What is Multi-Level Marketing and How does it Work?

Understanding Multi-Level Marketing

Multi-level marketing (MLM), also known as direct marketing or network marketing, is a method of selling products directly to consumers using independent sales representatives.

MLM companies tend to appeal to new recruits with promises of wealth and independence. While not illegal by definition, many MLMs have become infamous for their controversial business practices—and others have been revealed to be little more than illegal pyramid schemes.

What Is Multi-Level Marketing?

Multi-level marketing companies use people instead of retail outlets to sell their products to customers. This puts the responsibility for selling into the hands of independent distributor networks.

Under the MLM model, distributors are not employees of the company. Instead, they’re individual business owners who recruit their own distributor networks to help them sell products. Multi-level marketing firms rely upon this extended network of independent distributors to generate revenue.

How Multi-Level Marketing Works

To understand how MLM works, think of a pyramid. In our example, "Alice" is the first independent distributor hired directly by Direct Marketing Company. "Alice" becomes the top of the pyramid.

"Alice" recruits five independent distributors, who each turn around and recruit five more independent distributors, and so on. This fills out the pyramid that Direct Marketing Company relies upon to sell its products.

"Alice" is the sponsor, or upline, of everyone she recruits. The people she recruits (as well as all the people they recruit) become her downline.

The directions of these relationships are important to keep in mind because they impact the money everyone in the pyramid earns in most multi-level marketing schemes. All distributors pay a portion of their earnings to the company as well as to those upline of them.

“MLM distributors earn money from selling products to people they know, commissions from each person they recruit to the company and commissions from the sales and recruits generated from their own recruits, continuing down multiple levels,” says Christine Alemany, CEO of TBGA, a branding and marketing support agency. “In order to succeed, a distributor must continuously recruit as many downlines as possible to join their team.”

Typically MLMs offer a detailed compensation plan that outlines precisely how these upline and downline relationships work and how distributors get paid. These plans spell out things like recruiting and sales commissions as well as define the requirements a member must meet to be eligible for compensation, usually expressed in minimum sales targets and numbers of new recruits.

Pyramid Scheme vs. MLM

It’s understandable if the dynamic of MLM companies has you questioning if they’re little more than pyramid schemes. Both, after all, operate with the same pyramid-shaped structure.

So what makes one legitimate and the other an illegal scam? It comes down to the sales versus recruitment focus in the compensation plan.

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.

Why Are Mlms Bad? Understanding The Negative Consequences Of Multi-Level Marketing.

1. Unrealistic Promises: Most MLM companies make unrealistic promises about potential earnings, often exaggerating the potential of their product. This can lead to disappointment and disillusionment when reality doesn’t match up with expectations.
2. Pyramid Structure: The structure of MLM businesses is often pyramid-shaped, meaning that most of the profits are made by a few people at the top while those on the lower rungs are left to struggle for what little they can get. This creates an unfair system where those at the bottom have little chance of profiting from their efforts.
3. High-Pressure Sales Tactics: Many MLM companies employ high-pressure sales tactics in order to push their products, which can lead to people feeling pressured into signing up or buying something they don’t really need or want.
4. Lack of Transparency: Many MLMs lack transparency when it comes to how much money people actually make, making it difficult for potential recruits to make an informed decision about joining a particular program or company.
5. Recruiting Over Selling: Since most MLMs focus more on recruiting than actually selling products, there is a risk that members will be more focused on recruiting rather than selling actual products, leading to an unsustainable system with little incentive for members to actually sell anything.
6. Low Retention Rates: Most MLM businesses have very low retention rates as people quickly become disillusioned with their experiences and decide that it isn’t worth their time and effort anymore  The low retention rate also makes it difficult for companies to sustain themselves in the long run as they rely on new recruits in order to keep growing and generating profits.
7. Difficulty Generating Leads: Many MLMs require members to generate leads in order for them to be successful but this can be difficult if you don’t have experience or don’t know how best to do this effectively and efficiently which can lead to frustration and failure members trying out this business model.
8. Low-Quality Products/Services: Many MLMs offer low-quality products or services that are overpriced compared with similar ones available elsewhere, making them hard for customers (and potential recruits) to justify buying them.  This lack of value further contributes towards making them unsustainable businesses in the long run as customers will not return if they do not see any value in what is being sold. 
9. Legal Issues: Some MLMs have been subject to legal action due to their practices, such as pyramid schemes or deceptive marketing tactics, which can lead to fines and even criminal charges for those involved.  This can create a negative perception of MLMs among potential customers and recruits which can make it harder for them to succeed.

