Multi-level marketing
Multi-level marketing, also called network marketing or pyramid selling, is a controversial and sometimes illegal marketing strategy for the sale of products or services in which the revenue of the MLM company is derived from a non-salaried workforce selling the company's products or services, while the earnings of the participants are derived from a pyramid-shaped or binary compensation commission system.
In multi-level marketing, the compensation plan usually pays out to participants from two potential revenue streams: the first is based on a sales commission from directly selling the product or service, while the second is paid out from commissions based upon the wholesale purchases made by other sellers whom the participant has recruited to also sell product. In the organizational hierarchy of MLM companies, recruited participants are referred to as one's downline distributors. MLM salespeople are, therefore, expected to sell products directly to end-user retail consumers by means of relationship referrals and word of mouth marketing, but more importantly they are incentivized to recruit others to join the company's distribution chain as fellow salespeople so that these can become downline distributors.
According to a study of 350 MLM companies in the United States, at least 99% of recruits lose money. Nonetheless, MLM companies function because downline participants are encouraged to hold onto the belief that they can achieve large returns, while the statistical improbability of this is de-emphasized. MLM companies have been made illegal or otherwise strictly regulated in some jurisdictions as merely variations of the traditional pyramid scheme.
Business model
Setup
Independent non-salaried participants, referred to as distributors, are authorized to distribute the company's products or services. They are awarded their own immediate retail profit from customers plus commission from the company, not downlines, through a multi-level marketing compensation plan, which is based upon the volume of products sold through their own sales efforts as well as that of their downline organization.Independent distributors develop their organizations by either building an active consumer network, who buy direct from the company, or by recruiting a downline of independent distributors who also build a consumer network base, thereby expanding the overall organization.
The combined number of recruits from these cycles is the sales force, called the salesperson's "downline". This "downline" is the pyramid in MLM's multiple-level structure of compensation.
Participants
The overwhelming majority of MLM participants—99.6% of participants, according to one study—lose money. Indeed, the largest proportion of participants must operate at a net loss so that the few individuals in the uppermost level of the MLM pyramid can derive their significant earnings. Said earnings are then emphasized by the MLM company to all other participants to encourage their continued participation at a continuing financial loss.Companies
Many MLM companies generate billions of dollars in annual revenue and hundreds of millions of dollars in annual profit. However, profits accrue to the detriment of most of the company's constituent workforce. Only some of the profits are then shared with individual participants at the top of the MLM distributorship pyramid. The earnings of those top few participants are emphasized and championed at company seminars and conferences, thus creating the illusion that participants in the MLM can become financially successful. This is then advertised by the MLM company to recruit more distributors in the MLM with an unrealistic anticipation of earning margins which are in reality merely theoretical and statistically improbable.Although an MLM company holds out those few top individual participants as evidence of how participation in the MLM could lead to success, the MLM business model depends on the failure of the overwhelming majority of all other participants, through the injecting of money from their own pockets, so that it can become the revenue and profit of the MLM company, of which the MLM company shares only a small proportion with a few individuals at the top of the MLM participant pyramid. Other than the few at the top, participants provide nothing more than their own financial loss for the company's own profit and the profit of the top few individual participants.
Financial independence
The main sales pitch of MLM companies to their participants and prospective participants is not the MLM company's products or services. The products or services are largely peripheral to the MLM model. Rather, the true sales pitch and emphasis is on a confidence given to participants of potential financial independence through participation in the MLM, luring with phrases like "the lifestyle you deserve" or "independent distributor".Although the emphasis is always made on the potential of success and the positive life change that "might" or "could" result, disclosure statements include disclaimers that they, as participants, should not rely on the earning results of other participants in the highest levels of the MLM participant pyramid as an indication of what they should expect to earn. MLM companies rarely emphasize the extreme likelihood of failure, or the extreme likelihood of financial loss, from participation in MLM.
