What is multilevel marketing?
Multilevel marketing (MLM) is a business model that involves unsalaried, hierarchical sales teams selling products directly to consumers in conjunction with recruiting additional company sales representatives. Multilevel marketing may also be referred to as referral marketing or network marketing.
Existing members of an MLM company sell and promote the products to a community of potential customers. They are often expected to also bring in new members to join the ever-expanding sales levels of the company. Within the structure of a multilevel marketing company, there is always a hierarchy of roles, or levels, that can be ascended through successful sales or recruitment, which are tied to rewards and promotions for the associates.
How does multilevel marketing work?
In multilevel marketing, a direct sales or a B2C (business-to-consumer) company sells products or services to individual sales representatives who often act as their own small business owners. In turn, these representatives focus on selling a product or service directly to consumers, normally without a storefront. The independent distributors within the MLM structure act as sales reps, brand ambassadors or micro-influencers.
The structure of an MLM business may include a flat hierarchy, which means there are only a small number of levels between the top executives and newest members. Some roles within an MLM business model may include CEO, distributor, sales representative and sponsor or recruiter. Usually, there is a compensation plan in place. Commonly, when a sales representative at the bottom level makes a sale, each person above them also earns a portion of the income. Sales representatives within MLMs are not paid hourly, but instead receive structured commissions at all levels. While recruiting new distributors is the focus, the representatives also earn money by selling the company's products.
The sales teams for MLMs often attract women, young mothers or those seeking alternative employment. MLM companies recruit former satisfied customers to sell with the promise of independence and new business opportunities. Part of the strategy of an MLM business is the concept that customers may have an easier time trusting friends and acquaintances who act as representatives rather than strangers selling the products. Representatives who use their communities as their customer base may also find that their friends and family are quick to support their business ventures.
Some popular ways that goods are sold in MLM include:
- farmer's markets and fairs
- online events
- social media groups
- social media marketing
- home visits
- word of mouth
- Influencer marketing
- viral marketing
- in-person or virtual parties
Is multilevel marketing legal?
Multilevel marketing is legal in the U.S. and most countries. It is banned in a handful of countries, such as Bangladesh, China and Saudi Arabia. While legal in the United States, the MLM business practice is often considered controversial because it can use predatory recruiting techniques and unpaid labor of its sales representatives. Critics say the MLM business strategy has many similarities to a pyramid scheme, which is illegal in most countries.
What is the difference between multilevel marketing and a pyramid scheme?
The major difference between an MLM and a pyramid scheme is whether it falls under the definition of a legal marketing strategy. In essence, MLM strategies are legal while pyramid schemes are not.
Major differences between MLM and illegal pyramid schemes include the following:
- Pyramid schemes place the most focus on the staff trying to recruit new members of a sales team, while MLM strategies include recruitment as part of a wider business strategy that also involves the sale of products.
- MLM systems require a buyback guarantee for any products that the sales representatives are not able to sell, whereas a pyramid scheme has no such agreement.
- MLMs provide a real product or service that benefits a customer, while a pyramid scheme emphasizes consistent investments from new service representative members and encouraging them to recruit more individuals into the business.
- MLM strategies recruit as many people as possible into their sales teams in order to sell as many products as possible, while pyramid schemes recruit as many people into their sales teams as possible for the sole purpose of taking advantage of the investments of their newest associates.
- MLM strategies may ask for a sales representative to purchase a minimum amount of their products, but pyramid schemes ask for a very large investment before a business owner can even sign a contract to begin working for them.
- MLM business practices include research and a strategy to focus on a target consumer for representatives to sell to, while pyramid schemes have little or no focus on the end user.
- In an MLM strategy, a sales representative may receive commissions for their sales or the sales of their recruits. However, in a pyramid scheme, the representative only receives commissions for recruiting more members underneath them.
It is important to note that while multilevel marketing companies are legal, even the most successful and ethical companies cannot ensure that their sales teams will earn any income.
How to tell if a multilevel marketing company is really a pyramid scheme
Anyone interested in learning more about the ethics of a multilevel marketing company can investigate the organization using the tools provided by the Better Business Bureau (BBB), a nonprofit organization that investigates the legality and morality of businesses. The Federal Trade Commission (FTC), the U.S. Consumer Product Safety Commission and the National Labor Relations Board are also helpful resources for those interested in the business practices of MLMs.
According to the FTC, people can evaluate whether an MLM is actually a pyramid scheme by paying attention to the following signs:
- Representatives are required to purchase a large amount of inventory.
- Income is based off the number of people representatives recruit and not the number of products sold to consumers.
- To stay at a particular level or at a high rank in the company, the representative must purchase products themselves.
To avoid investing in an MLM, people should be cautious, ask questions and do research into the company's reputation and business practices.
Examples of businesses that use multilevel marketing
Several companies with household names use MLM strategies. Among these companies, many are legitimate businesses. However, others have experienced controversy, including accusations of using pyramid schemes, accusations of fraud, class action lawsuits and instances of securities fraud. Some have also been accused of selling dangerous products or breaking wage payment laws.
Even with controversies, several MLM companies have proved to be very profitable. One of the most profitable MLM companies is Amway, which was worth $8.4 billion in 2020.
Some other well-known companies that use multilevel marketing include:
- Mary Kay