Multi Level Marketing (MLM)

Multi-level marketing (MLM) also referred to as Network Marketing is a business distribution model that allows a parent multi-level marketing company to market their products directly to consumers by means of relationship referral and direct selling.

Independent unsalaried salespeople of multi-level marketing referred to as distributors (associates, independent business owners, franchise owners, sales consultants, consultants, independent agents, etc.), represent the parent company and are rewarded a commission relative to the volume of product sold through each of their independent businesses (organizations).

Independent distributors develop their organization by either building an active customer base, who buy direct from the parent company and / or by recruiting a downline of independent distributors who also build a customer base, expanding the overall organization. Additionally, distributors can also earn a profit by retailing products which they purchased from the parent company at wholesale price.

Distributors earn a commission based on the sales efforts of their organization, which includes their independent sale efforts as well as the leveraged sales efforts of their downline. This arrangement is similar to franchise arrangements where royalties are paid from the sales of individual franchise operations to the franchisor as well as to an area or region manager. Commissions are paid to multi-level marketing distributors according to the company?s compensation plan. There can be multiple levels of people receiving royalties from one person's sales.

Legitimacy:
It is sometimes difficult to distinguish legal and reputable MLMs from illegal pyramid or Ponzi schemes. MLM businesses operate in the United States in all 50 states and in more than 100 other countries, and new businesses may use terms like "affiliate marketing" or "home-based business franchising". However, many pyramid schemes try to present themselves as legitimate MLM businesses.

In the most legitimate MLM companies, commissions are earned only on sales of the company's products or services. No money may be earned from recruiting alone ("sign-up fees"), though money earned from the sales of members recruited is one attraction of MLM arrangements. If participants are paid primarily from money received from new recruits, or if they are required to buy more product than they are likely to sell, then the company is a pyramid or Ponzi scheme, which is illegal in most countries.

New salespeople may be required to pay for their own training and marketing materials, or to buy a significant amount of inventory. A commonly adopted test of legality is that MLMs follow the so-called 70% rule which prevents members "inventory loading" in order to qualify for additional bonuses. The 70% rule requires participants to sell 70% of previously purchased inventory before procuring new orders. There are however variations in interpretations of this rule. Some attorneys insist that 70% of purchased inventory should be sold to people who are not participants in the business, while many MLM companies allow for self-consumption to be a significant part of the sales of a participant. The Federal Trade Commission offers advice for potential MLM members to help them identify those which are likely to be pyramid schemes.

Compensation plans:
Companies have devised a variety of MLM compensation plans over the decades.
Unilevel or Stairstep Breakaway plans are the oldest and most popular. They feature two types of distributors -- managers and non-managers -- and three types of pay:

Baseshop overrides are overrides (commissions) paid to managers by their subordinate non-managers, collectively called a baseshop. This is the same as any other sales organization.

Generational overrides are overrides of managers from the baseshop of managers who were previously their subordinate. Most plans compensate at least three generations of such managers.

Executive bonuses are commissions for managers who exceed a sales quota. For example, 2% of the total company sales revenue may go to a bonus pool that is shared monthly pro rata to managers who exceed $10,000 in that month.
Matrix plans limit the width of each level in a distributor's group, forcing strong distributors to pile ("spillover") their recruits over people who did not sponsor them.

Binary plans limit the width of each level to two legs. Commissions are based on "cycles," where a distributor is paid a fixed amount whenever both legs achieve a certain number of sales units each. Commissions are paid incrementally when the sales volume in each leg matches.
Elevator or Matrix schemes feature a board or a list on which each distributor pays in one or more product units to participate. When a certain number of units have been paid in, the structure splits and the earlier participant receives consideration. The Matrix scheme article discusses the legality of this plan.

Differential Pay Scale are compensation plans in which a person's override is based on the difference in compensation level between them and the person that made the sale or the highest level person between them and the sale. In this model if someone downline is at an equal or higher compensation level there will be no override since the differential would be 0 or negative. The plus side is that these plans can pay in unlimited depth and people get overrides from any leg in which they maintain a higher pay level than.

Criticism of MLM: The Federal Trade Commission (FTC) issued a decision, In re. Amway Corp. in 1979, which indicated that multi-level marketing was not illegal per se. However, Amway was found guilty of price fixing (by requiring "independent" distributors to sell at the low 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. 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. FTC trade regulation rules usually take 1-1/2 to 3 years before a final rule is established.

Criticisms have been raised against MLM programs for being cult-like in nature. Many MLM programs feature intense motivational programs, which can be hard to distinguish from cult propaganda. Criticism of Amway as a cult have been regarded as largely baseless, though some of the "Independent Business Organizations" within Amway have been accused of operating as cults.

Another criticism is that MLM programs are set up to make most distributors fail, as there is an incentive to continue to recruit distributors even as the products have reached market saturation, thus causing the average earnings per distributor to continue to fall.