Multi-Level Marketing: How MLM Works?

Introduction

Different marketing schemes run worldwide, and you may be familiar with Multi-Level Marketing. This old marketing style is quite popular because people think it is a quick-rich scheme. Does it so?

Is Multi-Level Marketing MLM work and worth joining this type of scheme? Is it legal? How can we find a trustworthy Multi-Level Marketing scheme?

There are so many questions that may be roaming in your mind. In this post, we will learn about Multi-Level Marketing(MLM) and why it is so popular. Is it beneficial to join such schemes, and what is the risk involved?

What is Multi-Level Marketing?

There are so many definitions of Multi-Level Marketing(MLM). It depends on the person’s perspective and how they see this marketing style.

According to the definition of the Federal Trade Commission(FTC):

“Multi-level marketing is one form of direct selling and refers to a business model in which a company distributes products through a network of distributors who earn income from their retail sales of the product and retail sales made by the distributors’ direct and indirect recruits. Because they earn a commission from the sales their recruits make, each member in the MLM network has an incentive to continue recruiting additional sales representatives into their ‘downlines.’”

Summing it to a short description, we can say that “Multi-Level Marketing. or MLM, is a system of selling products, goods, or services through a network of distributors.”

It means it takes the help of a network to advertise and distribute the products to different people, and when you join this scheme then, you will earn in two ways:

1. Through direct sales of the products
2. Through your distributer’s(contractors, associates) sale. You will earn a commission every time they will sell any product.

Multi-Level Marketing is known as Network Marketing, as it forms a network of distributors.

You can recruit people to sell products, but before they join this scheme, they have to buy your product, which is called “downline” for you.

Similarly, the person through which you can join this scheme to become a distributor is an “upline” for you. Also, you will be upline for your downline(recruited person).

So, this network has created a way from uplines to downlines. The more downlines you have, the more you will earn a commission.

Key Takeaways

• Multi-Level Marketing (MLM) is a scheme that works by recruiting people to sell products to others and recruit others to do the same.
• MLM companies often promise high earnings and financial freedom. Still, the reality is that most participants make little to no money.
• MLM can be risky and may not be a sustainable source of income for most people. It may not give your guaranteed results to become wealthy.
• Research an MLM company before joining, and be cautious of any promises that seem too good to be true.

Are you confusing Multi-Level Marketing with affiliate marketing?

Wait! If you think it sounds like affiliate marketing, then you misunderstand it. Affiliate marketing is a different marketing strategy in which you promote some products, and when someone buys that product, you will get a commission.

You don’t have to make any downline or recruit any person for promotion. When it comes to affiliate marketing, you can do it online or offline but don’t have to buy the product to promote it.

In MLM, you have to purchase the product to be a part of promoting the product.

Most of the MLM schemes are offline, and people sell physical products, while in affiliate marketing, people mainly promote online, and the product may be physical or digital.

But, some MLM schemes may be online and sell digital products.

How does Multi-Level Marketing work?

In MLM, the business person organizes meetings and events to spread the business scheme and how you can achieve success in this business model. You have heard about these events. It can be a webinar or events organized in hotels.

They show the advances of the model and also offer you testimonials.

Most will explain how their life is changed by joining this business model and now live lavish lives or buy brand-new cars. Well, the marketing tactics attract more people to these schemes.

We will know whether it is accurate or just a Ponzi scheme later.

When anyone shows interest in joining this scheme, the experienced person from MLM arrange meetings with the interested peoples and describe more about the business and plan. They will ask them to sign a contract and register your information.

Also, they will ask you to buy some products through them to become a member.

After completing all the steps, you can start.

Now, to understand how MLM works, follow these steps:

1. A plan

This is the company’s overall blueprint, which includes the company’s marketing and compensation plans.

2. Sponsor

It refers to the person or representative directly recruiting another person to join the business. Suppose MLM member X recruits member Y into the company; then X is the sponsor of Y and is responsible for the training of member Y.

3. Recruit

The person brought to the business, or you can say it, is a team member. In the above example, member Y is recruited, and recruits will be trained by their sponsors or experienced persons in this scheme.

4. Upline

It consists of the sponsors who came before someone. In the above example, member X is the upline of member Y because member X brought or recruited member Y.

Suppose member A recruited member X, then member A is the upline for member X. Y’s upline is X and A.

5. Downline

These are the recruits brought in below you or someone. This can include the members you have recruited as well as those who are recruited by your recruits. In the above example, Y is the downline of A and X. Also, X is a downline of A.

6. Commission

This is the payout through product sales and the profit you made on sales made by your team.

Does the MLM business big?

Multi-Level Marketing may be small or big depending upon the types of products and how extensive is the network of members. Some MLM has been running for decades and is still running and are big players in this industry.

Now, we will look at the top Multi-Level Marketing companies:

1. Amway

Amway was founded in 1959 and had annual sales of $11 billion. Its products include health and wellness, food and beverages, cosmetics, and others. It has over 3 million associates worldwide who are selling these products to people.

