What Is MLM?
Multilevel marketing (MLM) , also known as network marketing or referral marketing is a strategy that sells products and services through a non-salaried workforce in a pyramid-shaped commission system.
MLM encourages existing, independent members to promote and sell their offerings to other individuals and bring on new recruits into the business. The distributors receive commissions on the sales made by themselves and their downline teams, as explained in the next chapter.
Many MLM schemes are legal but there are illegal operations that are run as pyramid schemes.
How MLM works?
MLM is a legitimate business strategy where companies sell their products or services through person-to-person sales. That means you’re selling directly to other people, maybe from your home, a customer’s home or online.
Here's how it works. Individuals are brought into the business as contractors, independent business owners, distributors or direct salespeople. These people are then tasked with selling the company's products and/or services to others, including family and friends. They are given a commission for every sale they make.
Distributors are also encouraged to bring in or recruit others into the program. A distributor is not paid when a new ( downline ) individual is recruited. Yet, the sales from his downline individuals are also attributable to him. The distributor is compensated by a certain percentage of the sales from his downline team.
Many distributors with large-scale downline teams even do not sell products by themselves. They can receive sufficient commissions from their downline teams’ sales. The commission system effectively motivates existing distributors to build up or expand their downline teams.
There can be hundreds or even thousands of distributors, where members at all levels receive some form of commission, as long as the chain keeps going. The more layers there are, the more money people can make. However, most people who join legitimate MLMs make little or no money. Some of them lose money. In some cases, people believe they’ve joined a legitimate MLM, but it turns out to be an illegal pyramid scheme that steals everything they invest and leaves them deeply in debt.
When MLM becomes pyramid scheme scam?
Although it is legal, MLM is often controversial. One problem is pyramid schemes that use money from new recruits to pay people at the top rather than those who perform the work.
A pyramid scheme looks very similar to MLM where the business expands by recruiting several layers of members, which form a pyramid system.
The major difference is that the primary goal of an MLM company is to sell actual products or services to its customers. Conversely, a pyramid scheme does not supply any real products or investments where distributors are convinced that the company owns a valuable product or investment project. They only receive “promised payments” by recruiting downline participants. The more downline participants are recruited, the more people are dragged into the fraudulent activity.
MLM distributors, especially the lower-tier ones, usually make small amounts of money. Participants deceived by a pyramid scheme typically lose all the money they invested in or paid as “membership fees.”
If a business places a greater focus on recruitment rather than sales of products, the business is very likely a pyramid scheme.
The Federal Trade Commission (FTC) is responsible for investigating MLM companies. In some cases, it is even difficult for the FTC to determine whether the company is operating legally or not.
So, what makes one legitimate and the other an illegal scam?
An issue in determining the legitimacy of an MLM company is whether it sells its products primarily to consumers or to its members who must recruit new members to buy their products. If it is the former, the company is likely a legitimate multilevel marketer. If it is the latter, it could be an illegal pyramid scheme.
According to the Federal Trade Commission (FTC), “if an MLM is not a pyramid scheme, it will pay you based on your sales to retail customers, without having to recruit new distributors.” Pyramid schemes, meanwhile, rely on continuous recruitment of dues-paying members to stay afloat, even if they require members to keep buying products that they may not be able to sell.
How to spot a Pyramid Scheme?
Pyramid schemes look remarkably like legitimate MLM business opportunities and often sell actual products. But if you become a distributor for a pyramid scheme, it can cost you and your recruits (often your family and friends) a lot of time and money that you won’t get back.
The promoters of a pyramid scheme may try to recruit you with pitches about what you’ll earn. They may say you can change your life and even get rich — by selling the company’s products. That’s a lie. Your income would be based mostly on how many people you recruit, not how much product you sell. Pyramid schemes are set up to encourage everyone to keep recruiting people to keep a constant stream of new distributors and their money.
Often in a pyramid scheme, you’ll be encouraged or even required to buy a certain amount of product at regular intervals, even if you already have more inventory than you can use or sell.
You also may have to pay repeated fees for other items, like training sessions or expensive marketing materials. In addition, the company may say you can earn lavish rewards, like prizes, bonuses, exotic vacations, and luxury cars. However, it often turns out that you have to meet certain product purchase, recruitment, training, or other goals to qualify for the rewards, and only a handful of distributors ever qualify.
Eventually, most distributors find that no matter how hard they work, they can’t sell enough inventory or recruit enough people to make money. In the end, most people run out of money, have to quit, and lose everything they invested.
Here are some warning signs of a pyramid scheme:
- Promoters make extravagant promises about your earning potential.
- Promoters emphasize recruiting new distributors for your sales network as the real way to make money. Walk away. In a legitimate MLM program, you should be able to make money just by selling the product.
- Promoters play on your emotions or use high-pressure sales tactics, maybe saying you’ll lose the opportunity if you don’t act now and discouraging you from taking time to study the company.
- Distributors buy more products than they want to use or can resell, just to stay active in the company or to qualify for bonuses or other rewards. If you see this happening, keep your money.
Will the Pyramid Schemes Always Fail? Are MLM companies surviving?
Pyramid schemes are doomed to fail because their success depends on the ability to recruit more and more investors. Since there are only a limited number of people in a given community, all pyramid schemes will ultimately collapse. The only people who make money are those few who are on the top of the pyramid.
Legitimate MLM companies, on the other hand, can be around for a long time. Although the recruiting of additional investors is an essential part of the marketing practice, since legitimate MLM companies involve solid products or services, participants in these companies are not subject to huge losses.
Real-World Examples of MLM
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. 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 MLM companies in the world.
Herbalife Nutrition is one of the largest MLM companies for dietary supplements. Founded in California in 1980, it now has almost 2.3 million independent distributors worldwide.
There have been multiple lawsuits against Herbalife accusing it of misrepresenting its sales practices, including a settlement reached with the FTC in 2016, under which it had to restructure its business.
Amway is a well-known direct sales company that uses MLM to generate revenue. The company, which sells health, beauty, and home care products in more than 100 countries, reported $8.8 billion in sales conducted by its independent business owners in 2018. That being said, the company has been under so much scrutiny that members often actively avoid saying that they’re selling Amway products.
Is there any example of a true pyramid scheme?
In 2008, a massive pyramid scheme swept through Canada, promising citizens a chance to get rich by selling low-cost travel club membership plans. To qualify, applicant "sellers" were first required to purchase memberships for themselves, at a costly $3,200 price tag. More than 2,000 folks brought out their checkbooks, as they were promised $5,000 for each similar membership they sold. However, profits could only be realized when applicant members accumulated $100,000 in sales, which entailed selling at least 20 membership plans. But this proved virtually impossible in a downward economy, where people fiercely clung to their money. Consequently, aggrieved investors filed a class-action lawsuit, resulting in the return of their money, and the dismantling of the scheme.
In the end, here is few more facts:
- MLM is legal in the U.S. and most countries, but it is banned in a handful of countries, such as Bangladesh, China and Saudi Arabia
- The majority of MLM participants make no money
- Japan is the country with the second-largest direct sales workforce, with 3,300,000 distributors.
- Amway, Avon, and Herbalife are the most successful multi-level marketing companies
- The Dutch couple, Igor Alberts and Andreea Cimbala are widely recognized as the most successful business partners in MLM with more than $135 million in lifetime earnings
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