Comparisons to pyramid schemes
MLM companies have been made illegal in some jurisdictions as a mere variation of the traditional pyramid scheme, including in China. In jurisdictions where MLM companies have not been made illegal, many illegal pyramid schemes attempt to present themselves as MLM businesses. Given that the overwhelming majority of MLM participants cannot realistically make a net profit, let alone a significant net profit, but instead overwhelmingly operate at net losses, some sources have defined all MLM companies as a type of pyramid scheme, even if they have not been made illegal like traditional pyramid schemes through legislative statutes.MLM companies are designed to make profit for the owners/shareholders of the company and a few individual participants at the top levels of the MLM pyramid of participants. According to the U.S. Federal Trade Commission, some MLM companies already constitute illegal pyramid schemes even by the narrower existing legislation, exploiting members of the organization.
Lawsuits
Companies that employ the MLM business model have often faced criticism and lawsuits. Legal claims against MLM companies cover a wide range of issues, including accusations that their operations closely resemble illegal pyramid schemes. Additionally, MLM companies have been accused of engaging in price fixing and participating in collusion and racketeering, often involving secret compensation deals that favor a few participants at the expense of others. Critics also point to the high initial costs for new members, such as purchasing a marketing kit and initial products, as a barrier to entry. Many MLMs emphasize the recruitment of new members over actual sales, particularly sales to individuals outside of the MLM. This focus on recruitment often pressures participants to buy and use the company's products themselves, and exploit their personal relationships for sales and recruiting.Furthermore, MLMs are often scrutinized for having complex and exaggerated compensation schemes, making it difficult for most participants to earn significant income. False claims about the effectiveness of products are also commonly reported. Major revenue for the company, or its leading distributors, often comes from participant-attended conventions, training sessions, and sales of promotional materials, adding another layer of financial burden on members. Some MLM organizations have also been accused of using cult-like techniques to build enthusiasm and loyalty among their members, which has raised additional ethical concerns.
Direct selling versus network marketing
"Network marketing" and "multi-level marketing" have been described by author Dominique Xardel as being synonymous, with it being a type of direct selling. Some sources emphasize that multi-level marketing is merely one form of direct selling, rather than being direct selling. Other terms that are sometimes used to describe multi-level marketing include "word-of-mouth marketing", "interactive distribution", and "relationship marketing". Critics have argued that the use of these and other different terms and "buzzwords" is an effort to draw distinctions between multi-level marketing and illegal Ponzi schemes, chain letters, and consumer fraud scams—where none meaningfully exist.The Direct Selling Association, a lobbying group for the MLM industry, reported that in 1990 only 25% of DSA members used the MLM business model. By 1999, this had grown to 77.3%. By 2009, 94.2% of DSA members were using MLM, accounting for 99.6% of sellers, and 97.1% of sales. Companies such as Avon, Aerus, Tupperware, and Kirby were all originally single-level marketing companies, using that traditional and uncontroversial direct selling business model to sell their goods. However, they later introduced multi-level compensation plans, becoming MLM companies. The DSA has approximately 200 members while it is estimated there are over 1,000 firms using multi-level marketing in the United States alone.
History
The origin of multi-level marketing is often disputed, but multi-level marketing style businesses existed in the 1920s and the 1930s, such as the California Vitamin Company and the California Perfume Company.Income levels
Several sources have commented on the income level of specific MLM companies or MLM companies in general:- The Times: "The Government investigation claims to have revealed that just 10% of Amway's agents in Britain make any profit, with less than one in ten selling a single item of the group's products."
- Eric Scheibeler, a high level "Emerald" Amway member: "UK Justice Norris found in 2008 that out of an IBO population of 33,000, 'only about 90 made sufficient incomes to cover the costs of actively building their business.' That's a 99.7 percent loss rate for investors."
- Newsweek: based on Mona Vie's own 2007 income disclosure statement "fewer than 1 percent qualified for commissions and of those, only 10 percent made more than $100 a week."
- Business Students Focus on Ethics: "In the USA, the average annual income from MLM for 90% MLM members is no more than US $5,000, which is far from being a sufficient means of making a living "
- USA Today has had several articles:
- Based on the results of a 2018 poll conducted with 1,049 MLM sellers, the majority earned an average of less than $100 in sales over a five-year period, and 20% never made a single sale. The majority of sellers made less than 70 cents per hour. Nearly 32 percent of those polled acquired credit card debt to finance their MLM involvement.