2. Herbalife Ltd.

Established in 1980, it had annual sales of $4.8 billion and over 2.7 million associates. It has products like cosmetics, personal care, and nutritional supplements.

In 2016, Herbalife was cleared of allegations as the FBI could not provide sufficient evidence as they booked this company for a fraudulent business model.

3. Avon Products, Inc.

Avon was founded in 1986. It has annual sales of $11.3 billion and over 6.5 million associates. It markets a variety of beauty products, fashion apparel, and jewelry.

But this is not the end. According to the Direct Selling Association, in 2016, 20.5 million people from the U.S. were involved in MLM, with a total sale of $35.5 billion.

These data show how big the MLM business is and is available worldwide.

What is the difference between a pyramid scheme and multi-level marketing?

To determine whether it is a pyramid scheme, focus on these things:

1. The plan is to make more money by recruiting new members rather than selling the products yourself.

2. You will get a commission for recruiting new members. The number of people signed up matters in a pyramid scheme, not services or products.

3. If it is asking to invest a large amount of money in becoming a distributor.

Why is Multi-Level Marketing so popular?

People join MLM schemes because they think it is limitless. You can earn unlimited money because there is no limit to recruiting new members, which will generate passive income.

Your downline will work, and you will get a commission. This is the main logic that attracts people.

The business person from this scheme hosts events and advertises them to get more audience, showing you big dreams and how they can become possible through MLM. They provide a monthly performance bonus to urge people to make more sales.

People see how their uplines buy houses, dream cars, and live extraordinary lives, and it is all possible if you earn great money.

Joining the MLM scheme is not expensive, and becoming a distributor or member is cheaper than starting a business or buying a franchise.

People believe that investing a little money will have a fantastic earning opportunity, and they can earn passively without doing anything just through their downlines.

Is Multi-Level Marketing Legal?

Multi-Level Marketing is legal in the United States. Federal Trade Commission regulates such schemes. Many MLM schemes have long been running without allegations of fraud or illegal activities.

These are primarily unregulated but have a history of selling their products and paying their members.

But, if you consider becoming part of an MLM company, you should investigate the company’s details. You should check the history, reputation, any fraud registered against the company, testimonials of who bought the products or services, and any issues with the government.

Some MLM schemes may be Ponzi; these schemes will tell you that you will earn a lot of money briefly. They guarantee you that you will make interest on behalf of depositing some money.

Some of the schemes may be illegal pyramid schemes.

Pyramid schemes are very similar to MLM, but rather than selling products, the main focus of this scheme is to recruit as many people as possible. It is based on the number of people who signed up.

Should you join Multi-Level Marketing?

Well, it depends on many factors, like if you have money to invest and a passion for selling the products. You think you can get success and recruit people to earn a commission, whether MLM you are considering is legitimate or not.

An MLM is legal if

1. It has a quality product or service
2. It focuses on sales, not on the recruitment of members
3. Income earned from the sales of products and services

If you find that the product or service you want to sell is trustworthy and people have bought these products in the past, and there are testimonials, you can consider the plan.

If the quality of the product is good and the company’s focus is to provide value to the buyers and earn money through selling rather than recruiting, you can get started.

Before joining this scheme, ask yourself whether you are suitable for it not or just joining it because you heard that someone from these plans is earning millions of dollars.

FAQ

What are multi-level marketing companies?

 Companies that leverage a network of independent distributors to sell their products or services are called Multi-level marketing (MLM) companies. 

These distributors earn some commissions from their sales and the sales of the people they recruit to join the company.

What is the difference between multi-level marketing and pyramid schemes?

The main difference between MLMs and pyramid schemes is that MLMs have a legitimate product or service to sell. 

Pyramid schemes rely solely on recruiting new members to generate income. Pyramid schemes are mainly illegal because they inevitably collapse, leaving most participants with financial losses.

What is the difference between multi-level marketing and Ponzi schemes?

MLM involves selling a legitimate product or service and earning commissions based on sales. While some MLMs may have elements of a Ponzi scheme, they are not inherently fraudulent.

Ponzi schemes are fraudulent investment schemes where some returns are paid initially to the earlier investors using the investments of more recent investors. 

What are some famous multi-level marketing companies?

Some famous multi-level marketing companies are:

• Amway
• Avon Products
• Herbalife
• Nu Skin Enterprises
• Oriflame
• The Body Shop
• Mary Kay
• Tupperware
• Primerica
• Ambit Energy
• Amsoil
• Arbonne International

Conclusion

Multi-Level Marketing is one of the old and popular schemes, but it is not a quick-rich scheme. Check the company’s details and compensation plan, whether Ponzi or pyramid scheme. Treat your MLM business like a business and not a hobby.

Do not join by listening to stories and thinking if you can do this business. MLM businesses are making massive annual sales, and some reputed companies have been operating for a long time.

Like any other business, they require you to define and reach your market and make sales.