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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.
How does multi-level marketing work?
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?
This form of marketing, which is also known as network marketing, is a special type of direct sales approach in which products are sold to consumers through an ever-expanding sales network consisting of a few salaried employees and many freelance sales representatives. Participants can recruit interested customers as new sales representatives to generate additional earnings.
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.
Differentiating multi-level marketing from dubious pyramid schemes
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, whogrow 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.
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Key terms in MLM/network marketing
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: Listsall 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.
Examples of multi-level marketing/network marketing companies
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.