Multi-level marketing

Multi-level marketing (MLM) (also called network marketing or NM) is a business model that combines direct marketing with franchising.

Overview

In a typical multi-level marketing or network marketing arrangement, individuals associate with a parent company as an independent contractor and are compensated based on their sales of products or service, as well as the sales achieved by those they bring into the business.

In a legitimate MLM company, commissions are earned only on sales of the company's products or services. No money may be earned from recruiting alone ("sign-up fees"). One must analyze the compensation plan to determine whether participants are paid from actual sales to customers and not from money received from new recruits. If participants are paid from money received from new recruits, then the company is an illegal pyramid or Ponzi scheme.

Some less legitimate companies produce revenues primarily by attracting new participants with the hope of reward and selling them a product(s) or service(s) of dubious value at inflated prices, as opposed to selling product(s) or service(s) consumers would purchase at the given price without regard to the opportunity attached. One must evaluate the product(s) or service(s) and determine if a significant percentage of consumers would continue purchase said product(s) or service(s) if they do not make money from the underlying opportunity. If the product(s) or service(s) have dubious value or if the participants must purchase excessive quantities of the product(s) or service(s) without reasonable intent to use or resell said items, then the company is likely a thinly veiled illegal pyramid or Ponzi scheme.

Multi-level marketing has a recognized image problem due to the fact that it is often difficult to distinguish legitimate MLMs from illegal scams such as pyramid or Ponzi schemes. MLM businesses do operate legitimately in all 50 U.S. states and more than 100 other countries, and new businesses may use terms like "affiliate marketing" or "home-based business franchising". However, many pyramid schemes try to present themselves as legitimate MLM businesses.

History

The 1980s saw a major shift as companies began managing the stocking and distribution of products as well as commission payments to their members. This allowed members to focus on selling. Today, most MLM companies act as logistics companies that take orders, ship products and calculate and pay commissions.

With the arrival of the Internet, MLM companies have started to go online. Many established MLM companies began to use the Internet to promote their products. At the same time, many other new MLM companies started their businesses using the Internet, which is generally called online MLM.

Compensation plans

Companies have devised various MLM compensation plans over the decades.

• Unilevel or Stairstep Breakaway plans are the oldest and most popular. They feature 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 the same as any other 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 are commissions for managers who exceed a sales quota. For example, 2% of the total company sales revenue may go to a bonus pool that is shared monthly pro rata to managers who exceed $10,000 in that month.
• Matrix Plans limit the width of each level in a distributor's group, forcing strong distributors to pile ("spillover") their recruits over people who did not sponsor them.
• Binary plans limit 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.
• Elevator or Matrix schemes feature a game board or a list on which each distributor pays 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. The Matrix scheme article discusses the legality of this plan. You must do your own research as with any other investment.

Criticism of MLM

Amway in particular is a frequent target for critics for generating considerable revenues from selling instructional and motivational materials to its participants. The FTC issued a decision, In re. Amway Corp. in 1976, which indicated that multi-level marketing was not illegal.

Fraudulent MLM schemes can usually be identified by high entrance fees or requirements to purchase expensive inventories. They often collapse quickly when the merchandise cannot be resold, leaving all but those at the top of the pyramid with financial losses.

The Federal Trade Commission advises that multi-level marketing organizations with greater incentives for recruitment than product sales are to be viewed skeptically. In April 2006, it proposed a Business Opportunity Rule intended to require all sellers of business opportunities—including MLMs—to provide enough information to enable prospective buyers to make an informed decision about their probability of earning money. FTC trade regulation rules usually take 1-1/2 to 3 years before a final rule is established.

External links

• Federal Trade Commission article
• FTC Proposed New Business Opportunity Rule