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Multi level Marketing

Multi level Marketing

Does the image of a spammy pyramid scheme come to your mind when you hear the word "multi-level marketing"? It's easy to understand why. After all, the multi-level marketing model itself is derived from a pyramid structure. But believe it or not, multi-level marketing is not illegal. If you're curious about how multi-level marketing works and what benefits it brings, read along.

Multi-Level Marketing Definition

Many people associate multi-level marketing with an illegal practice, though it has been employed by multiple businesses worldwide.

Here's the complete definition of multi-level marketing.

Multi-level marketing (MLM) is a form of direct marketing or network marketing. It sells directly to consumers without going through a retail outlet.

Individual distributors are often engaged in the process. These people outside the company market the products and services to their network. Distributors receive a percentage of sales for every successful lead they drive. They also receive a commission for bringing in recruits (new distributors).

Overall, you can break the multi-level marketing model into three primary roles:

  1. Sponsors - people who recruit other people to become distributors for the business.

  2. Recruits - people who are recruited as distributors.

  3. Distributors - people who distribute (sell/promote) the company's products and services.

In many cases, an MLM participant earns their income from being both a "distributor" and "sponsor."

MLMs also come with a compensation plan. This plan describes the relationship between distributors and the business, how distributors get paid, and how to recruit other members.

That said, multi-level marketing is not seen in a positive light. It is often associated with illegal pyramid schemes that attract recruits with false promises of high income.

Explore another network marketing model in our explanation of Affiliate marketing.

Multi-Level Marketing Strategy

The best way to picture a multi-level marketing strategy is to think of a pyramid.

Imagine yourself as a sponsor on the top of the pyramid and hire another six friends to sell your products. These six friends will be your distributors, and hire six other friends to join your network. As it goes on, the pyramid's bottom gets wider. This means that your products have more distributors and exposure to the public.

The multi-level pyramid is where the name "MLM" comes from.

Now MLM also has two directions: upline and downline.

  • Upline refers to people at the top of the pyramid, for example, the sponsor. These are people who recruit other distributors to join the pipeline.

  • Downline is made up of people recruited by sponsors and higher-level distributors.

Distributors in a multi-level marketing network earn their commissions from two primary sources:

  • Direct sales to customers.

  • Recruiting other distributors.

MLM is often associated with a pyramid scheme. It's easy to understand why. The MLM model itself is derived from a pyramid structure. Though a significant distinction is that while the controversial MLMs are legal, a pyramid scheme is illegal.

How does the pyramid scheme work?

  • A pyramid scheme is an illegal form of MLM where people must pay to stay in the company. They invest in the business through membership and purchase monthly inventory to distribute to customers. The founders get fees from memberships and inventory sales.
  • A pyramid scheme is powered by new recruits (people who pay for inventory and members), not by the end customers. As a result, it focuses mainly on gaining new members than selling products or services.
  • Only founders and a few participants at the top of the pyramid gain significant money. So-called "associates" or "distributors" often lose more than they make when participating in the scheme.

A comparison table of MLM and pyramid schemes:

Multi-level MarketingPyramid Scheme
No payment for inventory upfrontPay for inventory upfront
Main commissions from sellingHigh commissions for recruiting
Companies buy back unsold goodsCompanies do not buy back unsold goods
Focuses on sales and marketingFocuses on recruiting rather than sales and marketing

Table 1. MLM vs. Pyramid schemes.

There is a 70 percent rule for MLMs. This means that at least 70% of all goods are purchased by non-distributors.1

Another big question when talking about MLM: Is it possible to make money in the long run?

MLM Pyramid scheme diagram StudySmarterFig. 1 - Pyramid scheme diagram

As you can see from this illustration, the multi-level marketing model is not sustainable.

  • At level 1, one person recruits six members, so the number of participants is 61 = 6.

  • At level 2, six former participants recruit six other members each, so the number of participants is 62 = 36.

  • At level 3, 36 participants recruit six other members each, so the number of participants is 63 = 216.

  • ...

  • And so on until we reach level 13. The number of participants is 613 = 13,060,694,016. This is way more distributors than our world's total population! In other words, long-term MLM is not possible.2

The more popular an MLM is, the harder it is for everyone to make a profit; sometimes, it is impossible.

