Jump to content

Multi-level marketing

From Wikipedia, the free encyclopedia

This is an old revision of this page, as edited by 71.224.206.164 (talk) at 05:34, 25 February 2010 (added controversy paragraph in intro). The present address (URL) is a permanent link to this revision, which may differ significantly from the current revision.

Marketing
Key concepts
Promotional content
Promotional media
Research

Multi-level marketing (MLM), (also called network marketing[1][2][3][4][5], direct selling[6][3], referral marketing[7], and pyramid selling[8][9][10][11][12]) is a term that describes a marketing structure used by some companies as part of their overall marketing strategy. The structure is designed to create a marketing and sales force by compensating promoters of company products not only for sales they personally generate, but also for the sales of other promoters they introduce to the company, creating a downline of distributors and a hierarchy of multiple levels of compensation in the form of a pyramid.

The products and company are usually marketed directly to consumers and potential business partners by means of relationship referrals and word of mouth marketing.[13]

MLM companies have been a frequent subject of controversy as well as the target of lawsuits. Criticisms have focused on their similarity to illegal pyramid schemes, price-fixing of their products, high initial start-up costs, emphasis on recruitment of lower-tiered salepeople over actual sales, encouraging if not requiring salespeople to purchase and use the product, potential exploitation of personal relationships which are used as new sales/recruiting targets, complex and sometimes exaggerated compensation schemes, and the cult-like techniques which some groups use to enhance their members enthusiasm and devotion. Not all MLM companies are operate the same way, and MLM groups have persistently denied that their techniques are anything but legitimate business practices.

Setup

Independent, unsalaried salespeople of multi-level marketing, referred to as distributors (or associates, independent business owners, dealers, franchise owners, sales consultants, consultants, independent agents, etc.), represent the company that produces the products or provides the services they sell. They are awarded a commission based upon the volume of product sold through their own sales efforts as well as that of their downline organization.

Independent distributors develop their organizations by either building an active customer base, who buy direct from the company, or by recruiting a downline of independent distributors who also build a customer base, thereby expanding the overall organization. Additionally, distributors can also earn a profit by retailing products they purchased from the company at wholesale price.

This arrangement of distributors earning a commission based on the sales of their independent efforts as well as the leveraged sales efforts of their downline is similar to franchise arrangements where royalties are paid from the sales of individual franchise operations to the franchiser as well as to an area or regional manager. Commissions are paid to multi-level marketing distributors according to the company’s compensation plan. There can be individuals at multiple levels of the structure receiving royalties from a single person's sales.

Legality and Legitimacy

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.[6]

Because pyramiding (getting commissions from recruiting new members including "sign-up fees") is illegal in most states,[14] to remain legitimate in the U.S. a company that uses multi-level marketing has to make sure commissions are earned only on sales of the company's products or services if they cross state boundaries. 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 may be a pyramid scheme, which is illegal in most countries.

In a 2004 United States Federal Trade Commission (FTC) Staff Advisory letter to the Direct Selling Association states:

Much has been made of the personal, or internal, consumption issue in recent years. In fact, the amount of internal consumption in any multi-level compensation business does not determine whether or not the FTC will consider the plan a pyramid scheme. The critical question for the FTC is whether the revenues that primarily support the commissions paid to all participants are generated from purchases of goods and services that are not simply incidental to the purchase of the right to participate in a money-making venture.[15]

The FTC offers advice for potential MLM members to help them identify those which are likely to be pyramid schemes.[14]

However there are people who hold that all MLMs are nothing more than pyramid schemes even if they are legal[7][16][17][18] rendering the whole issue of a particular MLM being legal moot.

Compensation plans

Companies have devised a variety of MLM compensation plans over the decades.

  • Unilevel plans This type of plan is often considered the simplest of compensation plans. As the name suggests, the plan allows a person to sponsor one line of distributors, called a "frontline." Every distributor the person sponsors is considered to be on that sponsor's frontline and there are no width limitations, meaning there is no limit to the amount of people one can sponsor in the frontline. The common goal of this plan is to recruit a large number of frontline distributors and then encourage them to do the same. This is due to the fact that commissions are normally paid out on a limited depth, which typically means sponsor can earn commissions on sales between 5 and 7 levels deep.[19]
  • Stairstep Breakaway plans This type of plan is characterized as having representatives who are responsible for both personal and group sales volumes. Volume is created by recruiting and by retailing product. Various discounts or rebates may be paid to group leaders and a group leader can be any representative with one or more downline recruits. Once predefined personal and/or group volumes are achieved, a representative moves up a commission level. This continues until the representative's sales volume reaches the top commission level and "breaks away" from their upline. From that point on, the new group is no longer considered part of his upline's group and the multi-level compensation aspect ceases. The original upline usually continues to be compensated through override commissions and other incentives.
  • Matrix plans This type of plan is similar to a Uni-Level plan, except there is also a limited number of representatives who can be placed on the first level. Recruits beyond the maximum number of first level positions allowed are automatically placed in other downline (lower level) positions. Matrix plans often have a maximum width and depth. When all positions in a representative's downline matrix are filled (maximum width and depth is reached for all participants in a matrix), a new matrix may be started. Like Uni-Level plans, representatives in a matrix earn unlimited commissions on limited levels of volume with minimal sales quotas.
  • Binary plans: A binary plan is a multilevel marketing compensation plan which allows distributors to have only two front-line distributors. If a distributor sponsors more than two distributors, the excess are placed at levels below the sponsoring distributor's front-line. This "spillover" is one of the most attractive features to new distributors since they need only sponsor two distributors to participate in the compensation plan. The primary limitation is that distributors must "balance" their two downline legs to receive commissions. Balancing legs typically requires that the number of sales from one downline leg constitute no more than a specified percentage of the distributor's total sales.[20]
  • Hybrid plans are compensation plans that are constructed using elements of more than one type of compensation plan.

