One of the terms that you may come across in Digital Marketing is Multi-Level Marketing or MLM. This article aims to explore what exactly MLM consists of and why in some places it seems to have achieved quite a bad reputation.
What is Multi-Level Marketing?
MLM is a marketing strategy whereby salespeople not only receive compensation for the sales that they achieve, but they also receive compensation for the sales that anyone they recruit into the organisation makes.
The model is fairly simple and has been around possibly since the 1920s. There are therefore two aims for the company using it;
- Sell products
- Recruit new salespeople
According to an Economist article MLM sales accounted for nearly $30 billion in 2011 in the US alone, making it a well used model in business.
However it also a well used model in criminal fraud businesses such as Ponzi schemes and chain letters, the challenge then is how do you know the difference or indeed is there a difference?
Examples of MLM Schemes
You are probably familiar with some of the big companies that use MLM type techniques and support working from home projects. Companies such as Avon or Tupperware are household names and would have started out as direct selling companies, before turning to use MLM strategies.
These businesses recruit and train sales people who in turn host gatherings to sell the products and earn commissions. The sales reps or distributors as they are known, are also encouraged to gather more distributors and are rewarded from their sales as an incentive.
What’s the Difference Between an MLM and a Pyramid Scheme?
Pyramid schemes operate from a very similar model. They can be investment focused so people pay in cash and then attract new members to pay in cash which then becomes their commission or investment return. The obvious danger with these schemes is that once recruitment stops the last ones in have paid money into an investment and will lose everything.
The main difference between the two schemes is that MLM schemes are legal whereas pyramid schemes are not. Legitimate MLM schemes place greater emphasis on selling products, whereas pyramid schemes tend to focus on recruiting new members.
Pyramid schemes usually require participants to pay to join and the focus is on recruiting new members rather than selling products.
Where products are used in pyramid schemes they often have to be bought by the distributors first and sold onto others. However, there is usually more pressure placed on distributors to recruit other distributors to work below them, than to actually sell the product.
As soon as recruitment stops the scheme collapses leaving those nearer the bottom with losses, sometimes quite high ones.
The financial analyst magazine the Economist, highlights an example of one of the largest MLM schemes in America, called Herbalife. Many of its competitors claim this company is actually a pyramid scheme and took the company to court in 2015.
Herbalife is a weight loss product company that only sells its products through independent ‘distributors’. It has a global revenue of $4.5billion (£3 billion) and claims to have 3 million distributors working for it
One hedge fund manager claims that less than 1% of the salespeople will be making a full time income, whilst over 90% of the sales team will make no commissions at all. However the 2015 court case in Los Angeles, ruled that although Herbalife did tread in the grey area between MLM and Pyramid scheme it was not guilty of any wrongdoing and was a legitimate organisation.
Research Into MLM Scheme
Other researchers studying MLM schemes include Robert Fitzpatrick, he has also supported suggestions that very few of the MLM distributors ever receive any significant level of commission. The eleven companies in Fitzpatrick’s research work had a combined global revenue of $12 billion and over 9 million distributors working amongst them. The average commission for 99% of the distributers was less than $13 week.
The main reason for the low level payout of commissions is that the products are over-priced
“The companies ….have essentially non-existent or unfeasible retail sales opportunities -” (Pyramidschemealert.com)
Any commissions that are earned, are paid out to the top level of the company. One company it was discovered, paid out 87% of all commissions to the top 1% of the distributor chain. This is one of the reasons that many MLM schemes are considered to be scams.
Does this mean that all MLMs are scams?
MLMs are still fighting to be recognised as a legitimate business model. They are open about their structure, although perhaps misleading about the ease by which you can actually make money.
So how do yo recognise a legitimate business opportunity from a MLM scam?
Features of MLM Schemes
One of the accusations made against MLM schemes is that they encourage an almost cult like approach to their recruitment and selling techniques. Motivational Speakers are often used along with mass gatherings, to inspire enthusiasm and encourage distributors at the bottom of the pyramid to keep trying.
Websites and presentations that use motivational quotes are another tactic used to encourage people to stay and persevere for as long as possible.
Here are some of the signs to look out for that would be an indication that the business opportunity is too good to be true, and likely to lead to losses rather than the high levels of profit that you’ve been promised.
- Do you have to pay for the products you are selling?
- Do you actually own the business that you are creating?
- Is your business dependent on someone else selling or promoting goods on your behalf?
- Do you have to attend seminars and workshops (and pay for them) in order to succeed?
Network Marketing and MLMs
Another term that has started to appear to describe MLMs is Network Marketing. It is also sometimes used to try and differentiate a product based pyramid scheme from a cash based pyramid investment scheme.
The terms are however all referring to the same types of products, the concept is all about multi-level sales programmes.
MLM Success Stories
There are several websites such as mlmsuccessstories.com which are devoted to promoting success stories about MLM. Stories on this site also reflect the reality that although there might be success for some, for the vast majority that isn’t a reality.
There are other stories whereby MLM schemes have appeared to become more controlled and mainstream in their marketing strategies. Lower level distributors have been restricted so that the number of distributors that you need to recruit is now only 3 or 4. You don’t always need to personally call people instead recruitment can be done through email lists and blog sites.
All of these tactics begin to blur the lines between pyramid schemes, MLMs and other web based selling and promotion schemes such as affiliate or internet marketing.
Is MLM and Affiliate Marketing the Same Thing?
No… is the short answer to this question, and this is where it becomes important to understand the details, because there are some key differences.
Multi-level marketing schemes have a restricted group of products on offer, that usually have to be bought by the seller first. There is also the requirement to recruit new people into the organisation to work below you (hence the name multi-level).
In affiliate marketing you are your own boss and run your own business. You decide which products to promote and you don’t have to buy them in advance. You sell through a website and people choose to visit your site, you don’t have to cold call or hustle anyone.
There are many people looking to make money on the internet and there are definitely genuine opportunities available for those willing to work hard and try. However, there are also plenty of scam sites and internet fraud sites that are seeking to exploit new people just entering internet work for the first time.
Do Your RESEARCH
For every scheme that you come across check out reviews and opinions about the programme. there will always be those that want to run down a company but when the complaints outweigh the good comments then this is a warning sign.
Look at genuine training opportunities such as Wealthy Affiliate and decide whether the scheme you are looking at operates in a similar way, or is there pressure being placed on you to do or sell things.
Setting Up Your Own Website
It is relatively easy and cost effective to set up your own website, see this article on the site How to Build a WordPress Website. To access training and support I would recommend this organisation Digital Marketing at Wealthy Affiliate (especially as I contribute onwards some of the training available) and you can always ask questions through the comments section here before starting anything new.
Best of luck with your own ventures and I look forward to hearing about your own progress and experiences of MLM schemes, especially any that you might be willing to share with others.