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What Is an MLM?

Multilevel Marketing Explained

DEFINITION:

A multilevel marketing company (MLM) is a firm that sells its product or service via direct sales.

Definitions and Examples of MLMs

Rather of having a storefront operation, multilevel marketing organizations rely on independent distributors to sell their goods directly to customers and recruit new salespeople into the company. Sales are typically online or in customers’ homes. These distributors aren’t hourly or paid workers. Instead, they are independent contractors and only get money when they sell the goods. The firm encourages each distributor to acquire new members to join their downline. Then, the distributor receives a share of any sales their recruits create.

Many individuals use the phrases “MLM” and “pyramid scheme” interchangeably. And although they’re not completely the same thing, some MLM firms are pyramid scams and in violation of federal law.

An unlawful pyramid scheme is a corporation that recruits distributors, exactly as an MLM would. But in the case of a pyramid scheme, participants can’t truly earn money providing a product or service; rather they make money by recruiting other distributors to join beneath them. Pyramid schemes are unlawful, and the Federal Trade Commission (FTC) tries to shut them down.

A notable example of FTC action against a pyramid scam is the January 2020 temporary stoppage of an instant-coffee pyramid scheme named “Success by Health.” The FTC’s news statement regarding the lawsuit reveals the company’s founders got $7 million from their distributors and pocketed more than $1.3 million of it.

“The FTC alleges that less than 2% of participating consumers received more money from the defendants than they paid to them, and that those lucky few averaged less than $250 per month—a far cry from the defendants’ promises of ‘financial freedom,’” the FTC’s announcement said.

The difference between a pyramid scheme like Success by Health and a legal MLM is that legal MLMs have a valid product and distributors may earn money by selling that product. And although reputable MLM organizations also urge distributors to attract new participants into their “downline,” they don’t necessary have to do so to gain money.
Note
Many MLM firms require distributors to acquire their own goods to sell. Participants may also have to pay a monthly fee to access the company’s marketing and establish a website.

How MLMs Work

MLMs depend on additional individuals regularly entering the organization so the people at higher levels may make money from the sales of people who are newer to the organization. You may be required to pay money ahead to join. You'll have sales targets you'll be pressured to fulfill, and you may also be asked to attract a specific quantity of individuals to the company who will become your downline.

There are hundreds of MLM organizations operating in the U.S., and it may be tough to figure out whether a trendy new product or employment offer from a friend is an MLM in disguise. You may have had the experience of a casual discussion with an acquaintance turning into a sales pitch to join their MLM team. When you join a team at the request of a friend or acquaintance, you become part of their "downline." This places you lower in the hierarchy and in a position where others above you get money from your sales. The individuals you bring into the company then become downline from you. Here are some features most MLMs have in common:

You can only purchase a product from a distributor: MLM firms normally only sell their items via distributors; you can’t buy the item from a retail shop.
 
Someone solely promotes things from one company: There’s no lack of influencers marketing items online. As a consequence, you could have a hard time finding out which are MLM items. If an influencer you follow or someone you’re friends with on Facebook solely pushes items from one firm, they could be an MLM distributor.
 
A recruiter approaches you with promises that sound too good to be true: A work offer could make guarantees of generating a lot of money, but the business strategy appears uncertain.
 
You have to pay to join: You’d be hard-pressed to discover a credible employment offer if you had to pay to acquire the job. If a firm demands you to purchase a product ahead or pay a membership fee, it’s certainly an MLM.
 
You’re asked to attract new members: One of the primary elements of MLM organizations is that, in addition to selling a product, distributors are encouraged to attract participants into their downline to make extra money. This business strategy is an indicator that the firm is either an MLM or a pyramid scam.
Note
Women dominate the MLM sector, outnumbering male distributors at roughly a 3-to-1 proportion.

Criticism of MLMs

MLM businesses aren’t new. Amway, one of the most well-known MLM organizations, has been operational since 1959 and was at the core of an FTC judgment that helped to separate genuine MLM companies from unlawful pyramid schemes. MLMs have only risen in prominence since then, with firms like doTerra, LuLaRoe, and Scentsy moving into the mainstream. Roughly 7.7 million Americans made $40.1 billion in direct sales in 2020, up from $28.6 billion in 2010, according to statistics from the Direct Selling Association (DSA).

Despite repeated claims of large incomes, few MLM members actually end up gaining money. According to an AARP research, roughly seven out of 10 distributors break even or lose money, 25% earn a profit, 27% make no money at all, and a staggering 47% lose money.
Note
If you aren’t convinced on joining an MLM, try establishing a company of your own. Many MLM recruiters tempt individuals with the prospect of entrepreneurship and “being your own boss.” In truth, joining an MLM means working for someone else.

Considerations for MLMs

While the research plainly reveals that direct sales aren’t successful for most individuals, many people nevertheless join for the promise of financial independence. And undoubtedly, there are individuals who earn a career in an MLM firm. Before enrolling, here are a few things to bear in mind:

Make sure you understand the business and the product: If you don’t comprehend the business strategy or the product isn’t the major emphasis of the firm, you might be dealing with an MLM that’s an unlawful pyramid scam.
 
Ask about financial facts upfront: Find out what type of upfront expense there is. If the firm asks you to acquire things to sell, ensure sure they also take returns on unsold products.
 
Familiarize yourself with sales and marketing: When you join an MLM as a distributor, you’re a salesman. Your success will be reliant on your ability to promote the product. If you’re new to sales, grasp the fundamentals of business and marketing.
 
Key Takeaways
 
Multilevel marketing firms are enterprises that offer items or services via direct sales.
 
MLMs depend on distributors to recruit additional salespeople into the firm. Distributors get money on the sales of customers they bring in.
 
The Federal Trade Commission watches MLMs and has shut some of them down owing to their being pyramid scams.
 
If you're contemplating joining an MLM, be sure you understand the payment structure, what's needed of you, and any money you'll be asked to come up with ahead.

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