Multilevel marketing

Multilevel marketing (MLM) is a business model within the broader category of Business Models and Sales and Marketing where a company sells its products or services through a network of non-salaried participants. These participants, often referred to as Independent contractors or distributors, earn income in two primary ways: by selling the company's products directly to consumers, and by recruiting new participants into the system. The recruits form a "downline" organization, and the original participant earns commissions on the sales generated by their downline, creating multiple levels of compensation. Multilevel marketing is also sometimes referred to as Network marketing or cellular marketing.

History and Origin

The roots of multilevel marketing can be traced back to the early 20th century with the rise of Direct sales companies that relied on independent agents selling products door-to-door or through home demonstrations. Companies like Avon and Fuller Brush pioneered direct selling methods. The formalized concept of a multi-level Compensation plan, where distributors earn not only from their own sales but also from the sales of those they recruit, began to emerge in the mid-20th century. The Direct Selling Association (DSA), a national trade association for direct selling companies in the United States, was founded in 1910 as the Agents Credit Association and later became the Direct Selling Association in 1968, reflecting the evolution of the industry.

Key Takeaways

• Multilevel marketing involves individuals selling products and recruiting others to build a sales network.
• Income is typically derived from personal retail sales and commissions on sales made by recruited downline members.
• MLM operates on a tiered structure, rewarding participants for sales volume generated by their entire team.
• Regulatory bodies scrutinize MLMs to differentiate legitimate models from illegal pyramid schemes.
• Participation in multilevel marketing often involves purchasing inventory or starter kits.

Interpreting Multilevel marketing

In multilevel marketing, understanding the structure is crucial. A participant's success is often interpreted not just by their ability to sell products, but also by their capacity for Recruitment and the sales volume of their entire network. The company typically provides a detailed compensation plan outlining how Income streams are generated from personal sales and downline activity. Higher-ranking participants in the hierarchy typically earn a greater percentage of commissions from the sales of their extensive downlines.

Hypothetical Example

Consider Sarah, an independent Distributor for "Vitality Health," a multilevel marketing company selling dietary supplements. Sarah buys supplements at a wholesale price and sells them to her friends and family at retail, earning a profit. Her first month, she sells $500 worth of products and earns a 25% Sales commission, netting $125.

Excited by her initial success, Sarah recruits two friends, Tom and Lisa, to also become Vitality Health distributors. Tom and Lisa become part of Sarah's downline. In their first month, Tom sells $300 worth of products, and Lisa sells $200. According to Vitality Health's compensation plan, Sarah earns an additional 5% commission on the total sales of her direct recruits. So, from Tom and Lisa's sales ($300 + $200 = $500), Sarah earns an extra $25. As Tom and Lisa recruit their own downlines, Sarah could potentially earn a small percentage from their recruits' sales as well, creating a multi-level compensation structure.

Practical Applications

Multilevel marketing is prevalent in various industries, including health and wellness, cosmetics, household goods, and financial services. Companies utilize MLM as a distribution strategy to reach consumers directly, often bypassing traditional retail channels. Regulatory bodies like the Federal Trade Commission (FTC) in the United States provide guidance on legal multilevel marketing practices, distinguishing them from illegal pyramid schemes. The FTC highlights that legitimate MLMs must compensate participants primarily based on actual sales to retail customers, not simply on the act of Recruitment or large upfront purchases by new participants. The FTC issues business guidance concerning multilevel marketers, outlining principles and practices they consider when assessing whether a compensation structure is unlawful and operating as a pyramid scheme.⁵,⁴ Effective Regulatory compliance is crucial for MLM companies to ensure ethical operations and consumer trust. Many MLM companies aim to emphasize product sales over recruitment to adhere to Consumer protection regulations.

Limitations and Criticisms

Despite its widespread use, multilevel marketing faces significant limitations and criticisms. A common critique is the high attrition rate among participants. Many individuals who join MLMs earn little to no money, and some even lose money due to required purchases of inventory, training materials, or fees. For instance, the Federal Trade Commission has noted that most people who join legitimate MLMs make little or no money, with some losing money.³ A New York Times article from 2011, referencing an FTC study, indicated that making money in a multilevel marketing plan can be challenging.² Concerns also include potential Market saturation, where the pool of potential customers and recruits becomes exhausted. Ethical concerns often arise regarding the emphasis on recruitment over product sales, leading to accusations of inventory loading—where distributors are pressured to buy more products than they can reasonably sell to qualify for commissions or advancements. Engaging in multilevel marketing requires careful Due diligence to evaluate the company's business model and ensure it aligns with sound Business ethics.

Multilevel marketing vs. Pyramid scheme

Multilevel marketing is often confused with a Pyramid scheme, but a crucial legal distinction exists. A legitimate multilevel marketing program primarily derives its revenue from the sale of products or services to ultimate consumers. Participants earn money from their own retail sales and a percentage of the sales made by their downline.

In contrast, a pyramid scheme is an illegal fraudulent operation where participants primarily profit from the recruitment of new members, rather than from the sale of legitimate products or services. Money from new participants is used to pay recruiting commissions to earlier participants, similar to a Ponzi scheme. The U.S. Securities and Exchange Commission (SEC) warns investors about pyramid schemes posing as multi-level marketing programs, emphasizing that in a pyramid scheme, money from new participants pays recruiting commissions to earlier participants with little or no retail consumer sales. T¹he legality hinges on whether genuine retail sales drive the compensation structure or if the primary revenue comes from recruitment fees or mandatory product purchases not tied to actual consumer demand.

FAQs

Is Multilevel marketing a legitimate business model?

Yes, multilevel marketing can be a legitimate business model, provided its primary focus is on the sale of products or services to end consumers, and compensation is based on these sales. It is distinct from illegal pyramid schemes that rely predominantly on Recruitment fees.

How do people earn money in Multilevel marketing?

Participants in multilevel marketing typically earn money in two ways: through direct sales of products or services to retail customers, and through commissions earned on the sales made by the independent distributors they have recruited into their sales network, often called their downline.

What are the risks of joining a Multilevel marketing company?

Key risks include the potential for low earnings or even financial losses due to mandatory product purchases, fees, or high Market saturation. Success often requires significant sales skill, dedication, and the ability to build and motivate a team, similar to any Entrepreneurship venture. Many people fail to earn a profit in MLM.

How can one differentiate between a legitimate Multilevel marketing company and a pyramid scheme?

A legitimate MLM emphasizes sales of real products or services to actual consumers. A pyramid scheme, on the other hand, prioritizes recruitment, with participants making money primarily from fees paid by new recruits rather than from product sales. Always conduct thorough Due diligence and scrutinize the compensation plan to understand the primary source of income.