Multi-level marketing is a
marketing strategyMarketing strategy is a process that can allow an organization to concentrate its limited resources on the greatest opportunities to increase sales and achieve a sustainable competitive advantage.-Developing a marketing strategy:...
in which the sales force is compensated not only for sales they personally generate, but also for the sales of others they recruit, creating a downline of distributors and a
hierarchyA hierarchy is an arrangement of items in which the items are represented as being "above," "below," or "at the same level as" one another...
of multiple levels of compensation. Other terms for MLM include
pyramid selling,
network marketing, and
referral marketing.
Most commonly, the salespeople are expected to sell products directly to consumers by means of relationship referrals and
word of mouthWord of mouth, or viva voce, is the passing of information from person to person by oral communication. Storytelling is the oldest form of word-of-mouth communication where one person tells others of something, whether a real event or something made up. Oral tradition is cultural material and...
marketing. Some people use "direct selling" as a
name for MLM, although MLM is only one type of
direct sellingDirect selling is the marketing and selling of products directly to consumers away from a fixed retail location. Peddling is the oldest form of direct selling. Modern direct selling includes sales made through the party plan, one-on-one demonstrations, and other personal contact arrangements as...
, which started centuries ago with peddling.
MLM companies have been a frequent subject of criticism as well as the target of lawsuits. Criticism has focused on their similarity to illegal
pyramid schemeA pyramid scheme is a non-sustainable business model that involves promising participants payment or services, primarily for enrolling other people into the scheme, rather than supplying any real investment or sale of products or services to the public...
s, price-fixing of products, high initial start-up costs, emphasis on recruitment of lower-tiered salespeople over actual sales, encouraging if not requiring salespeople to purchase and use the company's products, potential exploitation of personal relationships which are used as new sales and recruiting targets, complex and sometimes exaggerated compensation schemes, and cult-like techniques which some groups use to enhance their members' enthusiasm and devotion.
In contrast to MLM is single-level marketing, where the salesperson is rewarded for selling the product directly to the consumer.
Direct selling, network marketing, and multi-level marketing
"Network Marketing" and "Multi-level Marketing" have been described by author Dominique Xardel as being synonymous, and as methods of
direct sellingDirect selling is the marketing and selling of products directly to consumers away from a fixed retail location. Peddling is the oldest form of direct selling. Modern direct selling includes sales made through the party plan, one-on-one demonstrations, and other personal contact arrangements as...
. According to Xardel, "direct selling" and "network marketing" refer to the distribution system, while the term "multi-level marketing" describes the compensation plan. 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 different terms and "
buzzwordA buzzword is a term of art, salesmanship, politics, or technical jargon that is used in the media and wider society outside of its originally narrow technical context....
s" is an effort to distinguish multi-level marketing from illegal
Ponzi schemeA Ponzi scheme is a fraudulent investment operation that pays returns to its investors from their own money or the money paid by subsequent investors, rather than from any actual profit earned by the individual or organization running the operation...
s,
chain letterA typical chain letter consists of a message that attempts to the recipient to make a number of copies of the letter and then pass them on to as many recipients as possible...
s, and consumer fraud scams. Some sources classify multi-level marketing as a
form of direct selling rather than
being direct selling.
The
Direct Selling AssociationThe Direct Selling Association is the name of several similar trade associations in the United States, United Kingdom, Australia, Malaysia, Singapore, and New Zealand that represent direct selling companies, including those that use multi-level marketing compensation plans or party plan product...
, an
AmericanThe United States of America is a federal constitutional republic comprising fifty states and a federal district...
industry body, reported that in 1990 twenty-five percent of members used MLM, growing to 77.3 percent in 1999. Companies such as Avon, Electrolux, Tupperware, and Kirby all originally used single level marketing to sell their goods and later introduced multi-level compensation plans. By 2009, 94.2% of members were using MLM, accounting for 99.6% of sellers, and 97.1% of sales. The DSA has approximately 200 members while it is estimated there are over 1000 firms using multi-level marketing in the US alone.
History
It is generally accepted that the first multi-level marketing plan was introduced in 1945 by the
California Vitamin Company (shortly afterwards to become
NutriliteNutrilite is a brand of mineral, vitamin, and dietary supplements created in 1934 by Dr. Carl F. Rehnborg. Nutrilite products are currently manufactured by Access Business Group, a subsidiary of Alticor whose products are sold via the Amway and Amway Global Corporations worldwide...
). The plan allowed Nutrilite distributors with at least 25 regular customers to recruit new distributors and draw a 3 percent commission from their sales. Unlike traditional direct selling, this was an ongoing payment whenever the customer re-ordered, allowing direct sellers to build a sales organization that could generate a residual-like income.