Multi-Level Marketing Examples

Multi-level receives a lot of bad rap, but that doesn't mean it's not popular. In fact, several successful multi-level marketing networks have lasted for decades.

Avon

Avon is the number one direct-selling beauty company in the world, with over 6 million sales representatives in more than 50 countries. Every minute, 20 products are sold, and the brand claims itself as the #1 word-of-mouth beauty brand.3

Amway

Another long-standing network marketing company (since 1959) is Amway. The brand operates in the nutrition sector and has over 3 million sales representatives worldwide. In 2021, it announced sales of nearly $9 billion. As Amway CEO puts it: "Amway is powered by people, an incredibly diverse group bound together by our common desire to help people live better, healthier lives." 4

Tupperware

Our final example is Tupperware - a well-known plastic food container brand (since 1946). The company offers a generous compensation plan (25% commission) for partners to sell a wide range of kitchen products, including tools, cookware, and food storage. To participate, a sales partner needs to pay a $60 one-off membership and reach $600 sales quote per 6 months. According to a report, most Tupperware partners can't reach this quota and lose their money within a year. So even though Tupperware is legit, participants are rarely active in the long run.5

Types of Multi-Level Marketing

There are three types of multi-level marketing based on the source of income:

  • Income from products,

  • Income from services,

  • Income from membership.

In product and service MLM, companies partner with individual distributors to sell their products/services without going through a retail store. Distributors are often referred to as associates, representatives, or affiliates. They can market the products/services to customers through advertising, digital marketing, door-to-door, etc. Distributors receive a commission for every sale they make. In some cases, they are rewarded for getting new distributors onboard.

There is a slight difference between Product MLM and Service MLM.

Product MLM businesses manufacture products themselves, then distribute them to associates for resale. The associates (distributors) can keep the inventory or have the producer ship the product to customers once the order is made. Distributors earn a commission per product sold.

Service MLM businesses require no inventory. The associates market the service the same way as products, though they'll get compensated for service subscriptions. For example, customers sign up for financial services or education programs.

Membership MLM businesses - this is an illegal pyramid scheme. It focuses on recruiting new people rather than sales and marketing. Recruiters get paid substantial funds for getting new members onboard. The membership fee is the main source of income in this channel. Only a few people benefit from the scheme at the top of the pyramid.6

Multi-Level Marketing Advantages and Disadvantages

Before wrapping up this explanation, let's consider multi-level marketing advantages and disadvantages.

Advantages of multi-level marketing

Overall, participants in multi-level marketing can benefit from the following:

  • Low start-up cost - MLM distributors don't have to produce the product. They can acquire products directly from manufacturers and distribute them through traditional or digital marketing methods. This removes production costs, and the distributor can focus entirely on marketing and sales.

  • Flexibility - MLM partners can work anywhere, anytime. It is different from an office job. People can keep inventory at home and start selling at their own pace.

  • Cost-effectiveness - Multi-level marketing benefits companies as well. They don't have to pay a fixed salary for participants but only share a profit when a sale is made. Multi-level marketing allows companies to get the product distributed quickly with little internal marketing effort.

Disadvantages of multi-level marketing

That being said, multi-level marketing has numerous disadvantages:

  • Ponzi scheme: There is a very thin line between multi-level marketing and a Ponzi scheme (pyramid scheme). As the focus shifts from selling products to acquiring new "recruiters," the business model will turn into a pyramid scheme. Pyramid schemes are scammy and illegal. They cause people to lose their money.

  • No professional training - Distributors are not a company's internal sales force, so they don't get trained like internal staff and must manage the whole selling process on their own. MLM is not a good fit for people who lack sales experience or communication skills.
  • Low income - It's challenging to get new buyers, especially in the beginning stage, where you have low creditability. MLM is not a stable job, and there is no fixed salary.

  • Negative reputation - MLM is not well perceived among the public. People tend to stay away from MLM for fear of getting ripped off.

Untitled note - Key takeaways

  • Multi-level marketing (MLM) is a form of direct marketing. It sells directly to consumers without going through a retail outlet.
  • Three parties are involved in the MLM process: sponsors, distributors, and recruits.

