What Is Multilevel Marketing (MLM)?
The term 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 on new recruits into the business. Distributors
are paid a percentage of their recruits' sales. New recruits become the
distributor's network or downline and are, in turn, encouraged to make sales to
earn money.
Many MLM schemes are legal,
but there are also illegal operations that are run as pyramid schemes. This has
cast some negative light on legitimate MLM businesses.
Understanding
Multilevel Marketing (MLM)
Multilevel marketing is a legitimate business strategy that is
commonly used by businesses that rely (heavily) on sales to generate revenue.
Unlike traditional sales channels, multilevel marketing programs involve the
use of networks for sales and to recruit new participants. As such, they're
often referred to as network marketing.
Participants
are also encouraged to bring in or recruit others into the program as
participants. While they may not be pressured to do so, signing up new
contractors provides a financial incentive for participants, who receive a
percentage of the sales of their recruits. and their recruits, and of their
recruits, and so on.1
There can be hundreds—even thousands—of participants, depending on
the size of a company. Members at all levels receive some form of commission,
as long as the chain keeps going. 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 who sit toward the bottom earn fewer commission dollars.
Relatively few, though, generally earn any meaningful income from their efforts.2
Is MLM Right
For You?
Because
multilevel marketing plans are commission-based, the participants do not
receive salaries. That means that MLM businesses are often best-suited for
people with an entrepreneurial spirit, who can set their own goals and
schedules, who are good at sales, and who can effectively network with others
not only to sell products but to recruit new marketers.
Special
Considerations
Although it
is legal, multilevel marketing is often controversial. One problem is pyramid
schemes that use money from new recruits to pay people at the top rather than
those who perform the work. These schemes (and the people behind them) take
advantage of others by pretending to be engaged in legitimate multilevel or
network marketing. You can spot pyramid schemes by their greater focus on
recruitment than on product sales.1
An issue
in determining the legitimacy of a multilevel 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 is the former, the company is likely a
legitimate multilevel marketer. If it is the latter, it could be an
illegal pyramid scheme.2
Relatively
few earn meaningful incomes from their efforts. To some observers, this
reflects the characteristics of a pyramid scheme. That's why the Federal Trade
Commission (FTC) has been investigating multilevel marketing companies for
several decades.
Real-World Examples of Multilevel
Marketing
There are a lot of examples of multilevel marketing in the
corporate world. The following are just two of the most popular and well-known
companies that operate in this sphere.
Amway
Amway is a well-known direct sales company that uses MLM to
generate revenue. The company, which sells health, beauty, and home care
products in more than 100 countries, reported $8.9 billion in sales conducted
by its independent business owners in 2021.3 This makes it the largest MLM
business in the world, by revenue.4
Herbalife Nutrition
Herbalife Nutrition is a high-profile MLM company that
manufactures and distributes weight-loss and nutritional products. The company
argues that most of its revenue is from
product sales—not recruitment. It also says it offers members many
protections, such as a money-back guarantee, so they will not be stuck with
products they could not sell.
There have been multiple lawsuits against Herbalife accusing
it of misrepresenting its sales practices, including a settlement reached with
the FTC in 2016, under which it had to restructure its business.5
Activist investor William Ackman also shed a national
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
scam. He gave up on that bet in 2018.6 The stock rose dramatically from that
point through 2021, however it has since fallen to recent lows in 2022.
What Is MLM, and Is it Legal?
Broadly speaking, multilevel marketing is a sales structure where
members of a company are encouraged to recruit new members. Once recruited,
this salesperson receives a cut of their recruiter's sales. At the same time,
each salesperson profits from the sale of a given product. MLMs are often
legal, legitimate businesses whose distributors earn money from the sale of
actual products and from commissions on products sold by distributors that they
recruit.
Is Multilevel Marketing a Pyramid
Scheme?
Multilevel marketing is controversial and often compared to
pyramid schemes. While some multilevel marketing operations are legal, others
have come under investigation. This typically occurs when the majority of the
operation’s profits funnel up to the top, leaving little for the rest of its
members.
When an organization focuses primarily on recruitment, rather than
selling products, this may also signal that it is operating under a pyramid
scheme. Sometimes, members of these schemes will number in the hundreds or even
thousands.
What Are Some Red Flags to Look Out
for an Illegal MLM Pyramid Scheme?
The Federal Trade Commission (FTC) warns people to take note of,
and avoid, MLM promoters who:7
Make extraordinary
claims of enormous earning potential
Try to persuade people
that recruiting others is where the real money lies
Pressure people to get
involved without learning more about the company
Make it clear that an
opportunity will be lost unless people get in immediately
Another warning sign is seeing existing distributors who continue
to buy products that they can never sell so that they can qualify for some kind
of reward.
What Is an Example of Multilevel
Marketing?
Avon is an example of multilevel marketing. The company operates
under a model where sales are driven through a network of salespeople, through
presentations, or one-on-one settings in homes or businesses. Like a number of
other multilevel marketing businesses, Avon typically does not operate a fixed
retail location. The parent company, instead, provides the tools and resources to
entrepreneurs to conduct their business at various locations. This type of
business model is also referred to as a direct sales model.
Other examples of MLM businesses include Tupperware, Rodan +
Fields, Natura & Co., Vorwerk, Nu Skin, and PM International, among many
others.4
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