Multi level Marketing

Does the image of a spammy pyramid scheme come to your mind when you hear the word "multi-level marketing"? It's easy to understand why. After all, the multi-level marketing model itself is derived from a pyramid structure. But believe it or not, multi-level marketing is not illegal. If you're curious about how multi-level marketing works and what benefits it brings, read along.

Multi-Level Marketing Definition

Many people associate multi-level marketing with an illegal practice, though it has been employed by multiple businesses worldwide.

Here's the complete definition of multi-level marketing.

Individual distributors are often engaged in the process. These people outside the company market the products and services to their network. Distributors receive a percentage of sales for every successful lead they drive. They also receive a commission for bringing in recruits (new distributors).

Overall, you can break the multi-level marketing model into three primary roles:

1. Sponsors - people who recruit other people to become distributors for the business.

2. Recruits - people who are recruited as distributors.

3. Distributors - people who distribute (sell/promote) the company's products and services.

In many cases, an MLM participant earns their income from being both a "distributor" and "sponsor."

MLMs also come with a compensation plan. This plan describes the relationship between distributors and the business, how distributors get paid, and how to recruit other members.

That said, multi-level marketing is not seen in a positive light. It is often associated with illegal pyramid schemes that attract recruits with false promises of high income.

Multi-Level Marketing Strategy

The best way to picture a multi-level marketing strategy is to think of a pyramid.

Imagine yourself as a sponsor on the top of the pyramid and hire another six friends to sell your products. These six friends will be your distributors, and hire six other friends to join your network. As it goes on, the pyramid's bottom gets wider. This means that your products have more distributors and exposure to the public.

The multi-level pyramid is where the name "MLM" comes from.

Now MLM also has two directions: upline and downline.

• Upline refers to people at the top of the pyramid, for example, the sponsor. These are people who recruit other distributors to join the pipeline.

• Downline is made up of people recruited by sponsors and higher-level distributors.

Distributors in a multi-level marketing network earn their commissions from two primary sources:

• Direct sales to customers.

• Recruiting other distributors.

MLM is often associated with a pyramid scheme. It's easy to understand why. The MLM model itself is derived from a pyramid structure. Though a significant distinction is that while the controversial MLMs are legal, a pyramid scheme is illegal.

A comparison table of MLM and pyramid schemes:

Table 1. MLM vs. Pyramid schemes.

Another big question when talking about MLM: Is it possible to make money in the long run?

Fig. 1 - Pyramid scheme diagram

As you can see from this illustration, the multi-level marketing model is not sustainable.

• At level 1, one person recruits six members, so the number of participants is 6¹ = 6.

• At level 2, six former participants recruit six other members each, so the number of participants is 6² = 36.

• At level 3, 36 participants recruit six other members each, so the number of participants is 6³ = 216.

• ...

• And so on until we reach level 13. The number of participants is 6¹³ = 13,060,694,016. This is way more distributors than our world's total population! In other words, long-term MLM is not possible.²

Multi-Level Marketing Examples

Multi-level receives a lot of bad rap, but that doesn't mean it's not popular. In fact, several successful multi-level marketing networks have lasted for decades.

Avon

Amway

Tupperware

Types of Multi-Level Marketing

There are three types of multi-level marketing based on the source of income:

• Income from products,

• Income from services,

• Income from membership.

In product and service MLM, companies partner with individual distributors to sell their products/services without going through a retail store. Distributors are often referred to as associates, representatives, or affiliates. They can market the products/services to customers through advertising, digital marketing, door-to-door, etc. Distributors receive a commission for every sale they make. In some cases, they are rewarded for getting new distributors onboard.

There is a slight difference between Product MLM and Service MLM.

Product MLM businesses manufacture products themselves, then distribute them to associates for resale. The associates (distributors) can keep the inventory or have the producer ship the product to customers once the order is made. Distributors earn a commission per product sold.

Service MLM businesses require no inventory. The associates market the service the same way as products, though they'll get compensated for service subscriptions. For example, customers sign up for financial services or education programs.

Membership MLM businesses - this is an illegal pyramid scheme. It focuses on recruiting new people rather than sales and marketing. Recruiters get paid substantial funds for getting new members onboard. The membership fee is the main source of income in this channel. Only a few people benefit from the scheme at the top of the pyramid.⁶

Multi-Level Marketing Advantages and Disadvantages

Before wrapping up this explanation, let's consider multi-level marketing advantages and disadvantages.

Advantages of multi-level marketing

Overall, participants in multi-level marketing can benefit from the following:

• Low start-up cost - MLM distributors don't have to produce the product. They can acquire products directly from manufacturers and distribute them through traditional or digital marketing methods. This removes production costs, and the distributor can focus entirely on marketing and sales.

• Flexibility - MLM partners can work anywhere, anytime. It is different from an office job. People can keep inventory at home and start selling at their own pace.

• Cost-effectiveness - Multi-level marketing benefits companies as well. They don't have to pay a fixed salary for participants but only share a profit when a sale is made. Multi-level marketing allows companies to get the product distributed quickly with little internal marketing effort.

Disadvantages of multi-level marketing

That being said, multi-level marketing has numerous disadvantages:

• Ponzi scheme: There is a very thin line between multi-level marketing and a Ponzi scheme (pyramid scheme). As the focus shifts from selling products to acquiring new "recruiters," the business model will turn into a pyramid scheme. Pyramid schemes are scammy and illegal. They cause people to lose their money.

• No professional training - Distributors are not a company's internal sales force, so they don't get trained like internal staff and must manage the whole selling process on their own. MLM is not a good fit for people who lack sales experience or communication skills.

• Low income - It's challenging to get new buyers, especially in the beginning stage, where you have low creditability. MLM is not a stable job, and there is no fixed salary.

• Negative reputation - MLM is not well perceived among the public. People tend to stay away from MLM for fear of getting ripped off.