What Is an MLM? Multilevel Marketing Explained

A multilevel marketing company is a company that sells its product or service through direct sales. More commonly called "MLM", these companies make money by hiring independent distributors to sell their products directly to consumers.

Multi-level marketing (MLM) has become a popular way for people to earn income outside of traditional employment. Distributors sign a contract with a company for a chance to earn money by selling their product. While joining an MLM may look promising, the numbers tell a different story. Before signing up for an MLM, there are several things to consider first.

Definitions and examples of MLM

Rather than having a shell operation, MLM companies rely on independent distributors to sell their products directly to consumers and attract other suppliers to the company. Sales are often made online or at customers' homes. These distributors are not salaried or hourly employees. Instead, they are independent contractors and only make money when they sell the product. The company encourages each distributor to recruit new entrants to join their downline. The distributor then earns a percentage of all sales generated by his recruits.

Many people use the terms "MLM" and "pyramid scheme" interchangeably. And while they are not exactly the same, some MLM companies are pyramid schemes and violate federal law.

An illegal pyramid scheme is a company that recruits distributors just like an MLM would. But in the case of a pyramid scheme, participants cannot actually make money by selling a product or service, but instead make money by recruiting new distributors to join them. Pyramid schemes are illegal and the Federal Trade Commission (FTC) is working to shut them down.

A good example of the FTC's action against a pyramid scheme is the temporary closure of an instant coffee pyramid scheme in January 2020 called "Health Success." The FTC press release on the lawsuit indicates that the company's founders received $ 7 million from its distributors and pocketed more than $ 1.3 million from them.

“The FTC claims that less than 2% of participating consumers received more money from the defendants than they were paid, and that those lucky few earned on average less than $ 250 a month, well below the promises of ' financial freedom 'of the accused ”. The FTC statement was noted.

The difference between a pyramid scheme like Success by Health and a legal MLM is that legal MLMs have a legitimate product and distributors can make money selling that product. And while legitimate MLM companies also encourage distributors to recruit new entrants into their "downline," they don't necessarily need to do this to make money.

Many MLM companies require distributors to purchase their own inventory to sell. Participants may also have to pay a monthly fee to use the company's website and marketing.

How MLM works

MLMs have more people continually joining the organization, so top-level people can make money from the sales of people who are newer to the organization. You can be expected to pay upfront to join. You will have sales quotes that you must adhere to, and you will also be able to bring a certain number of people into the organization that will form your downline.

MLM businesses seem more prevalent than ever these days, and it can be hard to tell if a popular new product or a friend's job opportunity is MLM in disguise. Many people have experienced a situation where a casual conversation with an acquaintance turns into pressure to join their downline. These are some of the things that most MLMs have in common.

  • You can only buy a product from a distributor: MLM companies generally sell their products only through distributors; you cannot purchase the item from a retail store.
  • Someone only promotes the products of one company - There is no shortage of influencers promoting products online. As a result, you may find it difficult to figure out what MLM products are. If an influencer you follow or someone you are friends with on Facebook is only promoting the products of a company, it could be that they are an MLM distributor.
  • A recruiter approaches you with promises that seem too good to be true: A job opportunity may offer guarantees that you will make a lot of money, but the business model seems unclear.
  • You have to pay to join: It would be difficult to find a legitimate job opportunity that would have to pay to get the job. If a business requires you to buy a product in advance or pay a membership fee, it is probably an MLM.
  • You are asked to recruit new members: One of the main characteristics of MLM companies is that, in addition to selling a product, distributors are encouraged to recruit participants in their downline to earn more money. This business model is an indication that the company is an MLM or pyramid scheme.

MLM Reviews

MLM companies are not new. Amway, one of the best-known MLM companies, has been around since 1959 and was at the center of an FTC decision that helped distinguish legitimate MLM companies from illegal pyramid schemes. MLMs have only risen in prevalence since then, with brands like doTerra, LuLaRoe, and Scentsy infiltrating the medium. Roughly 7.7 million Americans generated $ 40.1 billion in direct sales in 2020, up from $ 28.6 billion in 2010, according to data from the Direct Selling Association (DSA).

Despite the frequent promises of high profits, few MLM participants end up making money. According to an AARP study, approximately 7 out of 10 distributors tie or lose money, 25% make a profit, 27% win nothing, and a surprising 47% lose money.

If you don't want to join an MLM, consider starting your own business. Many MLM recruiters lure people in with the promise of being an entrepreneur and "being your own boss." Actually joining an MLM means working for someone else.

Considerations for MLM

While the data clearly shows that direct selling isn't profitable for most people, many still stick to the promise of financial freedom. And of course there are people who make a living in an MLM company. Before joining, here are some points to consider:

  • Make sure you understand the company and the product - If you don't understand the business model or the product is not the main focus of the business, you may be dealing with an MLM that is an illegal pyramid scheme.
  • Ask for financial details ahead of time - find out what kind of upfront cost there is. If the business requires you to purchase products to sell, make sure they also accept refunds for unsold products.
  • Get familiar with sales and marketing - When you join an MLM as a distributor, you become a salesperson. Your success will depend on your ability to market the product. If you're new to sales, learn the basics of business and marketing.

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