How does multilevel marketing work?
A business strategy called multilevel marketing (MLM) entails hiring extra firm sales agents while employing hierarchical, non-salaried sales teams to offer products directly to customers. Other names for multilevel marketing include network marketing and referral marketing.
A community of potential clients is served by existing MLM firm members who sell and advertise the items. As the company’s sales levels rise, they are frequently asked to recruit new individuals to join them. There is usually a hierarchy of positions or levels within a multilevel marketing organization that can be attained through successful sales or recruitment and are connected to awards and promotions for the associates.
How exactly does multilevel marketing operate?
In multilevel marketing, a corporation that engages in direct sales or business-to-consumer (B2C) sales offers goods or services to lone sales representatives who frequently operate as their own small business owners. These agents, in turn, concentrate on selling a good or service directly to customers, typically without a storefront. The independent distributors in the MLM system serve as sales representatives, brand stewards, or micro-influencers.
A flat hierarchy, which means there are few levels between the top executives and the newest members, may be part of the organizational structure of an MLM company. The CEO, distributor, sales representative, sponsor, and recruiter are a few possible roles in an MLM company model. Usually, a compensation strategy is in place. Each individual above a sales representative at the bottom level typically receives a percentage of the income when they close a deal. In MLMs, sales representatives are paid on a tiered commission structure rather than an hourly wage. The representatives’ primary goal is to locate new distributors, but they can also profit by hawking the company’s products.
Women, new mothers, or anyone looking for alternative work frequently join MLM sales teams. With the promise of freedom and new business opportunities, MLM firms entice previously happy consumers to sell. One of the methods utilized by MLM businesses is the notion that customers may be more likely to trust acquaintances and close friends who act as representatives than complete strangers who are marketing the products. People that use their communities as a source of customers can also discover that their friends and family are eager to support their business endeavors.
In MLM, the following are some common ways that products are sold:
- Marketplaces and fairs for farmers
- Website events
- Groups on social media
- House visits for social media marketing
- Through word of mouth
- Influencer marketing, viral marketing, live or online gatherings
Multilevel marketing is it legal?
Most nations, including the United States, allow multilevel marketing. Few nations have it outlawed, including Bangladesh, China, and Saudi Arabia. Despite being legal in the US, the MLM business model is frequently seen as unethical because it can involve sales agents working for free and using predatory recruiting methods. Critics claim that the MLM business model shares many characteristics with a pyramid scheme, which is prohibited in the majority of nations.
What distinguishes multilevel marketing from a pyramid scheme?
The main distinction between an MLM and a pyramid scam is whether it qualifies as a legitimate marketing technique. In essence, MLM tactics are permitted however pyramid schemes are prohibited.
Following are some significant distinctions between MLM and unlicensed pyramid schemes:
- While MLM techniques use recruitment as part of a larger business strategy that also involves the sale of items, pyramid schemes rely primarily on the staff seeking to attract new members of a sales team.
- A repurchase guarantee is required by MLM systems for any products that the sales agents are unable to sell, but not by pyramid schemes.
- A legitimate product or service is offered by MLMs that is beneficial to the client, however a pyramid scheme places greater emphasis on new service representative members’ consistent investments and motivates them to bring on new members to the business.
- As many individuals as possible are recruited into MLM strategies’ sales teams in order to sell as many items as possible, whereas as many people as possible are recruited into pyramid schemes’ sales teams in order to profit from the investments of their newest colleagues.
- Pyramid schemes require a very substantial investment before a business owner can even sign a contract to start working for them. MLM tactics may require a sales representative to acquire a minimum number of their items.
- In contrast to pyramid scams, MLM business techniques include research and a strategy to concentrate on a target consumer for representatives to sell to.
- A sales representative may get commissions from their own sales or the sales of their recruits in an MLM strategy. In contrast, the only way a representative makes money in a pyramid scheme is by adding new members below them.
- Although multilevel marketing businesses are lawful, it is crucial to remember that even the most prosperous and moral businesses cannot guarantee that its sales teams will make any money.
How to determine whether a multilevel marketing firm is actually a pyramid scheme
Using the resources offered by the Better Business Bureau (BBB), a nonprofit organization that looks into the legality and morality of businesses, anyone interested in finding out more about the ethics of a multilevel marketing company can research the company. Those who are interested in the MLM industry’s business methods can also find useful information from the Federal Trade Commission (FTC), the U.S. Consumer Product Safety Commission, and the National Labor Relations Board.
The FTC advises users to pay attention to the following indicators when determining whether an MLM is genuinely a pyramid scheme:
- A significant quantity of inventory must be purchased through representatives.
- Instead of how many things are sold to customers, income is determined on how many recruits a representative can make.
- The representative must make their own purchases in order to maintain a certain level or rank inside the business.
- People should exercise caution, inquire, and conduct background checks on MLM companies to prevent investing in them.
Examples of companies utilizing multilevel marketing
Numerous well-known businesses employ MLM techniques. Numerous of these firms are actual corporations. Others, however, have generated controversy due to allegations of employing pyramid schemes, fraud, class actions, and incidents of securities fraud. A few have also been charged with marketing harmful goods or disobeying the rules on labor payments.
Despite controversy, a number of MLM businesses have proven to be highly successful. Amway, with a 2020 market capitalization of $8.4 billion, is one of the most lucrative MLM businesses.
Additional well-known businesses that engage in multilevel marketing include:
- Mary Kay