The Buddy System

MULTILEVEL MARKETING often conjures images of scam artistsselling only dreams. So how come you may soon find its techniquesindispensable?

In some ways Bill Gouldd, the founder of this year's number onecompany, Equinox International, is like many founders on our list:he's in his early forties; he's never studied business; and hisattempts to work for others were often frustrating. And like many ofhis Inc. 500 peers, Gouldd put everything he owned on the lineto start his company.

Few Inc. 500 founders, however, begin their ventures with akitty of more than $800,000 and assets of more than $1 million. Andfewer still find themselves the subject of a 20/20investigative report, as Gouldd did last June. Equinox, in Las Vegas,markets itself as an environmentally conscious "direct-selling"company. The 20/20 report was not so kind: it questionedwhether Equinox was a pyramid scheme.

Equinox is a multilevel marketer, and Gouldd a seasonedmultilevel pro. He cut his teeth at a half dozen othermultilevel-marketing outfits, where he made and lost a small fortune.But Gouldd says he's out to professionalize the industry. He wants toshred the chain-letter-scam image and get people to think ofmultilevel marketing as a smart model of mass marketing. Says Gouldd,"We're taking word-of-mouth advertising and maximizing it."

Equinox is not the only Inc. 500 company to capitalize onthat reputation-challenged distribution channel. In fact, from thetop of the list to the bottom are product and service companies thathave adapted multilevel marketing--practitioners prefer the terms direct selling and network marketing--to controloverhead, create means of distribution, and build a national salesforce on a budget. All of those companies have tapped into a growingcontingent of displaced workers, professionals worried about theirfuture, at-home moms and couples--all looking to get into businessfor themselves.

And growth through network marketing is not new to the Inc.500. Ten years ago the list included two very differentcompanies--Herbalife International, which survived lawsuits andgovernment investigations in the United States before expandingoverseas, and Discovery Toys Inc. (see page 94)--both of which reliedon direct selling to grow. In more recent years we've seen thePampered Chef, in Addison, Ill., which sells kitchen supplies throughTupperware-style parties; Country Peddlers, a two-time winner fromTinley Park, Ill., which direct-sells handcrafted collectibles; andArtistic Impressions, in Lombard, Ill., which markets paintings hometo home.

Granted it might be easy to write off Bill Gouldd as asmooth-talking con artist. And he doesn't do much to challenge thatconclusion: he paid the state of California a $75,000 fine foralleged multilevel-marketing abuses committed while he was involvedin a previous venture, and later he changed the spelling of his name(adding the second d at the urging, he says, of a spiritualadviser who told him he was "out of balance"). While some of theself-improvement courses he personally conducts are free, otherscarry a price tag of up to $2,500. "If you want someone's attention,you'll find it in their wallet," Gouldd says.

But you'd be foolish to dismiss multilevel marketing out of hand.Con-sider that Excel Communications (#80), the largest company (interms of sales) on this year's list, reached almost $507 million inrevenues in 1995 direct-selling long-distance service. Excel makesfamous Inc. 500 alumnus Microsoft Corp. look sluggish bycomparison. Microsoft took 15 years to hit the $1-billion mark; Excelfigures on doing it in 8. In just the first half of 1996, the Dallascompany had surpassed $600 million in sales. Its network ofindependent sales reps now numbers 700,000--second only, the companymaintains, to Amway, which distributes some 400 products through morethan 2.5 million reps around the world.

Wait a minute. Long-distance service sold like Tupperwareor--gasp--NuSkin cosmetics? What's going on here? Is it true, asmultilevel-marketing advocates argue, that in an age of marketingclutter and consumer distrust, there's no more effective way to movegoods than person to person (better yet, friend to friend)--thecornerstone transaction in the multilevel-marketing model?"Multilevel marketing is the future," Excel Com- munications chiefexecutive Kenny Troutt says without hesitation.

What if he's right?

troutt might be doing more than anyone else to change theindustry's image by doing away with some of its more onerous baggage.Take "front loading," for example, the practice of pressuring salesreps (also called distributors) to purchase more inventorythan they can hope to resell. Excel Communications' reps couldn't buyup blocks of long-distance service even if they wanted to.

That difference appealed to Bill Contreras, a longtime real estatebroker in the La Jolla, Calif., area, who joined the Excel networkafter a professional basketball coach told him about the company."I've had many network-marketing opportunities come across my deskover the years, but I never wanted to sell a product," saysContreras. "But when I saw the Excel marketing plan, I said, 'This isgreat, a savings on long-distance service.' The plan said noinventory, no delivery, no collection, no employees, no quotas, andno paperwork. I thought, here's a business I can own, at home,part-time, with serious income potential."