MLM: what is multi-level marketing?

By de­f­i­n­i­tion, multi-level marketing (MLM), also called network marketing is a sales strategy in which products or services are sold directly to consumers without going through in­ter­me­di­ary retail stores. In most cases, MLM companies sell cosmetics or dietary sup­ple­ments. These are consumer goods that can be sold to regular customers at frequent intervals.

Tup­per­ware parties and AVON con­sul­tants are typical examples of multi-level marketing that most people are familiar with. But how exactly does multi-level marketing work, and how does it differ from tra­di­tion­al direct sales?

In contrast to tra­di­tion­al direct sales, where sales rep­re­sen­ta­tives are employed by a company, the multi-level marketing model uses freelance dis­trib­u­tors who work full- or part-time. Most of these recruits are satisfied customers them­selves, who are offered bonuses, favorable purchase con­di­tions, and high com­mis­sions. The idea behind multi-level marketing is to use the dis­trib­u­tors’ personal networks for targeted referral marketing, according to the principle: “You’re more likely to believe a friend than an ad­ver­tis­ing agency.”

In­de­pen­dent dis­trib­u­tors are often better brand am­bas­sadors than celebri­ties are. Like micro-in­flu­encers in online marketing, dis­trib­u­tors in MLM influence their friends. Word of mouth is as important as it is in in­flu­encer marketing or viral marketing.

The term multi-level marketing refers to the different levels within the pyramid-like or­ga­ni­za­tion­al structure. The company’s sales manager has a small team of salaried employees who recruit freelance dis­trib­u­tors, who in turn recruit new partners.

When a dis­trib­u­tor makes a sale, they receive a com­mis­sion. The person who recruited the dis­trib­u­tor also receives a partial com­mis­sion, and their sponsor also gets a per­cent­age of the sale. This principle continues all the way up to the top of the pyramid. Even the CEO should receive a portion of the com­mis­sion in addition to the actual value of the goods. As a result, dis­trib­u­tors at higher levels often generate more income from the com­mis­sions on the sales their recruits make than they do from their own sales.

Unlike the hi­er­ar­chies in a tra­di­tion­al company, the levels in a multi-level marketing model only govern how com­mis­sions are shared. Dis­trib­u­tors at higher levels have no man­age­r­i­al authority over par­tic­i­pants at lower levels. Many dis­trib­u­tors are very happy with this flat hierarchy because they feel they have more direct contact with senior man­age­ment. However, dis­trib­u­tors in a multi-level marketing company face much higher en­tre­pre­neur­ial risks than sales­peo­ple in tra­di­tion­al direct sales jobs, as com­mis­sions are usually their sole source of income.

Most dis­trib­u­tors in MLM or­ga­ni­za­tions are highly motivated, even though they often have no formal business training and only receive product and sales training through the company. In most cases, companies use two standard models for rewarding strong per­for­mance: Par­tic­i­pants who are suc­cess­ful in re­cruit­ing new dis­trib­u­tors will generate sig­nif­i­cant passive income through com­mis­sions. Suc­cess­ful sellers can also work their way up the ladder and earn higher com­mis­sions.

The pyramid scheme business model only works if the number of par­tic­i­pants grows sub­stan­tial­ly. Rather than em­pha­siz­ing actual product sales, these schemes focus on re­cruit­ing new par­tic­i­pants, who grow the business by investing their money or working. For example, companies that sell guides on making money with the scheme instead of selling actual products are not only un­trust­wor­thy, they’re illegal. As are companies that sell products – often just one product – that are so over­priced that no-one would buy them without an incentive to earn a com­mis­sion from recruits.

In contrast, a le­git­i­mate multi-level marketing company sells high-quality products at cheaper prices than com­peti­tors with tra­di­tion­al dis­tri­b­u­tion channels. The com­mis­sion must make it worth­while for dis­trib­u­tors to par­tic­i­pate and can be higher than tra­di­tion­al sales com­mis­sions because the company saves on overhead costs for employees, rent, and wholesale margins. Reputable network marketing companies can also be iden­ti­fied by their ad­ver­tis­ing, which em­pha­sizes products rather than the op­por­tu­ni­ty to generate passive income by re­cruit­ing ad­di­tion­al dis­trib­u­tors.

In the multi-level marketing or network marketing en­vi­ron­ment, you’ll often encounter technical terms that sometimes have different meanings to their coun­ter­parts in everyday language.

Plan: Lists all the ways sales­peo­ple can make money. The plan also shows how com­pen­sa­tion changes with sales volume and partners recruited. Reputable companies make the plan as trans­par­ent as possible for their employees.

Sponsor: A person who recruits another person into the business.

Recruit or partner: A person recruited into the business by a sponsor. The sponsor earns money from the partner’s sales.

Dis­trib­u­tor: Most multi-level marketing or­ga­ni­za­tions refer to their par­tic­i­pants as dis­trib­u­tors, not sales rep­re­sen­ta­tives.

Downline: All the people below a dis­trib­u­tor; either members recruited by the dis­trib­u­tor or new recruits enrolled by these members. All dis­trib­u­tors earn income on the sales of their downline.

Upline: All dis­trib­u­tors above a member’s own sponsor in the hierarchy. The upline extends all the way up to the Head of Sales. All dis­trib­u­tors in the upline earn com­mis­sion on sales by downline partners.

The most suc­cess­ful multi-level marketing companies in the USA include the following:

Tup­per­ware is one of the best-known MLM companies worldwide. Founded in the USA in 1938, the company has become syn­ony­mous with its entire product category – plastic food storage con­tain­ers – to a level rivaled only by companies with classic dis­tri­b­u­tion channels like Scotch tape or Hoover vacuum cleaners. Worldwide, over 40 Tup­per­ware parties are hosted every minute.

Avon is a cosmetics brand with around 6 million rep­re­sen­ta­tives and annual revenue of $5.7 billion. It is one of the largest multi-level marketing companies in the world. In early 2020, Avon Products, Inc. was acquired by cosmetics group Natura & Co, which includes The Body Shop brand.

Herbalife is one of the largest multi-level marketing companies for dietary sup­ple­ments. Founded in Cal­i­for­nia in 1980, it now has almost 2.3 million in­de­pen­dent dis­trib­u­tors worldwide.

Amway is the largest network marketing company in the world, with revenue of almost $9 billion. Es­tab­lished in Michigan in 1959, its roughly 3 million rep­re­sen­ta­tives sell health, beauty, and home care items in over 100 countries.

Companies like Mary Kay, Nu Skin, Vorwerk, and Young Living also suc­cess­ful­ly sell consumer goods in the USA using multi-level marketing models.