Setup
Independent, non-salaried salespeople of multi-level marketing, referred to as distributors (or associates, independent business owners, dealers, franchise owners, sales consultants, consultants, independent agents, etc.), represent the company that produces the products or provides the services they sell. They are awarded a commission based upon the volume of product sold through their own sales efforts as well as that of their downline organization.
Independent distributors develop their organizations by either building an active customer base, who buy direct from the company, or by recruiting a
downline of independent distributors who also build a customer base, thereby expanding the overall organization. Additionally, distributors can also earn a profit by retailing products they purchased from the company at
wholesaleWholesaling, jobbing, or distributing is defined as the sale of goods or merchandise to retailers, to industrial, commercial, institutional, or other professional business users, or to other wholesalers and related subordinated services...
price.
Income levels
Several sources have commented on the income level of specific MLMs or MLMs in general:
- The Times
The Times is a British daily national newspaper, first published in London in 1785 under the title The Daily Universal Register . The Times and its sister paper The Sunday Times are published by Times Newspapers Limited, a subsidiary since 1981 of News International...
: "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."
- Scheibeler, a high level "Emerald" Amway member: "UK Justice Norris found in 2008 that out of an IBO [Independent Business Owners] 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
Newsweek is an American weekly news magazine published in New York City. It is distributed throughout the United States and internationally. It is the second-largest news weekly magazine in the U.S., having trailed Time in circulation and advertising revenue for most of its existence...
: based on Mona VieMonaVie is a beverage company distributing products made from blended fruit juice concentrates with freeze-dried açaí powder and purée through a multi-level marketing business model...
'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 (San Lian Life Weekly 1998)"
- USA Today
USA Today is a national American daily newspaper published by the Gannett Company. It was founded by Al Neuharth. The newspaper vies with The Wall Street Journal for the position of having the widest circulation of any newspaper in the United States, something it previously held since 2003...
has had several articles:
- "While earning potential varies by company and sales ability, DSA
The Direct Selling Association is the name of several similar trade associations in the United States, United Kingdom, Australia, Malaysia, Singapore, and New Zealand that represent direct selling companies, including those that use multi-level marketing compensation plans or party plan product...
says the median annual income for those in direct sales is $2,400."
- In an October 15, 2010 article, it was stated that documents of a MLM called Fortune reveal that 30 percent of its representatives make no money and that 54 percent of the remaining 70 percent only make $93 a month. The article also states Fortune is under investigation by the Attorneys General of Texas, Kentucky, North Dakota, and North Carolina with Missouri, South Carolina, Illinois, and Florida following up complaints against the company.
- A February 10, 2011 article stated "It can be very difficult, if not impossible, for most individuals to make a lot of money through the direct sale of products to consumers. And big money is what recruiters often allude to in their pitches."
- "Roland Whitsell, a former business professor who spent 40 years researching and teaching the pitfalls of multilevel marketing": "You'd be hard-pressed to find anyone making over $1.50 an hour, (t)he primary product is opportunity. The strongest, most powerful motivational force today is false hope."
USA
MLM businesses operate in all 50 states. New businesses may use terms such as "affiliate marketing" or "home-based business franchising". Many
pyramid schemeA pyramid scheme is a non-sustainable business model that involves promising participants payment or services, primarily for enrolling other people into the scheme, rather than supplying any real investment or sale of products or services to the public...
s try to present themselves as legitimate MLM businesses. However, there are people who hold that
all MLMs are essentially pyramid schemes even if legal.
The United States
Federal Trade CommissionThe Federal Trade Commission is an independent agency of the United States government, established in 1914 by the Federal Trade Commission Act...
states "Steer clear of multilevel marketing plans that pay commissions for recruiting new distributors. They're actually illegal pyramid schemes. Why is
pyramiding dangerous? Because plans that pay commissions for recruiting new distributors inevitably collapse when no new distributors can be recruited. And when a plan collapses, most people - except perhaps those at the very top of the pyramid - end up empty-handed."
In a 2004 Staff Advisory letter to the Direct Selling Association, the FTC states:
Much has been made of the personal, or internal, consumption issue in recent years. In fact, the amount of internal consumption in any multi-level compensation business does not determine whether or not the FTC will consider the plan a pyramid scheme. The critical question for the FTC is whether the revenues that primarily support the commissions paid to all participants are generated from purchases of goods and services that are not simply incidental to the purchase of the right to participate in a money-making venture.