  • Multi-level marketing earns commission from direct sales and recruiting new members.

  • Though their legality, MLMs are often associated with illegal pyramid schemes that attract recruits with false promises of high income.

  • There is a thin line between MLM and pyramid schemes.

  • MLMs do not provide a stable income source.


References

  1. E. Napoletano & Benjamin Curry. Understanding Multi-Level Marketing. 2022. https://www.forbes.com/advisor/investing/multi-level-marketing-mlm.
  2. Wikipedia. Pyramid scheme. https://en.wikipedia.org/wiki/Pyramid_scheme.
  3. Avon. Fact Sheet. 2021. https://www.avonworldwide.com/dam/jcr:91cfc608-8987-4dae-b4f2-e18ada02f2bf/avon-corporate-factsheet.pdf.
  4. Amway Global. Amway Announces 2021 Sales of $8.9 Billion USD. 2022. https://www.amwayglobal.com/newsroom/amway-announces-2021-sales-of-8-9-billion-usd.
  5. Make Time Online. Tupperware MLM Review: Pyramid Scheme or Legit Money Opportunity?.2022. https://maketimeonline.com/tupperware-mlm-review.
  6. Dale Marshall. Smart Capital Mind. What are the Different Types of MLM Businesses? 2022. https://www.smartcapitalmind.com/what-are-the-different-types-of-mlm-businesses.htm.

Frequently Asked Questions about Multi level Marketing

Multi-level marketing is also known as a form of network marketing since it uses a network of distributors to distribute a product or service. 

MLM is not the same as a pyramid scheme. A pyramid scheme is scammy and illegal. It collects income from membership fees and inventory purchases by distributors (members of the scheme) rather than selling to end customers. Pyramid schemes are illegal, whilst the controversial MLMs are legal.

MLM rests under the big umbrella of network marketing. Network marketing also includes other marketing models like affiliate marketing. 

An example is Tupperware - a well-known plastic food container brand (since 1946). The company offers a generous compensation plan (25% commission) for partners to sell a wide range of kitchen products, including tools, cookware, and food storage. To participate, a sales partner needs to pay a $60 one-off membership and reach $600 sales quote per 6 months. 

Social selling is not the same as MLM. Social selling means using social channels to engage with customers whereas MLM distributors can utilize any marketing methods (both offline and online) to attract buyers. 

Final Multi level Marketing Quiz

Question

Multi-level marketing (MLM) is a form of ______________. 

Show answer

Answer

direct marketing

Show question

Question

The three main roles in MLM are: 

  • Sponsor
  • _______
  • _______

Show answer

Answer

Distributor, Recruit

Show question

Question

People who recruit other people to become distributors in an MLM network are called __________. 

Show answer

Answer

sponsors

Show question

Question

Distributors often receive a commission as a ____________. 

Show answer

Answer

percentage of sales

Show question

Question

Multi-level marketing is the same as a pyramid scheme. 

Show answer

Answer

True

Show question

Question

A pyramid scheme focuses on __________ .

Show answer

Answer

recruiting new members

Show question

Question

The difference between MLM and a pyramid scheme is that __________.

Show answer

Answer

MLM is legal, while a pyramid scheme is illegal. 

Show question

Question

What is an upline in the multi-level marketing pyramid model?

Show answer

Answer

the direction from bottom to top levels of the pyramid in MLM

Show question

Question

In a multi-level marketing business model, members have to pay for inventory upfront. 

Show answer

Answer

True

Show question

Question

What is the 70% rule in MLM?

Show answer

Answer

At least 70% of customers are non-distributors. 

Show question

Question

The multi-level marketing model is sustainable in the long run. 

Show answer

Answer

True

Show question

Question

What are the three types of MLM?

Show answer

Answer

There are three types of multi-level marketing based on the source of income: 


  • Income from products

  • Income from services

  • Income from membership 

Show question

Question

What is not a benefit of multi-level marketing?

Show answer

Answer

Low start-up cost 

Show question

Question

MLM is not well perceived among the public.

Show answer

Answer

True

Show question

Question

Name three examples of MLM businesses you know.

Show answer

Answer

Tupperware

Amway

Avon

Show question

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