There is a lot of confusion and even fear about the term multi-level marketing or MLM. People out of the industry may not understand it and therefore may judge unfairly against companies that may use this structure in their business. Let's take a look at what multi-level marketing really is so you can set your fears aside.
Often associated with pyramid schemes, multi-level marketing, aka MLM, is a marketing structure that may also be referred to as network marketing. This is a term developed by those that market their business through networking with others and through the use of the internet. Direct sales is also associated within these other terms as well since the function of selling is a direct one on one sale.
The difference is the terms network marketing and direct sales are mainly focusing on product movement while most people associate MLM with the structure of the compensation plans.
Multi-Level Marketing in its basic definition is a type of compensation plan that a company uses to structure the sales people. As the sales team brings on new team members, the recruiter can be paid for the recruitment and a percentage of the product that is sold by the team too. The structure of the recruits continues on many levels under the original recruiter. The levels can go very deep up to 10 or more levels below the first level in some multi-tiered companies; most keep it around 5-8 levels.
The recruited team mates can also recruit new sales members and they in turn would also be placed under them, earning a percentage of the profits and recruiting bonuses, if applicable.
The negative connotation of Multi-Level Marketing has come from many years of claims of companies that offer no product sales; direct sales reps only use of the products; encouraging recruitment into the company instead of product sales; required distribution of the product on a monthly basis to both the sales rep and the consumer.
There has also been a lot of concern over MLM’s that create intricate tiers of compensation so that it is hard to tell what one would earn. They have also had problems with people required to invite others to their home under false pretenses and then badgering them to sign up with the company as well. Tales of exaggerated income helped fuel the signups.
As you may already realize, these practices are now few and far between. With the FTC now watching many questionable multi-level companies for illicit actions, it is pretty safe to say that most companies that are structured in multi tiers for compensation are legitimate businesses.
Many of the multi-level marketing companies will require a purchase of product on a monthly or quarterly basis in order to receive commissions. Whether this practice is acceptable by the Direct Selling Association and the FTC is still to be determined. The final determining factor is whether the required “sale” is made in order to remain active by the distributor/rep or if they are actually using or selling the product.
Companies that require a minimum purchase to remain active and receive commissions on recruitment can be potentially labeled as a pyramid scheme. The structure of the company is the deciding factor. If the company has little or no product or the product is excessively expensive, it is a red flag. Also a definite red flag is if the main or only focus is bringing in new members that pay a fee for no products.
Pyramid schemes are illegal because the structure is built on will eventually collapse. This causes of those involved a loss of their money they may have invested.
Multi-Level Marketing companies today are mainly strong businesses with multi-tiered compensation levels. The products they promote are usually legitimate and affordable. It does help to be aware of what a MLM looks like so that when you are looking for a new business venture you know the difference between a legitimate company and a pyramid scheme.
If you are interested in a new product that you have seen advertised and are interested in selling the product, many times the structure of the company will be in multi levels. There are a few companies that exist on a single level marketing and compensation strategy, which is one that pays you for product sales only.
It is always a good idea to take the time to research and learn about any company you may want to join. While multi-level marketing as a concept may have a negative image in some peoples view, most companies do operate within the guidelines of the FTC and the Direct Selling Association.