What is Multilevel Marketing (MLM)?
Multilevel marketing (MLM) is a distinctive sales strategy employed by some direct-sales companies to sell products and services. It involves motivating current members to promote and sell their offerings to others and recruit new participants into the business.
In this model, distributors earn a percentage of their recruits’ sales. The new recruits form the distributor’s ’network’ or downline and are also encouraged to make sales to generate earnings.
Many MLM frameworks operate legally, but there are illegal schemes often designed as pyramid schemes, which tarnish the reputation of legitimate MLM ventures.
Key Aspects
- MLM is a recognized business model used by certain direct-sales companies for marketing products and services.
- Existing members are prompted to promote and sell products and also recruit new members into the business.
- Participants earn a percentage from the sales made by their recruits.
- Income is derived from multiple levels within the structure, meaning higher layers earn more commissions.
- The Federal Trade Commission (FTC) ensures that MLM practices do not degenerate into illegal pyramid schemes.
The Inner Workings of Multilevel Marketing
Multilevel marketing hinges on creating robust networks for sales and recruiting new participants, often referred to as network marketing. Members join as contractors, independent business owners, distributors, or direct salespeople, tasked with selling the company’s products/services to others, both offline and online, earning commissions for each sale made.
Recruitment of others into the program isn’t mandatory but offers a monetary incentive, adding a percentage of the new recruits’ sales to the network marketer’s income, thus broadening their earning potential.
Hundreds or even thousands of members may comprise these networks, contingent on a given company’s reach. Each tier of participants earns some form of commission, with more layers increasing potential earnings.
Is MLM the Right Choice for You?
Multilevel marketing businesses, given their commission-based nature, generally attract individuals with entrepreneurial skills, goal-oriented mindsets, adept at sales, and proficient at networking to drive both product sales and recruit new marketers.
Special Considerations
While legal, MLM has its controversies, often overlapping with pyramid schemes that exploit new recruits’ money to benefit those at the top rather than rewarding actual sales efforts. Pyramid schemes can be discerned by a predominant focus on recruitment over product sales.
The legitimacy of an MLM company largely depends on whether it sells products primarily to consumers or its members tasked with recruiting new members to purchase these products. The latter scenario often signals an illegal pyramid scheme.
Real-World Examples of Multilevel Marketing
Amway
A renowned direct-sales company utilizing MLM to generate revenue, Amway offers health, beauty, and home care products in over 100 countries, consistently reporting billions in sales through their independent business owners, positioning it as the world’s largest MLM entity by revenue.
Herbalife Nutrition
Herbalife Nutrition is an MLM giant dealing in weight-loss and nutritional products, with its primary revenue sourced from product sales, complemented by member protections like money-back guarantees.
Despite numerous legal challenges, including an FTC settlement necessitating a business restructure, Herbalife remains a prominent MLM example.
Legality and Legitimacy of MLM
MLM companies urge members to recruit as well as sell products, both delivering a profit margin. While some MLMs fit the legal mold, businesses that veer towards excessive recruitment often fall under scrutiny for operating similar to pyramid schemes.
Identifying Illegal MLM Pyramid Schemes
The FTC advises vigilance against MLM promoters promising unrealistic earnings, pressing for recruitment, or urging hasty commitments without in-depth company comprehension. Products purchased merely to qualify for rewards serve as a substantial red flag.
Example of Multilevel Marketing
Avon exemplifies successful MLM operations, promoting a sales network devoid of fixed retail locations and empowering entrepreneurial resources for diverse, location-independent selling strategies.
Other MLM enterprises include Tupperware, Rodan + Fields, Natura & Co., Vorwerk, Nu Skin, PM-International, illustrating how broad this business model’s reach extends.
Conclusion
Multilevel marketing is a potentially lucrative sales strategy differentiating itself from illegal pyramid schemes by focusing primarily on product sales rather than recruitment. Earnings predominantly hinge on recruits’ sales effectiveness, making network expansion a critical profitability factor.
Related Terms: Direct Sales, Pyramid Scheme, Network Marketing, Commission, Revenue.
References
- Federal Trade Commission, Consumer Advice. “Multi-Level Marketing Businesses and Pyramid Schemes”.
- South Dakota Consumer Protection, Office of Attorney General. “Multi-Level Marketing vs. Pyramid Schemes”.
- Amway. “About Amway”.
- Direct Selling News. “Top Direct Selling Companies in the World”.
- Federal Trade Commission. “Herbalife Will Restructure Its Multi-level Marketing Operations and Pay $200 Million for Consumer Redress to Settle FTC Charges”.
- CNBC. “Five Years After Brawl with Icahn, Ackman Exits Losing Bet Against Herbalife”.
