Multilevel Marketing

Updated on April 30, 2024
Article bySusmita Pathak
Reviewed byDheeraj Vaidya, CFA, FRM

Multilevel Marketing Meaning

Multilevel marketing (MLM) is a form of the business strategy employed by direct sales companies to generate sales revenue. It involves a network of distributors earning by selling company products and services directly to consumers, either in-person or online. These direct salespeople recruit other participants and earn commission from the sales they make.

Companies adopt this distribution model to promote their offerings and build a large consumer base while maintaining minimal sales costs. It is usually a referral sale based on word-of-mouth advertising or personal relationship. For those who join such a scheme, it serves as a simple means of earning money. Although considered legitimate, MLM is illegal in some jurisdictions for having a pyramid-style commission structure.

Key Takeaways

  • Multilevel marketing (MLM) is a product distribution model in which distributors profit from direct sales of products and services to customers and commissions from sales made by their downline recruits.
  • Businesses adopt this marketing approach to market their products and grow a broad consumer base while keeping sales costs low. It also enables a majority of the population to earn money.
  • Some MLM programs resemble pyramid schemes and hence are considered illegal or under investigation in many countries. Instead of asking distributors and their downline members to make deposits, a legitimate MLM company rewards them based on the sales they make to retail customers.
  • The top five MLM companies include Amway, Market America, Avon, Herbalife, and Nu Skin.

How Does Multilevel Marketing Work?

A multilevel marketing business model is typically a part of a direct sales business strategy. Using this approach, a company establishes a network of distributors, who earn commissions by selling products and services directly to consumers. In addition, it lets them recruit new members to their networks, which makes up the “downline.”

Multilevel Marketing Meaning

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A share of the profit from each sale made by downline distributors goes to the frontline distributor. Thus, each distributor in the chain gets a chance to earn in two different ways. However, using a non-salaried or commission-based workforce to earn money makes MLM contentious.

Besides distributors, individuals joining the program can work as participants, contractors, direct sales representatives, or independent business owners. These people execute sales either in person or online. Since they build a network for conducting sales on behalf of the brand by adding more and more people, it is also known as network marketing. All members continue to receive commissions as long as the network keeps growing.

Anyone can become a part of an MLM scheme by signing a contract, purchasing goods, and commencing sales. Many companies offer enticing incentives, such as holiday packages and performance-based cash rewards, to distributors for promoting sales and bringing others into the business.

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Quick Case Study

Let us take the case of Mark, who has developed a nutritional supplement that he wants to distribute to a large population. So, he decides to have five people working for him at the initial stage.

These five distributors recruit five more people each for better product distribution. As a result, the number of distributors increases from five to 30. Those five distributors, therefore, not only profit from selling the product directly to consumers but also earn through the commission on salesCommission On SalesSales commission is a monetary reward awarded by companies to the sales reps who have managed to achieve their sales target. It is an incentive geared towards producing more sales and rewarding the performers while simultaneously recognizing their efforts. A sales commission agreement is signed to agree on the terms and conditions set for eligibility to earn a commission.read more generated by their downline teams.

Multilevel marketing, also known as referral marketing or pyramid selling, has remained a controversial sales strategy. Even though many MLM programs are legal and allow a majority of the population to make money, some exhibit characteristics similar to a pyramid schemePyramid SchemePyramid Scheme is an investment scheme in which participants profit by recruiting other members under them, and each participant is required to recruit new participants, with each new entrant having to pay the entrance fees for entering the scheme, creating a hierarchy of people.read more. Hence, it is considered illegal or is a matter of investigation in many countries.

Multilevel Marketing Scheme

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It is also because people at the top of the network make significantly more money than those at the bottom. According to the U.S. Federal Trade Commission (FTC), some MLM companies encourage the pyramid scheme and exploit members who show faith in them.

Even if a company appears to have an MLM structure, it can be hard to trust and discern it from a pyramid scheme. Here are a few red flags that should make one question the legitimacy of a company:

  • The promoter makes overstated claims of guaranteed income.
  • Contractors ask members to recruit more participants to increase their earnings.
  • Distributors purchase more products than their selling capacity to ensure they earn more bonuses and rewards.
  • Promoters ask individuals to pay for joining and training procedures.

If a company shows the signs mentioned above, it cannot be a multilevel or referral marketing business. Therefore, interested individuals must explore the brand and check its background before working as a distributor. A legitimate MLM should:

  • Offer quality products and services
  • Focus on earning income from sales
  • Emphasize more on sales than recruitment

Multilevel Marketing vs Pyramid Scheme

In a pyramid scheme, the promoter makes exaggerated claims about earning money as a distributor. They often invite people to make deposits to start with and use that fund to pay those at the top of the scheme. In addition, the distributor encourages new participants to recruit more people to earn an incentive. It is where the greed factor comes in. Distributors start recruiting new members, most of them being their relatives and friends, to make more money in a short period.

