materials.
Thus, it is advised that before buying a franchisee or dealership, an individual must acquire complete information about the company, their products and policies. For doing so, it is even better to consult an expert in this domain.