Multi Level Marketing (MLM)

Multi Level Marketing MLM definition - toolshero

This article provides a practical explanation of Multi Level Marketing (MLM). After reading, you’ll understand the basics of this powerful marketing tool.

What is Multi Level Marketing (MLM)?

Multi Level Marketing (MLM), often (mistakenly) associated with pyramid marketing, is a business model in which MLM companies build a network of people who commit to sell their product or service. In MLMs, existing distributors are encouraged to recruit new distributors. They then get a percentage of their recruits’ sales. These recruits are said to be the downline of the distributor. The distributors also make money through the direct sales of products to customers. The products being marketed using this approach are mainly health related, as well as beauty and home care products.

Multi Level Marketing (MLM) is an appealing business proposition for many people. It offers them an opportunity to become part of a large system for distributing products to consumers. In contrast to a person who starts a business with nothing, MLM participants immediately have access to support from the supplier of the products. They sometimes also offer training courses. That way the MLM participant can relatively easily build their own network of customers.

In practice, MLM mostly occurs in the direct sales of products or services from home. Independent representatives supply the products to end users. MLM is called multi-level because of the aspect of multiple levels. Each representative has the option to recruit other representatives and train them to start their own business and earn money from the sales of their downline.

Multi Level Marketing (MLM) origins

The first forms of Multi Level Marketing organisations arose in the US in the 1940s. Back then there was a lot of demand for care products, for instance, and companies were trying to figure out how to reach potential customers. The idea of lots of distributors in a large network was born. The concept proved to be highly successful. Soon other companies started using the method as well. Even conventional companies switched to what was then a new approach to marketing. In later years, the concept gradually spread to Canada, Europe, and finally Asia.

Financial remuneration plan in Multi Level Marketing (MLM)

Every MLM company creates its own remuneration plan. The common element between all MLMs is that the remuneration plan consists of two potential revenue flows. The first form of remuneration is paid by the MLM company to the representatives in the form of commissions on their own sales. The second form of remuneration is paid based on the sales made by the other distributors in the main representative’s network. As mentioned earlier, the network under a main representative in the organisational hierarchy are called downline distributors.

MLM effectiveness

MLM distributors are expected to sell the products directly to end users based on word-of-mouth advertising and referrals. They are also expected to actively try to recruit others to join the MLM company’s distribution chain as fellow salespeople.

In practice, most recruits lose money when entering such a model. Nevertheless, participants are encouraged to stick with the MLM philosophy because it promises significant returns. The statistical improbability of that has been pointed out numerous times, for instance on the Federal Trade Commission‘s website.

Pyramid schemes

Not every Multi Level Marketing proposition is a legitimate business opportunity. Pyramid schemes are often employed as a means of fraud. This involves deliberately taking the money of people who aren’t paying attention. Pyramid structures are also dependent on recruiting people who are then labelled as distributors of a product or service. As is the case with legitimate MLMs, a pyramid scheme offers the opportunity to earn money by recruiting and signing up more distributors. They are also remunerated based on performance levels of the downline.

Difference between pyramid schemes and MLM

The difference between MLM and the pyramid schemes described above is that MLM is legal, while pyramid schemes are not. In many countries participation in a pyramid scheme is a criminal offence that may make you end up in prison. However, it can be difficult to distinguish between the two, particularly for people looking for business opportunities.

The reason why pyramid schemes are often illegal is due to the following. The sole purpose of pyramid schemes is to take people’s money and use it to recruit more victims. The purpose of MLM is the marketing of products. The theory behind a regular MLM is that the larger the distributor network is, the more products the umbrella company will sell.

Recognising pyramid schemes

Regular MLM companies make sure that no high start-up costs are involved with becoming a distributor. Illegal pyramid schemes, on the other hand, often require this. They often ask people to invest a lot of money. These costs are called stock costs. If it’s a legitimate MLM initiative, the company will always buy back unsold stock. Illegal pyramid schemes won’t do that.

In the case of pyramid schemes, there’s also more of an emphasis on recruiting new distributors instead of selling to end users. This makes it clear that the initiative is mainly aimed at the money brought in by new distributors.

Is Multi Level Marketing (MLM) a good idea?

Many MLMs have poor reputations. This is due in part to them frequently being associated with the illegal pyramid varieties. It is true that MLM distributors have a relatively high failure rate. However, there are a number of things that make the negative reputation of legitimate MLM initiatives sometimes ungroundedly negative.

First is the fact that there’s a lot of bad information going around about these initiatives. The failure rate in private business is pretty high to begin with. Secondly, it’s easier to walk away from a company that distributors have only invested 50 euros in, than from a company that required 5,000 euros of start-up investments. It’s also true that many MLM opportunities are poorly presented. When recruiting distributors, it’s usually about making easy money, rather than distributors thinking it’s a good product or believing in the marketing model.