Negative Consequences Of Participating In Mlms

•  Loss of Money: As mentioned above, many people lose money when they participate in an MLM. This is because the upfront payments and initial investments can be very high, and it is often difficult to make a profit.
•  Loss of Time: Participating in an MLM requires a great deal of time and effort. You must spend time recruiting new members, making sales calls, attending meetings, and managing your team. All of this time could be better spent pursuing other opportunities that have a higher chance of success.
•  Damage to Reputation: Participating in an MLM can damage your reputation with friends and family members who are not interested in joining the network or purchasing its products. This can lead to strained relationships and loss of trust between you and those close to you.
• Pressure from Uplines: Many MLMs require participants to constantly recruit new members in order to make more money or increase their rank within the network. This can lead to pressure from uplines (people higher up in the network) to keep recruiting more people or risk losing out on potential income or status within the organization. This pressure can be overwhelming and lead to feelings of guilt or anxiety.
•  Difficult to Leave: Many MLMs require participants to sign contracts that make it difficult or impossible to leave the organization. This can lead to a feeling of entrapment and make it difficult for participants to move on if they decide they no longer wish to participate in the MLM.

How Mlms Mislead Potential Participants

1. Promising unrealistic financial returns: MLMs often make exaggerated claims about the potential for financial returns, which can lead people to believe that they will be able to earn more money than is actually possible.
2. Making deceptive claims about products and services: MLMs may make false or misleading claims about the products and services they offer in order to entice potential participants into joining their network.
3. Focusing on recruitment over sales: Many MLMs focus more on recruiting new members than on selling products and services, which can lead participants to believe that all they have to do is recruit new members in order to make money.
4. Minimizing the risks involved: MLMs may downplay or even ignore the risks associated with participating in their network, such as losing money or not earning any return on investment.
5. Not disclosing all fees upfront: MLMs may fail to disclose all of the fees associated with participating in their network upfront, which can lead people to believe that there are no costs involved with joining an MLM when there actually are costs involved.
6. Not clearly explaining how income is earned: Many MLMs do not provide clear information about how income is earned within their networks, which can lead people to believe that they will be able to earn money without doing any work or taking any risks when this is often not true.
7. Not providing adequate training or support: Many MLMs do not provide adequate training or support for their members, which can lead people to become frustrated and give up on participating in an MLM altogether because they feel like they don’t know what they’re doing or don’t have anyone who can help them succeed within the network.
8. Misleading potential participants with exaggerated success stories: Some MLMs use false success stories of people who have supposedly made large amounts of money in a short period of time through an MLM as a way of enticing potential participants into joining their networks without fully disclosing all of the risks involved with participation in an MLM scheme.
9. Making promises that cannot be kept: MLMs often promise things like quick riches, easy work, and high incomes without properly explaining how these promises are impossible for most people who join their networks.
10. Not providing clear information about refund policies: ManyMLMs do not provide clear information about refund policies, which can leave unsuspecting customers feeling cheated if they find out that they are unable to get their money back after signing up for an MLM scheme.

Final Thoughts On Mlms

In this article, we explored why MLMs are often unsustainable and have many negative consequences. We also explored why MLMs are often misleading and can lead to legal and ethical issues. While there are many benefits to participating in an MLM (such as the ability to work from home), there are also many risks associated with them. It is important to understand these risks before joining an MLM.

About: Andries vanTonder

Over 40 years selfemployed 

He is a Serial Entrepreneur, an Enthusiastic supporter of Blockchain Technology and a Cryptocurrency Investor

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