Criticism of MLM

The Federal Trade Commission (FTC) issued a decision, In re Amway Corp., in 1979 in which it indicated that multi-level marketing was not illegal per se in the United States. However, Amway was found guilty of price fixing (by requiring "independent" distributors to sell at the low price) and making exaggerated income claims.[21][22]

The FTC advises that multi-level marketing organizations with greater incentives for recruitment than product sales are to be viewed skeptically. The FTC also warns that the practice of getting commissions from recruiting new members is outlawed in most states as "pyramiding".[14] 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. In March 2008, the FTC removed Network Marketing (MLM) companies from the proposed Business Opportunity Rule:

The revised proposal, however, would not reach multi-level marketing companies or certain companies that may have been swept inadvertently into scope of the April 2006 proposal.[23]

Another criticism of MLMs is that "MLM organizations have been described by some as cults (Butterfield, 1985), pyramid schemes (Fitzpatrick & Reynolds, 1997), or organizations rife with misleading, deceptive, and unethical behavior (Carter, 1999), such as the questionable use of evangelical discourse to promote the business (Hopfl & Maddrell, 1996), and the exploitation of personal relationships for financial gain (Fitzpatrick & Reynolds, 1997)."[24]

Various other reports regarding profits by MLM members have been stated by

  • The Times: "The Government investigation claims to have revealed that just 10 per cent of Amway’s agents in Britain make any profit, with less than one in ten selling a single item of the group’s products."[25]
  • Scheibeler, a high level "Emerald" Amway member: "UK Justice Norrisfound in 2008 that out of an IBO [Independent Business Owners]population of 33,000, 'only about 90 made sufficient incomes to coverthe costs of actively building their business.' That's a 99.7 percent loss rate for investors."[26]
  • Newsweek: based on MonaVie's own 2007 income disclosure statement "fewer than 1 percentqualified for commissions and of those, only 10 percent made more than$100 a week."[27]
  • Business Students Focus on Ethics: "In the USA, the average annual income from MLM for 90% MLM members is nomore than US$5,000, which is far from being a sufficient means ofmaking a living (San Lian Life Weekly 1998)"[28]
  • USAToday: "While earning potential varies by company and sales ability,DSA says the median annual income forthose in direct sales is $2,400."[29]

Because of this some people have even gone so far as to say at best MLMs are nothing more than legalized pyramid schemes[7][30][31][32] with one of them stating "Multi-level marketing companies (MLMs) have become an accepted and legally sanctioned form of pyramid scheme in the United States."[33] and the other "Multi-Level Marketing: A form of Pyramid Scheme, not necessarily fraudulent..."[34]


