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Multi-level marketing (MLM) refers to a strategy used by some direct sales companies to sell products and services. MLM encourages existing members to promote and sell their offerings to other individuals and bring new recruits into the business. Distributors are paid a percentage of the sales of their recruits. New recruits become a network of distributors or downlines and, in turn, are encouraged to sell to earn money.
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Many MLM schemes are legal, but there are also illegal operations run as pyramid schemes. This has cast a negative light on legitimate MLM businesses.
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Multi-level marketing is a legitimate business strategy commonly used by businesses that rely heavily on sales to generate revenue. Unlike traditional sales channels, multi-level marketing programs use networks to sell and recruit new participants. As such, they are often referred to as network marketing.
Here’s how it works: Individuals are brought into the business as contractors, independent business owners, distributors, or direct sellers. These people are then tasked with selling the company’s products and/or services to others, including family and friends. Sales can be made in person or online. They get a commission for every sale they make.
Participants are also encouraged to recruit others into the program as participants. Although they may not be pressured to do so, signing up new contractors provides a financial incentive to participants, who receive a percentage of their recruits’ sales. and their recruits, and their recruits, and so on.
There can be hundreds—even thousands—of participants, depending on the size of the company. Members at all levels receive some form of commission as long as the chain lasts. The more layers there are, the more money people can make. Think of it as a pyramid. The person or people at the top earn the most, while those sitting at the bottom earn less commission. However, relatively few of them generally earn a significant income from their efforts.
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Because multi-level marketing plans are commission-based, participants don’t get paid. This means that MLM businesses are often best suited to people with an entrepreneurial spirit, who can set their own goals and schedules, who are good at selling, and who can effectively network with others not only to sell products but also to recruit new marketers.
Although legal, multi-level marketing is often controversial. One of the problems is pyramid schemes that use money from new recruits to pay the people at the top rather than those doing the work. These schemes (and the people behind them) take advantage of others by pretending to be involved in legitimate multilevel or network marketing. You can spot pyramid schemes by their greater focus on recruiting than selling products.
The question in determining the legitimacy of a multi-level marketing company is whether it sells its products primarily to consumers or to its members who must recruit new members to buy their products. If it’s the former, the company is probably a legitimate multi-level seller. If the latter, it could be an illegal pyramid scheme.
Relatively few of them earn significant income from their efforts. To some observers, this reflects the characteristics of a pyramid scheme.
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There are many examples of multilevel marketing in the corporate world. Below are just two of the most popular and well-known companies operating in this sphere.
Amway is a famous direct selling company that uses MLM to generate income. The company, which sells health, beauty and home care products in more than 100 countries, regularly reports billions of dollars in sales from its independent business owners. This makes it the largest MLM business in the world, by revenue.
Herbalife Nutrition is a high-profile MLM company that manufactures and distributes weight loss and nutrition products. The company claims that most of its revenue comes from product sales, not recruiting. It also says it offers members plenty of protection, such as a money-back guarantee, so they won’t be stuck with products they can’t sell.
There have been multiple lawsuits against Herbalife accusing it of misrepresenting its sales practices, including a 2016 settlement with the FTC that required it to restructure its operations.
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Activist investor William Eckman also put a spotlight on the company by shorting $1 billion of the company’s stock in 2012. Ackman accused the company of operating a pyramid scheme, backing up his allegations with a bet that the stock price would fall under the weight of the fraud. He backed out of that bet in 2018.
Generally speaking, multilevel marketing is a sales structure where company members are encouraged to recruit new members. Once recruited, this salesperson receives a portion of their recruiter’s sales. At the same time, each seller profits from the sale of a given product. MLMs are often legal, legitimate businesses whose distributors make money from selling actual products and from commissions on products sold by the distributors they recruit.
Multi-level marketing is controversial and is often compared to pyramid schemes. While some multi-level marketing operations are legal, others are under investigation. This usually happens when most of the profits of the operation trickle down to the top, leaving little for the other members.
When an organization focuses primarily on recruiting rather than selling products, it can also signal that it is operating within a pyramid scheme. Sometimes the members of these schemes will number in the hundreds or even thousands.
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Another warning sign is that you see existing distributors who continue to buy products they can never sell in order to qualify for some kind of reward.
Avon is an example of multi-level marketing. The company operates according to a model where sales take place through a network of sellers, through presentations or individual settings in homes or businesses. Like many other multi-level marketing businesses, Avon does not typically operate a fixed retail location. The parent company, instead, provides tools and resources for entrepreneurs to conduct their business in different locations. This type of business model is also called a direct selling model.
Other examples of MLM businesses include Tupperware, Rodan + Fields, Natura & Co., Vorwerk, Nu Skin, and PM International, among many others.
Multi-level marketing is a legitimate sales approach, but it shares some characteristics with illegal pyramid schemes. The key difference between MLM and pyramid scheme is that MLM keeps its focus on sales, while pyramid schemes mostly focus on recruitment. Although MLM focuses on sales, it is difficult to make money without success in recruiting additional salespeople and thereby increasing commissions.
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Network marketing is a business model that depends on individual sales by independent representatives, often working from home. A network marketing job may require you to build a network of business partners or salespeople to help you generate leads and close sales.
There are many reputable network marketing operations out there, but some have been declared pyramid schemes. The latter may focus less on selling to consumers than on recruiting resellers who may be asked to pay upfront for expensive starter kits.
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Network marketing is known by various names, including multi-level marketing (MLM), mobile marketing, affiliate marketing, direct-to-consumer marketing, referral marketing, or home business franchising.
Companies following the network marketing model often create tiers of resellers – that is, resellers are encouraged to recruit their own networks of resellers. New level (or “higher”) creators earn commissions on their own sales and on sales made by people at the level they created (“lower”). Over time, a new level can produce another level, which contributes to a higher commission for the person at the highest and middle level.
Therefore, salespeople’s earnings depend on employment as well as product sales. The early entrants who are in the top tier make the most.
There is a certain stigma attached to the network marketing business, especially multi-level ones, which can be characterized as pyramid schemes—that is, top-level sellers can make impressive amounts of money from commissions from the levels below them. People at lower levels will earn much less. The company makes money by selling expensive starter kits to new recruits.
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The appeal of network marketing is that an individual with a lot of energy and good sales skills can create a profitable business with a modest investment.
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