The truth is that MLM companies operate like any other business. An MLM initiative can succeed or fail. The most important aspects are that new distributors have their own marketing strategy, find the right target audience, and create their own market.

Examples of successful MLM

Herbalife Nutrition Ltd. is probably the most well-known MLM of them all. This often-talked-about multi-level business produces and distributes a range of food supplements that are said to help with weight loss and better health. The complete network of Herbalife consists of over 500,000 distributors. Herbalife’s activities have been investigated numerous times. This major company has also been taken to court a number of times. Businessman William Ackman accuses the company of using pyramid scheme methods. Herbalife on the other hand claims that the majority of its revenue comes from the sale of products, not recruitment. It claims to offer plenty of protection to distributors, for instance with a money-back guarantee. This means new members won’t be stuck with lots of unsellable products.

Other companies using the MLM business model are also frequently the topics of court proceedings. The legal claims against these businesses are often related to the following:

  • Emphasis on recruitment over sales
  • Similarities to illegal pyramid schemes
  • Price fixing
  • Extortion and back-room deals
  • Secret compensation packages
  • Exploiting personal relationships
  • Complex and unusual compensation strategies
  • Cult-like techniques groups are exposed to in order to increase enthusiasm

Tips for becoming successful with MLM

Success in Multi Level Marketing (MLM) depends on several things. If you’re considering joining such an initiative, keep the following in mind.

  1. Find a company that’s a member of an association like the Direct Selling Association. They require member companies to be ethical.
  2. Choose a service or product you’re actually interested in. If you can’t get excited about a product, it’s going to be difficult getting others to be the same. Consumable products generally perform well. If someone likes the product, they’re more likely to come back.
  3. Look into the history and the remuneration scheme of the company. It’s important to understand how the company makes its money. It’s also important to observe the recommended marketing techniques carefully.
  4. Treat your own business like a real company. Despite claims from MLMs, it’s not a success story for everyone. As with any business, MLM requires motivation, proper marketing strategies, and innovative ideas. The success of MLM or any other business is dependent on the work put in by the person behind it.

Advantages of MLM

Starting MLM initiatives can be a good idea if it’s done properly. It offers a number of advantages compared to other business opportunities:

Financial advantages

Keep the information about golden castles in the sky in mind when starting an MLM initiative. Like any other business, it takes hard work and vision. MLM can become successful if sufficient time and effort is put in. The effort you put in, will make you earn more money.

Many people are active in direct selling (MLM) in addition to their regular jobs, earning them a bit of extra money.

Flexible hours and work locations

Direct selling meets many people’s needs. MLM enables distributors to work from wherever they want and when they want. This offers members the freedom to plan their own day, depending on existing priorities and responsibilities.

Relationships

One characteristic of MLM initiatives is that it’s mainly about building networks. This puts members in touch with a group of like-minded people with the same goal. For people moving to a new place, for example, it’s a good way to meet new people.

To summarise Multi Level Marketing (MLM)

Multi Level Marketing (MLM) is a business model in which MLM companies build a network of distributors that sell products or services for them. New distributors joining MLM initiatives are given a stock of products to sell, and they’re expected to recruit new distributors themselves. They are then given a percentage of the proceeds of members recruited by them: the downline.

MLM opportunities are often associated with illegal pyramid structures. Illegal pyramid schemes are intended to use someone’s money to recruit other distributors. The products or services they have to purchase for this turn out to be worthless, and new members are stuck with the consequences. A regular MLM company does not require an unreasonably high start-up investment and will always buy back unsold stock from distributors.

Despite their poor reputation, there are also success stories. Herbalife Nutrition, for instance, is one of the largest MLM players in the world, earning thousands of people passive income. However, Herbalife hasn’t gone unnoticed on the enforcement radars.

If an MLM is accompanied with the right attitude, it can have several advantages for new players and distributors. For instance, it allows people to generate additional passive income, and it’s possible to independently set your own hours and work locations.

Now it’s your turn

What do you think? Are you familiar with the explanation of Multi Level Marketing (MLM)? Would you consider an MLM opportunity if you were presented with one? Have you ever bought products or services from an MLM distributor? Or are you part of an MLM chain yourself? Do you have any other tips or additional comments?

Share your experience and knowledge in the comments box below.

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More information

  1. Bloch, B. (1996). Multilevel marketing: What’s the catch?. Journal of Consumer Marketing.
  2. Koehn, D. (2001). Ethical issues connected with multi-level marketing schemes. Journal of business ethics, 29(1-2), 153-160.
  3. Nat, P. J. V., & Keep, W. W. (2002). Marketing fraud: An approach for differentiating multilevel marketing from pyramid schemes. Journal of Public Policy & Marketing, 21(1), 139-151.

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