What is Multi-Level Marketing (MLM)?

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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.

screenshot Multi-Level Marketing

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.

image pyramid scheme

In a pyramid scheme only those higher up the pyramid can financially benefit, everyone else loses money.

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.

Herbalife

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.

MLM Scams

Does this mean that all MLMs are scams?

screenshot scam

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.

screenshot motivation site for MLM businesses

A motivation site for MLM businesses

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.

screenshot MLM success stories

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.

screenshot affiliate marketing

Affiliate Marketing is a technique used by individuals, you don’t belong to a scheme or have to recruit others, it is simply a commission based sales business.

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.

Conclusion

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.

6 thoughts on “What is Multi-Level Marketing (MLM)?

  1. Vinnie Prasad

    I honestly can’t stand MLM from the experience I had with a number of different MLM companies. The recruitment process I stumbled upon through a work college felt like I was introduced to a cult. Everyone just seemed so brainwashed and focused on selling the product even though they didn’t believe in it.

    Not a business model I would associate myself with. Great article and a great explanation as to what MLM really is.

    Thank you

    Vinnie

    Reply
    1. Marie

      Hi Vinnie thanks for sharing your experience, it’s great to hear from those who have been involved. Like yourself I have heard a number of people say they struggle with the ethics of MLMs, especially when they are being asked to sell overpriced goods to people who are struggling to start out in a business themselves.

  2. fixitz.org

    I am totally against multi level marketing because I am pretty sure it is another version of a Ponzi scheme. There are more failures than success in MLM business and that number could be 99.99% failures to 0.01% success.
    Therefore for those who is thinking of MLM, I rather you truly become your own boss being an affiliate marketer.

    Reply
    1. Marie

      Thanks and yes they are all related to Ponzi schemes, which also use the same structure of making money through tiered levels of recruitment. Statistically you are likely to incur losses unless you have really done your homework on the scheme.

      Affiliate marketing is a better business model in my opinion as you say and there is an article here on What is Affiliate Marketing and How Does it Work?

  3. rufat

    I think anyone can achieve success both in affiliate marketing and MLM. Some people prefer affiliate marketing like myself and some people prefer MLM marketing because they have certain skills we don’t have such as direct face to face selling skills. This a fact that most people fail in affiliate marketing because they are not willing to work hard or don’t give their business enough time to see the results of their online efforts. In MLM its’ different. Most people fail in MLM because they fall victims to scams such as Empower Network and the like or because MLM opportunity is very limited in itself.

    Reply
    1. Marie

      Hi Rufat thanks for commenting, whilst I’d like to say that MLM marketing offers potential to earn money the research speaks for itself. Whilst there are certainly cases whereby individuals may not be willing to put in the work and drop out of the system, the reality from the research here is that 97% of distributors do not make a success of it. Therefore the MLM business model is not designed to achieve success for the majority, it is an elite system and it relies on the bottom tier paying in more than they sell, in order for the others to be successful.

      This like you say is in contrast to affiliate marketing, which like any self-employed business also has a failure rate, but that is largely down to individual effort and possibly a lack of appropriate support. I am a strong believer in mentoring and peer support for online businesses, as you can see from this article Why Every SEO Content Writer Needs a Mentor

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