Multi-level marketing (MLM), otherwise known as network or referral marketing, is a strategy in which businesses sell their products through person-to-person sales. When consumers join MLM programs, they act as distributors. Distributors make money by selling the product directly to other consumers. They earn a small percentage of sales from those that they recruit to do the same – often referred to as their “downline.”
The difference between multi-level marketing and pyramid schemes
Many equate multi-level marketing with sometimes fraudulent and often illegal pyramid schemes.
However, individuals who invest in MLM can make money through sales alone without the need to recruit others.
Multi-level marketing also incorporates high-quality products that serve a purpose – the classic examples being Avon and Tupperware.
Pyramid schemes, on the other hand, rely on income being derived by recruiting as many people as possible.
The quality of the product is also low, overpriced, or simply doesn’t work.
Furthermore, pyramid schemes do not offer the possibility of inventory buy-backs and are not backed by research into consumer demand.
Whatever the marketing strategy, it is important to understand that the presence of a pyramid selling structure does not automatically make it illegal.
The reality is that MLM businesses are the same as any other; their success or failure is dependent upon finding, attracting, and then selling to a target market.
Examples of successful multi-level marketing businesses
Home, health, and beauty company Amway is the largest MLM company in the world, with close to $9 billion in annual revenue.
A landmark ruling in 1979 confirmed that Amway was a legitimate business and not a pyramid scheme.
The aforementioned Tupperware is perhaps the most well-known example of a successful MLM company.
With annual revenue of $2.26 billion and almost 3 million distributors, their line of durable kitchen products are synonymous with food storage and are much sought after.
Companies such as Digital Altitude and Tecademics are also using multi-level marketing.
They sell business systems to entrepreneurs that teach them how to market their own companies while also receiving income from referrals.
Advantages and disadvantages of multi-level marketing
Multi-level marketing is well placed to take advantage of the surge in popularity of freelancing and the gig economy.
If businesses do their product research properly, then MLM can also leverage word-of-mouth advertising and increase recruitment levels.
Multi-level marketing also gives each distributor the flexibility and empowerment of growing their own “business” as they recruit more and more people in their downline.
Because of the association with pyramid schemes, businesses that employ multi-level marketing strategies should expect closer scrutiny from regulatory bodies.
The stigma that still surrounds multi-level marketing amongst consumers also means that businesses might find it difficult to sell their products.
Resistance might also be met when businesses ask their distributors to buy large amounts of a product without the guarantee that it will be sold.
Furthermore, the freelance nature of MLM means few entitlements such as insurance or paid vacations.
These factors mean that, to some extent, MLM businesses are at the mercy of their distributors to make a profit.
- Multi-level marketing involves an individual consumer deriving an income from selling a company’s products. The consumer also derives a percentage of the sales income from consumers who they manage to recruit in their downline.
- Multi-level marketing is not a pyramid scheme if it features high-quality products and doesn’t rely on recruiting others to make money.
- Multi-level marketing gives consumers the freedom and autonomy of running their own business, but it comes with attached stigmas and extra scrutiny.
Is MLM a pyramid scheme?
Multi-level marketing is a form that follows a pyramidal structure, where people at the top bring in more affiliates, which might also affiliate others.
Multi-level marketing can effectively outsource a salesforce, one of the most expensive cost centers for most companies.
However, when the multi-level scheme’s main aim is to bring more affiliates in, you get illegal schemes rather than enable the underlying product to find more distribution.
In short, the main distinction between legal and illegal multi-level marketing is whether there is a foundational product that gets sold or if the scheme becomes the main product.
In the latter case, changes are the multi-level marketing scheme might be illegal.
What is an example of multi-level marketing?
Take the case of a software company that invites other affiliates to sell its software and gain a percentage of the sales as a result.
These affiliates are incentivized to build their affiliates’ teams which can distribute the product in a much broader market. One example is Herbalife.
For a multi-level marketing scheme to work and be legal, it needs to emphasize creating an affiliates’ team to sell the underlying product to potential customers.
When affiliates are prompted to be the primary customers purchasing the underlying product, multi-level marketing can turn awry and into illegal schemes.
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