What is Multi-level-Marketing (MLM)
Multi-level marketing (MLM) or also known as network marketing is a business strategy used by direct sales companies to encourage “distributors” or “independent business” owners to recruit others into their business or downline.
Distributors or independent business owners are paid a percentage of their recruits’ sales or their referrals into the business. It’s a controversial marketing strategy and business practice that is highly criticized and often looked down upon from other people due to the fact that a vast majority of people who join MLM companies end up losing money.
The Multi-Level Marketing Business Model
The multi-level marketing business model can get pretty complicated but it’s actually quite simple. Most are typically made up of either “distributors” or “independent business owners”. The two terms are used interchangeably.
People are typically referred by someone into the business with common sales tactics such as asking you to:
- Start your own business
- Be your own boss
- Promising unlimited income potential
- Promising financial freedom
- Making your own hours
- The ability to help others
People inside MLM’s make money in one of two ways:
- Commission from sales made by the business owner
- Commissions from people who they referred to start their own business under them
People who refer others into the “business opportunity” build what is commonly known as a downline.
Below is an example of what a downline looks like.
All these people are considered business owners and had to pay some sort of money to join the network and get started. A common issue with MLM companies and opportunities lies in determining whether it’s legitimate or simply just hype.
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A common preconceived notion about multi-level marketing is that it’s some sort of scam or a scheme. One of the major reasons this is, is due to the fact that over 99% of people who join an MLM lose money.
Although the FTC has ruled that MLM business models are legitimate businesses, their business practices and recruiting methods are highly controversial. They tend to exploit minorities, people who are in dire financial need and people who are very young.
They tend to make wild income claims without much substantiated evidence and usually focus on getting you to buy into the “mindset” mentality.
It’s not to say that all MLM companies are scams. If you have ever thought about joining an MLM company or organization, it’s very important that you understand the compensation structure, the commission levels and all the associated risks with joining one.
Common Multi-Level Marketing Terminology
One of the most unique and obvious things about multi-level companies is the terminology that is often used to either recruit people or introduce them to the business. Some of the most common terminology being used that you might hear if you are ever approached by someone from the MLM company include:
- Business opportunity
- Passive income
- Business owner
- Independent distributor
- Compensation Plan
- Distributor Kit
These are some of the most common terms that will be thrown around by someone who either works for an MLM company or is trying to get you to join one.
Examples of Multi-Level Marketing Companies
One of the most controversial and well known multi-level marketing companies is Herbalife. They are one of the most high-profile multi level companies around and they are even public on the stock market. They sell weight-loss and nutritional products with over 750,000 global distributors.
There have been numerous public lawsuits against the company and its business practices over the years but the FTC has ruled them legitimate. Investor William Ackman, who originally exposed the company and accused them of operating a pyramid scheme was the main person who brought them to the spotlight.
They still operate to this day while the complaints and lawsuits continue to reign in.
The Legitimacy of Multi-Level Marketing Companies
This article is a rip on multi-level marketing companies, rather an attempt to simply give you more information as to how they operate and things to consider if you have ever been approached by someone who wanted to give you more information about a “business opportunity”.
There may be MLM companies who have legitimate operations with business models that don’t rely primarily on the recruiting component in order to make money. They are just very few and far in-between.
Check out the mini-documentary about MLM’s below. It may help to give you a bit more insight into their culture, business practices and expectations.