Thus, a pyramid scheme places a greater emphasis on recruiting than selling products. In fact, contrary to popular belief, the company neither sells genuine products or services nor owns any investment projects. Also, the operator earns a lot of money while participants receive less amount despite recruiting more participants. Gradually, not only recruits but also existing distributors begin to feel tricked and trapped.

Multilevel Marketing vs Pyramid Scheme

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The primary purpose of a multilevel marketing scheme is to sell products and services to customers. A legitimate MLM program pays distributors and their downline participants based on the sales made to retail consumers. In addition, distributors would never ask recruits to bring in more contractors.

In other words, a genuine multilevel marketer sells its items directly to customers. It is, however, an illegal pyramid scheme if it sells its products to its members and then asks them to recruit new participants to buy those products.

Examples Of Multilevel Marketing Companies

While several multilevel or network marketing businesses are operating worldwide, here are the top five companies that are worth mentioning:

#1 – Amway

Accounting to the annual turnoverAnnual TurnoverAnnual turnover is the yearly sales or yearly receipts of a profession. In finance, the annual turnover is commonly referred to by mutual funds and exchange-traded funds (ETF), measuring its annual investment holdings that determine the health and activity levels of the fund.read more of approximately $11 billion in 2019 alone, Amway tops the list of MLM companies. Established in 1959, the brand sells cosmetics, food and beverage, health and wellness, and home care products. Since then, it has enabled more than 3 million people in over 100 countries to work as direct sellers and earn money.

#2 – Market America

Founded in 1992, the brand has established a strong market presence, as seen by its $7.3 billion in yearly revenueRevenueRevenue is the amount of money that a business can earn in its normal course of business by selling its goods and services. In the case of the federal government, it refers to the total amount of income generated from taxes, which remains unfiltered from any deductions.read more in 2018. It offers a wide range of products through its unique “product brokerage” services. The company helps customers grab lucrative deals on basic and advanced items, from nutritional products to Internet packages.

#3 – Avon Products, Inc.

Avon is known for its high-quality beauty products, fashion accessories, and jewelry all over the world. That is why it is third on the list of the top MLM companies. Since its beginning in 1986, the brand has become a beacon of hope for more than 6.5 million people to earn money as direct salespeople. It recorded annual sales of $11.3 billion in 2019.

#4 – Herbalife Nutrition Ltd.

The fourth on the list is the controversial Herbalife Nutrition, which generated approximately $5 billion in annual revenues in 2018. Founded in 1980, the network marketing company has over 2.7 million direct sales associates. The brand offers cosmetics and products of personal care, weight loss, and nutrition.

#5 – Nu Skin

Established in 1984, Nu Skin Enterprises specializes in developing and selling personal care products and dietary supplements. It has over 1.2 million independent distributors working in 50 plus countries. In 2018, its Nu Skin and Pharmanex brands generated revenue worth approximately $4.7 billion, making it the fifth-largest network marketing company globally.

Multilevel Marketing Scams

Multilevel or referral marketing is a legitimate business approach, but its similarity with the pyramid scheme leads to skepticism. Additionally, multiple cases justify questioning the multilevel marketing business model.

For example, in a lawsuit filed against Herbalife Nutrition, the company was accused of running a fraudulent MLM scheme. However, a lack of evidence in a probe conducted by the Federal Bureau of Investigation led to the lawsuit settlement in July 2016. It ordered the network marketer to pay $200 million in damages to its members.

In January 2017, FTC sent refund checks to 350,000 people who lost their money working as Herbalife distributors. The trade commission also asked the company to restructureRestructureRestructuring is defined as actions an organization takes when facing difficulties due to wrong management decisions or changes in demographic conditions. Therefore, tries to align its business with the current profitable trend by a) restructuring its finances by debt issuance/closures, issuance of new equities, selling assets, or b) organizational restructuring, which includes shifting locations, layoffs, etc.read more its business.

Frequently Asked Questions (FAQs)

What is MLM system?

Multilevel marketing or MLM is a product distribution strategy where a network of distributors earns by selling products and services directly to consumers. In addition, they also have the liberty to have some downline recruits under them and receive a commission on their sales.

Is multilevel marketing a pyramid scheme?

Not every MLM program is a pyramid scheme. However, if any of the following red flags appear, it could be a sign of an illegitimate network marketing structure:

• The promoter makes overstated claims about assured earnings.
• Contractors encourage members to recruit additional people to boost their earnings.
• Distributors buy more products than they can sell to ensure they earn more bonuses and rewards.
• Promoters charge individuals for joining and training procedures.

Is multilevel marketing a legitimate business?

MLM is considered a legitimate business strategy that allows a majority of the population to make money. It pays distributors and their recruits based on the sales made to retail customers. In addition, promoters or contractors would never ask their recruits to have another downline participant.

This has been a guide to What is Multilevel Marketing and its definition. Here we discuss how Multilevel marketing works along with examples, scams, and its differences from pyramid schemes. You may also have a look at the following articles to learn more –

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