The FTC warns "Not all multilevel marketing plans are legitimate. Some are pyramid schemes. It's best not to get involved in plans where the money you make is based primarily on the number of distributors you recruit and your sales to them, rather than on your sales to people outside the plan who intend to use the products." and states that research is your best tool, giving eight steps to follow:
- Find — and study — the company’s track record
- Learn about the product
- Ask questions
- Understand any restrictions
- Talk to other distributors (beware of shills)
- Consider using a friend or adviser as a neutral sounding board or for a gut check
- Take your time
- Think about whether this plan suits your talents and goals
Criticism
The FTC issued a decision,
In re Amway Corp., in 1979 in which it indicated that multi-level marketing was not
illegal per seThe term illegal per se means that the act is inherently illegal. Thus, an act is illegal without extrinsic proof of any surrounding circumstances such as lack of scienter or other defenses...
in the United States. However,
AmwayAmway is a direct selling company and manufacturer that uses network marketing to sell a variety of products, primarily in the health, beauty, and home care markets. Amway was founded in 1959 by Jay Van Andel and Richard DeVos...
was found guilty of
price fixingPrice fixing is an agreement between participants on the same side in a market to buy or sell a product, service, or commodity only at a fixed price, or maintain the market conditions such that the price is maintained at a given level by controlling supply and demand...
(by effectively requiring "independent" distributors to sell at the same fixed price) and making exaggerated income claims.
The FTC advises that multi-level marketing organizations with greater incentives for recruitment than product sales are to be viewed skeptically. The FTC also warns that the practice of getting commissions from recruiting new members is outlawed in most states as "pyramiding". In April 2006, it proposed a Business Opportunity Rule intended to require all sellers of business opportunities—including MLMs—to provide enough information to enable prospective buyers to make an informed decision about their probability of earning money. In March 2008, the FTC removed Network Marketing (MLM) companies from the proposed Business Opportunity Rule:
The revised proposal, however, would not reach multi-level marketing companies or certain companies that may have been swept inadvertently into scope of the April 2006 proposal.
Walter J. Carl stated in a 2004
Western Journal of Communication article that "MLM organizations have been described by some as cults (Butterfield, 1985), pyramid schemes (Fitzpatrick & Reynolds, 1997), or organizations rife with misleading, deceptive, and unethical behavior (Carter, 1999), such as the questionable use of evangelical discourse to promote the business (Hopfl & Maddrell, 1996), and the exploitation of personal relationships for financial gain (Fitzpatrick & Reynolds, 1997)". In China, volunteers working to rescue people from the schemes have been physically attacked.
MLM's are also criticized for being unable to fulfill their promises for the majority of participants due to basic conflicts with Western cultural norms. There are even claims that the success rate for breaking even or even making money are far worse than other types of businesses: "The vast majority of MLM’s are recruiting MLM’s, in which participants must recruit aggressively to profit. Based on available data from the companies themselves, the loss rate for recruiting MLM’s is approximately 99.9%; i.e., 99.9% of participants lose money after subtracting all expenses, including purchases from the company." In part, this is because encouraging recruits to further "recruit people to compete with [them]" leads to "market saturation."
Another criticism is that MLM has effectively outlived its usefulness as a legitimate business practice. The argument is that, in the time when America was a series of relatively small, isolated towns and rural areas not easily accessible to small companies, MLM was a useful way to let people know of and buy products or services. But the advent of internet commerce, with its ability to advertise and sell directly to consumers, has rendered that model obsolete. Thus, today, nearly all modern MLMs ostensibly sell vastly overpriced goods and services (if there even is a real product or service involved at all) as a thin cloak of legitimacy, while their members are driven to recruit even more people into the MLM, effectively turning these programs into
pyramid schemeA pyramid scheme is a non-sustainable business model that involves promising participants payment or services, primarily for enrolling other people into the scheme, rather than supplying any real investment or sale of products or services to the public...
s.
It is because of this encouraging recruits to further recruit their competitors, some people have even gone so far as to say at best modern MLMs are nothing more than legalized
pyramid schemeA pyramid scheme is a non-sustainable business model that involves promising participants payment or services, primarily for enrolling other people into the scheme, rather than supplying any real investment or sale of products or services to the public...
s with one stating "Multi-level marketing companies have become an accepted and legally sanctioned form of pyramid scheme in the United States" while another states "Multi-Level Marketing, a form of Pyramid Scheme, is not necessarily fraudulent."
In October 2010 it was reported that multilevel marketing companies were being investigated by a number of state attorneys general amid allegations that salespeople were primarily paid for recruiting and that more recent recruits cannot earn anything near what early entrants do.
External links