Definition
Multilevel marketing, often referred to as MLM, is a strategy some direct sales companies use to encourage existing distributors to recruit new distributors. The recruiters earn a percentage of their recruits’ sales and the sales of the recruits’ own recruits, creating multiple levels of compensation. This system can result in a hierarchy of earnings levels, hence the term ‘multilevel’.
Key Takeaways
- Multilevel Marketing (MLM), also known as network marketing, is a business model in which independent representatives sell products or services from a company directly to consumers by word of mouth or direct sales. The earnings of the participants are derived from a pyramid-shaped or binary compensation commission system.
- MLM is controversial because it can often resemble pyramid schemes, which are illegal in many countries. The controversy lies in the fact that the individuals near the top of the pyramid benefit significantly more than those at the bottom. This can lead to some participants gaining substantial profits while other participants earn nothing or even lose money.
- Despite the controversy, legitimate MLM businesses exist. They comply with the law by differentiating themselves from pyramid schemes through the presence of real products or services along with the requirement that distributors earn their income principally from sales to customers outside their network, rather than through recruitment of new team members.
Importance
Multilevel Marketing (MLM) is an important financial term as it refers to a business strategy that involves the sale of products or services where the revenue of the MLM company is derived from a non-salaried workforce selling the company’s products or services, while the earnings of the participants are derived from a pyramid-shaped or binary compensation commission system.
It’s important because it’s a legal business model that offers investment opportunity and income for entrepreneurs who have an interest in sales, marketing, and networking.
MLM is often associated with direct selling and network marketing, providing opportunities for individuals to start their own business, often with lower initial investment costs compared to traditional businesses.
Understanding MLM is invaluable for those considering this as a potential business venture.
Explanation
Multilevel Marketing (MLM), also known as network marketing or pyramid selling, serves as a non-traditional business model whereby profits are derived from two primary sources: direct sales to customers, and the recruitment of new members. MLM’s main purpose is to allow companies to distribute their products or services directly to consumers through a network of independent distributors or partners, also known as MLM representatives or recruits.
These distributors earn commissions from both their personal sales and a percentage of the sales made by recruits in their downline, (those they have enrolled) thereby creating multiple levels of compensation, as indicated by the term. Primarily used by consumer-goods companies, MLM allows businesses to considerably reduce their advertising and distribution expenses as the marketing is carried out by the independent distributors who are incentivised to sell and promote the products due to potential earnings.
MLM is an appealing business opportunity for individuals seeking flexible work and the opportunity to build their own businesses without the cost of creating a product or service themselves. However, it’s worth noting that it has been often criticized due to its inherent resemblance to pyramid schemes, and potential recruits are recommended to be cautious and conduct thorough research before investing.
Examples of Multilevel Marketing
Amway: Amway is one of the most well-known and longest established companies that uses a multi-level marketing structure. It was founded in 1959 and sells health, beauty, and home care products. Amway relies on independent businesses owners (IBOs) to sell their products directly to consumers. Those IBs also recruit and train others to start their own Amway businesses, earning a commission on their team’s sales profits.
Herbalife Nutrition: Herbalife Nutrition is a global nutrition company that started their journey in
It sells weight-management, nutritional supplement, and personal-care products. The Herbalife marketing plan is based on multi-level marketing in which an independent distributor can earn profit from retailing product and sponsoring new distributors and build their own downline organization.
Nu Skin Enterprises: Founded in 1984, Nu Skin Enterprises is a multi-level marketing company that manufactures and sells personal care products and dietary supplements. Each distributor is encouraged to build their own network of distributors, thus creating several levels of distribution and compensation. The distributorship proceeds to earn income from their own sales as well as the sales of those within their distribution chain.
FAQs on Multilevel Marketing
What is Multilevel Marketing?
Multilevel Marketing (MLM) is a business model that involves the selling of products or services directly to customers, primarily via word-of-mouth or direct sales. The earnings of the MLM company are derived from a non-salaried workforce selling the company’s products/services while the earnings of the participants are derived from a pyramid-shaped or binary compensation commission system.
How does Multilevel Marketing work?
Participants in a Multilevel Marketing network sell products or services for a company directly to the public. Those who do so are rewarded with a percentage of the revenue they generate. They can also earn money by recruiting additional salespeople, who in turn become part of their ‘downline’. Participants earn a piece of the revenue generated by their downline, which can potentially include multiple levels of recruited sellers.
Is Multilevel Marketing the same as a pyramid scheme?
While the two may appear similar due to their tier structure, there are key differences between Multilevel Marketing and pyramid schemes. An MLM is focused on selling products, and participants can potentially earn a legitimate income through their sales. A pyramid scheme, on the other hand, generally makes money off of the recruitment of others and may not involve a tangible product. Pyramid schemes are illegal, while MLM practices are legal in most countries.
What are some popular Multilevel Marketing companies?
Some popular and reputable companies that use the Multilevel Marketing model include Amway, Herbalife, and Mary Kay. These companies have a wide range of products that their participants sell, from beauty and personal care items to nutritional supplements.
Related Entrepreneurship Terms
- Network Marketing
- Direct Sales
- Commissions
- Upline and Downline
- Recruitment
Sources for More Information
- Federal Trade Commission: The FTC provides information about consumer protection and trade practices. They have a particular section devoted to understanding multi-level marketing plans.
- Investopedia: Known as a leading online source for finance and investing education, Investopedia’s Term of the Day category has a clear explanation of Multi-Level Marketing.
- Better Business Bureau: This site provides insights into whether businesses are trustworthy. It includes reviews and ratings, and has content regarding multi-level marketing firms.
- Entrepreneur: Entrepreneur magazine contains articles about various business practices including multi-level marketing. It also provides advice for both starting and managing businesses.