See also

Notes

  1. ^ Pratt,, Michael G.; Rosa, José Antonio (2003), "Transforming work-family conflict into commitment in network marketing organizations", The Academy of Management Journal, 46 (4): 395–418{{citation}}: CS1 maint: extra punctuation (link)
  2. ^ Vander Nat, Peter J.; Keep, William W. (2002), "Marketing Fraud: An Approach for Differentiating Multilevel Marketing from Pyramid Schemes", Journal of Public Policy & Marketing, 21 (1): 139–15
  3. ^ a b Merrilees, Bill; Miller, Dale (1999), ""Direct Selling in the West and East: The Relative Roles of Product and Relationship (Guanxi) Drivers"", Journal of Business Research, 45 (3): 267–273
  4. ^ Cahn, Peter S. (2006), ""Building down and Dreaming up: Finding Faith in a Mexican Multilevel Marketer"", American Ethnologist, 33 (1): 126–142
  5. ^ Marcason, Wendy (2006), "What Are the Facts and Myths about Mangosteen?", Journal of the American Dietetic Association, 106 (6): 986
  6. ^ a b "Pyramid Schemes". FTC. May 13, 1998. Retrieved 2009-06-24.
  7. ^ a b c Carroll, Robert Todd (2003). The Skeptic's Dictionary: A Collection of Strange Beliefs, Amusing Deceptions, and Dangerous Delusions. John Wiley & Sons. pp. 235–36. ISBN 0471272426. Retrieved 2009-06-29.
  8. ^ Edwards, Paul (1997). Franchising & licensing: two powerful ways to grow your business in any economy. Tarcher. p. 356. ISBN 0874778980. {{cite book}}: Cite has empty unknown parameter: |coauthors= (help)
  9. ^ Clegg, Brian (2000). The invisible customer: strategies for successive customer service down the wire. Kogan Page. p. 112. ISBN 074943144X. {{cite book}}: Cite has empty unknown parameter: |coauthors= (help)
  10. ^ Higgs, Philip (2007). Rethinking Our World. Juta Academic. p. 30. ISBN 0702172553. {{cite book}}: Unknown parameter |coauthors= ignored (|author= suggested) (help)
  11. ^ Kitching, Trevor (2001). Purchasing scams and how to avoid them. Gower Publishing Company. p. 4. ISBN 0566082810.
  12. ^ Mendelsohn, Martin (2004). The guide to franchising. Cengage Learning Business Press. p. 36. ISBN 1844801624.
  13. ^ Xardel, Dominique (1993). The Direct Selling Revolution. Understanding the Growth of the Amway Corporation. Blackwell Publishing. pp. 1–4. ISBN 978-0631192299.
  14. ^ a b c "Multilevel Marketing Plans". FTC Consumer Alert. November 1996. Retrieved 2008-05-07.
  15. ^ Kohm, James A. (January 14, 2004). "RE: Staff Advisory Opinion - Pyramid Scheme Analysis" (reprint). Federal Trade Commission. {{cite journal}}: Cite journal requires |journal= (help)
  16. ^ Coenen, Tracy (2009). Expert Fraud Investigation: A Step-by-Step Guide. Wiley. p. 168. ISBN 0470387963.
  17. ^ Ogunjobi, Timi (2008). SCAMS - and how to protect yourself from them. Tee Publishing. pp. 13–19.
  18. ^ Salinger (Editor), Lawrence M. (2005). Encyclopedia of White-Collar & Corporate Crime. Vol. 2. Sage Publishing. p. 880. ISBN 0761930043. {{cite book}}: |last= has generic name (help)
  19. ^ "Unilevel Compensation Plan". The Compensation Plan. network-marketing-business-school.com. Retrieved 2009-08-28.
  20. ^ "Spencer Reese of Law Firm Grimes & Reese".
  21. ^ Richard Eisenberg (June 1, 1987). "The Mess Called Multi-Level Marketing With celebrities setting the bait, hundreds of pyramid-style sales companies are raking in millions, often taking in the gullible". CNN Money.
  22. ^ In re Amway Corp., 93 F.T.C. (1979).
  23. ^ "FTC Press Release".
  24. ^ Carl, Walter J. (2004) "The Interactional Business of Doing Business: Managing Legitimacy and Co-constructing Entrepreneurial Identities in E-Commerce Multilevel Marketing Discourse" Western Journal of Communication, Vol. 68.
  25. ^ Brown, David (November 27, 2007). "Marketing group merely 'selling a dream'". The Times. Retrieved July 13, 2009.
  26. ^ Berkowitz, Bill (Jan 28, 2009). "Republican Benefactor Launches Comeback". Inter press service. Retrieved July 11, 2009. (in reference to BERR vs Amway (Case No:2651, 2652 and 2653 of 2007) in point of objectionability"c")
  27. ^ Tony Dokoupil (August 2,2008). "A Drink's Purple Reign". Newsweek. Retrieved 2009-07-17. {{cite web}}: Check date values in: |date= (help)
  28. ^ Ryan (Editor), Leo; Wojciech, Gasparski (Editor); Georges, Enderle (Editor) (2000). Business Students Focus on Ethics (Praxiology): Theinternational Annual of Practical Philosophy and Methodology Volume 8. New Jersey: Transaction Publishers. p. 75. ISBN 0765800373. {{cite book}}: |last1= has generic name (help)
  29. ^ Peterecca, Laura (Sept 14, 2009). "What kind of business do you want to start?". USAToday. Gannett Company. pp. 4B. Retrieved Sept 14, 2009. {{cite news}}: Check date values in: |accessdate= and |date= (help)
  30. ^ Coenen, Tracy (2009). Expert Fraud Investigation: A Step-by-Step Guide. Wiley. p. 168. ISBN 0470387963.
  31. ^ Ogunjobi, Timi (2008). SCAMS - and how to protect yourself from them. Tee Publishing. pp. 13–19.
  32. ^ Salinger (Editor), Lawrence M. (2005). Encyclopedia of White-Collar & Corporate Crime. Vol. 2. Sage Publishing. p. 880. ISBN 0761930043. {{cite book}}: |last= has generic name (help)
  33. ^ Coenen, Tracy (2009). Expert Fraud Investigation: A Step-by-Step Guide. Wiley. p. 168. ISBN 0470387963.
  34. ^ Salinger (Editor), Lawrence M. (2005). Encyclopedia of White-Collar & Corporate Crime. Vol. 2. Sage Publishing. p. 880. ISBN 0761930043. {{cite book}}: |last= has generic name (help)
Retrieved from "https://en.wikipedia.org/w/index.php?title=Multi-level_marketing&oldid=346241600"