Multi-level marketing

Multi-level marketing (MLM, now sometimes called network marketing) is a business model that combines direct marketing with franchising.

Multi-level marketing businesses function by enrolling unsalaried salespeople (also called by MLM companies as Distributors, Independent Business Owners, Franchise Owners, Sales Consultants, Consultants, Independant Agents, etc...) to sell products and meanwhile earn additional sales commissions based on the sales of people enrolled into their downline, an organization of people that includes direct recruits, recruits' recruits and so on. This arrangement is similar to franchise arrangements where royalties are paid from the sales of individual franchise operations to the franchisor as well as to an area or region manager. There can be multiple levels of people receiving royalties from one person's sales.

Legitimacy

Multi-level marketing has an image problem due to the fact that it is often difficult to distinguish MLMs from illegal pyramid or Ponzi schemes. MLM businesses operate in the United States in all 50 states and in 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.

In the most legitimate MLM companies, commissions are earned only on sales of the company's products or services. No money may be earned from recruiting alone ("sign-up fees"), though money earned from the sales of members recruited is one attraction of MLM arrangements. If participants are paid primarily from money received from new recruits, or if they are required to buy more product than they are likely to sell, then the company is a pyramid or Ponzi scheme, which is illegal in most countries.

New salespeople may be required to pay for their own training and marketing materials, or to buy a significant amount of inventory. A commonly adopted test of legality is that MLMs follow the so-called 70% rule which prevents members "inventory loading" in order to qualify for additional bonuses. The 70% rule requires participants to sell 70% of previously purchased inventory before procuring new orders. There are however variations in interpretations of this rule. Some attorneys insist that 70% of purchased inventory should be sold to people who are not participants in the business, while many MLM companies allow for self-consumption to be a significant part of the sales of a participant . The Federal Trade Commission offers advice for potential MLM members to help them identify those which are likely to be pyramid schemes.

Compensation plans

Companies have devised a variety of 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 (commissions) paid to managers by their subordinate non-managers, collectively called a baseshop. This is the same as any other sales organization.
  • 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 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.

Criticism of MLM

The Federal Trade Commission (FTC) issued a decision, In re. Amway Corp. in 1979, which indicated that multi-level marketing was not illegal per se. However, Amway was found guilty of price fixing (by requiring "independent" distributors to sell at the low price) and making exaggerated income claims.

The FTC 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.

Criticisms have been raised against MLM programs for being cult-like in nature. Many MLM programs feature intense motivational programs, which can be hard to distinguish from cult propaganda. Criticism of Amway as a cult have been regarded as largely baseless, though some of the "Independent Business Organizations" within Amway have been accused of operating as cults.

Another criticism is that MLM programs are set up to make most distributors fail, as there is a continued incentive to continue to recruit distributors even as the products have reached market saturation, thus causing the average earnings per distributor to continue to fall.

See also

• List of multi-level marketing companies
• Believe (film)

External links

• Federal Trade Commission article
• FTC Proposed New Business Opportunity Rule
• Ten Big Lies of Multilevel Marketing
• Skeptic's Dictionary: multi-level marketing
• MLM FAQ