Multi-level marketing

Multi-level marketing (MLM) (also called network marketing (NM)) is a business model which utilizes a combination of direct marketing and franchising. Typically, individuals become associated with a parent company in an independent contractor relationship. Sellers are compensated based on their sales of a product or service, as well as the sales of those they bring into the business.

Multi-level marketing has a recognized image problem because of difficulties in making a clear distinction between legitimate network marketing and illegal "pyramid schemes" or Ponzi schemes. Nonetheless, many NM/MLM businesses operate legitimately in all fifty U.S. states and more than 100 foreign countries. Because of this image problem many new NM/MLM businesses do not use the words "Multi-level Marketing" or "Network Marketing" and instead use terms like "Affiliate Marketing", "Home-based Business Franchising" etc. See List of network marketing companies for more information.

In a legitimate MLM company, commissions are only earned on the sale of products or services to the end consumer who, in many cases, is also a distributor. No money may be earned on a "sign up fee" or for recruiting alone. Critics contend that some companies produce revenue primarily by attracting new participants, as opposed to selling products. Analysis of the compensation plan is often required to determine whether participants are paid based on actual sales of products to customers versus new recruit bonuses and sales of business support materials.

Distributors of Amway (the world's leading company in network marketing, with annual revenue exceeding USD $1 billion) in particular often receive criticism for generating considerable revenue from selling instructional and motivational materials to its participants. The FTC filed suit against Amway in 1976 (FTC vs. Amway) but lost the case, paving the way for many companies to adopt a multi-level distribution system.

A major shift in MLM occurred during the 1980s when companies began allowing their members to focus solely on marketing rather than handling the tasks of stocking/distributing products as well as taking care of commission payments to their sales organizations. Today, most MLM companies act as fulfillment companies by taking orders, shipping products, calculating and paying commissions, etc.

Often, victims of fraudulent or illegal MLM schemes are required to purchase expensive inventories of products. These schemes are often quick to collapse, when the merchandise cannot be resold, leaving all but those at the top of the pyramid with sometimes staggering financial losses.

Companies

See main article: List of network marketing companies

Compensation plans

Over the course of decades, companies have devised various MLM compensation plans:

• Stairstep Breakaway plan or Unilevel Plan. The oldest and most popular plan features two types of distributors: managers and non-managers and three types of pay:
  • Baseshop overrides are overrides of managers from their subordinate non-managers, collectively called a baseshop. This is no different from any sales organisation.
  • Generational overrides are overrides of managers from the baseshop of managers who were previously their subordinate. Most plans compensate at least three generations of such managers.
  • Executive bonuses. Additional commission to managers who exceed a sales quota. For example, 2% of the total company sales revenue goes to a bonus pool which is shared monthly pro-rata to managers who exceed $10,000 in that month.

• Matrix Plan. This plan limits the width of each level in a distributor's group, hereby forcing strong distributors to pile ("spillover") their recruits over people who did not sponsor them.
• Binary plan. This plan limits the width of each level to two legs. Commissions are based on "cycles" where a distributor is paid a fixed amount whenever both legs achieve a certain number of sales units each. Commissions are paid incrementally when the sales volume in each leg matches.
• Matrix scheme or Elevator scheme. This plan features a game board or a list where each distributor would pay in one or more product units to participate. When a certain number of units have been paid in, the structure splits and the earlier participant receives consideration. See the main article regarding the legality of this plan.