Reading Time: 5 Minutes
Published : May 22, 2024
Last Updated: June 7, 2024
Multi-level marketing (MLM) has been around for a while. We’ve all experienced it – a friend suddenly wants to reconnect, only to pitch an exciting business opportunity that promises life-changing results. The industry is experiencing rapid growth, projected to reach $329 billion by the end of 2030, with a CAGR of nearly 6.5% between 2023 and 2030.
Although frequently viewed as a scam, MLM network marketing is a legitimate business model with some highly successful direct sales companies operating under it. However, it’s also widely misunderstood.
Let’s demystify what multi-level marketing is, how it works, how it is different from pyramid schemes, and some examples.
Pro-tip
When evaluating an MLM, be wary of promises of high returns through recruitment rather than sales. The Federal Trade Commission warns against illegal pyramid schemes disguised as MLMs. Legitimate MLMs allow earning through retail sales, not just recruiting. Therefore, research thoroughly before committing money or time.
What is Multi-Level Marketing (MLM)?
Multi-level marketing is a business approach where independent salespeople earn money from selling products or services directly to consumers. They also make additional income by recruiting new salespeople to join their team and then earning a percentage of the sales made by those they have recruited.
In an MLM network marketing business, there are multiple levels of distributors, with those at the top earning commissions from the sales generated by the distributors they’ve recruited, who in turn earn from their own recruits, and so on. This creates a pyramid-like structure, with commissions filtering up through the levels.
The products are typically sold through personal demonstrations, home parties, or online. Salespeople make money not just from their own product sales but also from the sales made by the people they have recruited and the people recruited by those recruits.
How Does Multi-Level Marketing Work?
In a multi-level marketing business approach, companies sell their products or services through a network of independent contractors known as distributors. These distributors are not employees of the company but earn money by selling the products directly and by bringing in new distributors into their network.
Here’s a breakdown of how MLM works:
1. The Company
At the heart of the multi-level marketing model is a company that either makes or sources products or services to sell. This company relies on a network of distributors to promote and sell its products.
2. The Products or Services
Multi-level marketing companies offer a wide variety of products or services, such as cosmetics, wellness products, household items, educational courses, and even financial services. These products are often marketed as unique or high-quality, and distributors are encouraged to highlight their benefits when selling them.
3. The Compensation Plan
MLM network marketing compensation plans can be complex, but they generally involve two main ways for distributors to earn money:
- Direct Sales Commission: Distributors earn a commission on the products they sell directly to customers via MLM marketing. They buy products from the company at a discounted rate and then sell them at a markup, keeping the difference as profit.
- Earning from Recruiting: Besides selling products, distributors in multi-level marketing can also make money by recruiting new distributors into their “team” or “downline.” When they recruit someone new, they often receive a bonus or commission based on the sales or purchases made by that new recruit. As their team grows bigger by recruiting more people, they can also earn additional bonuses from the sales made by the recruits brought in by their existing team members. This creates multiple levels within the organization.
Note: According to statistics, only 25% of people are profitable in MLM, while 27% break even.
4. Training and Support
Multi-level marketing companies typically provide training and support to their distributors to help them succeed. This can include sales and marketing materials, product information, motivational events, and online resources.
You May Also Read: 11 Best Network Marketing Success Secret For Beginners
Pyramid Schemes V/s Multi-Level Marketing
Pyramid schemes and multi-level marketing are often confused, but they have fundamental differences. Pyramid schemes primarily focus on recruiting new members without offering any legitimate products or services, while the MLM business model involves the actual sale of products or services alongside recruitment.
Note: Before collaborating with any company, ensure it is not associated with an illegal pyramid scheme, as there are hundreds operating worldwide.
Here is a table highlighting the key distinctions between pyramid schemes and multi-level marketing:
| Aspect | Pyramid Scheme | Multi-Level Marketing |
|---|---|---|
Primary Focus | Recruitment of new members with no emphasis on product or service sales | Sale of products or services, with recruitment as a secondary aspect |
Revenue Source | Mainly from recruitment fees paid by new members | Primarily from product sales to end consumers, with bonuses from recruitment and team building |
Legitimacy | Illegal in most jurisdictions due to unsustainable structure and lack of real value creation | Legal business model when structured properly, although some MLM companies operate in a manner that resembles pyramid schemes |
Sustainability | Unsustainable and collapses when recruitment stalls, leaving most participants at a loss | Can be sustainable if there is genuine demand for the products or services being sold and if distributors focus on building a customer base |
Regulatory Scrutiny | Generally considered fraudulent and subject to legal action | Subject to regulations and scrutiny, with some MLM companies facing legal challenges or investigations for operating like pyramid schemes |
Recruitment Tactics | Often promises high returns with minimal effort or risk, preying on participants’ desire for quick wealth | Emphasizes the potential for entrepreneurship, flexible work hours, and supplemental income, sometimes exaggerating earnings potential |
Product or Service Quality | Often lacks genuine products or services, with emphasis on recruiting new members as the primary income source | Offers legitimate products or services, although quality can vary among different MLM businesses and their offerings |
Legal Status | Illegal in most countries and jurisdictions | Legal in many countries when operating within legal guidelines and regulations |
Examples | Ponzi schemes, chain referral schemes | Avon, Amway, Herbalife, Mary Kay, Tupperware |
Real-World Examples of Multi-level Marketing
Now that we know what MLM network marketing business is let’s look at some companies that follow this model.
1. Amway
Amway, short for “American Way,” is one of the oldest and largest MLM companies in the world. Founded in 1959 by Jay Van Andel and Richard DeVos, Amway initially focused on household cleaning products. Over the years, it expanded its product lines to include health, beauty, and wellness items, as well as home goods and personal care products.
Amway distributors, known as Independent Business Owners (IBOs), earn commissions from the sale of Amway products and also from recruiting new distributors into their MLM network. Amway is known for its extensive network of distributors spanning over 100 countries and its emphasis on personal development and entrepreneurship within the multi-level marketing business model.
2. Herbalife Nutrition
Herbalife Nutrition, founded in 1980 by Mark Hughes, specializes in nutrition and weight management products. The company offers a range of supplements, shakes, snacks, and personal care items aimed at promoting a healthy lifestyle.
Herbalife distributors, known as Independent Herbalife Members (IHMs), earn commissions on product sales and can also earn bonuses based on the sales of their downline in their multi-level marketing programs. Herbalife has faced both praise and criticism over the years, with some lauding its products for their effectiveness and others raising concerns about its MLM business practices and accusations of operating like a pyramid scheme.
3. Avon
Avon is one of the most iconic names in the MLM industry, known for its extensive line of beauty, skincare, fragrance, and personal care products. Founded in 1886 by David H. McConnell, Avon initially started as the California Perfume Company, later rebranding as Avon in 1939.
Avon is a globally renowned MLM company, celebrated for empowering women through entrepreneurial opportunities and financial independence. Avon Representatives, also known as Avon Beauty Advisors, sell products directly to customers through catalogs, online channels, and in-person demonstrations.
You May Also Read: The Myths and Truth About Network Marketing
Conclusion
MLM is a business model where independent distributors earn income from direct product sales as well as commissions from the sales generated by their recruited downlines. While legitimate MLM businesses exist across various industries, the model has faced criticism over prioritizing recruitment over actual retail sales outside the MLM network marketing program. However, as with any business opportunity, you should thoroughly understand the company, compensation plan, and potential risks before entering the MLM marketing system.
