There are three types of multi-level marketing (MLM) businesses, based on their major source of revenue: those that sell a product, those that sell a service, and those that sell memberships. MLM businesses are made attractive to potential salespeople because they can earn commissions not only from the sale of the goods or services they sell themselves, but also from the sales of those they recruit into the business. While many MLMs are very reputable and successful businesses, some have employed questionable marketing and recruiting tactics, sullying the reputation of the entire industry.
MLM businesses are generally regular businesses selling products or services. Multi-level marketing is their approach to distribution and sales; instead of selling goods out of a storefront or services from an office, they contract with individuals to do their selling as independent contractors. Known by such terms as associates, distributors, representatives, or affiliates, they reach out to potential customers in a number of different ways, including traditional advertising, online approaches, and door-to-door direct sales. New associates typically pay significant fees to join the sales force, and are sometimes permitted to advance to managerial status for a higher fee.
MLM associates earn commissions on their own sales, and they earn smaller commissions, or overrides, on the sales of those associates they’ve recruited to the business. When an associate recruits a new associate, that new associate becomes part of the recruiter’s “downline,” which comprises all an associate’s recruits, plus all of their recruits. Most MLM compensation packages offer overrides on second-, third-, and fourth-generation recruits, and some offer overrides on an associate’s entire downline.
MLM businesses that sell products usually make the product themselves, but in some cases, they’ll contract with a third party to manufacture it with the MLM’s label. Examples of such products include such things as vitamins and nutritional supplements, cosmetics and beauty aids, cleaning supplies and other household products, and other products that lend themselves to impulse and repeat purchases. While some associates will maintain an inventory of the product for immediate delivery when a sale is made, most take orders and transmit them to the home office. Some companies ship orders directly to the customers; others deliver orders in bulk to the associates, who then hand-deliver them to the customers. In either case, associates’ compensation is based on the dollar value of products ordered and paid for.
MLM businesses that sell services, on the other hand, have no need for inventories or recurring visits to clients. Their associates market the company’s services the same way as the product-selling associates, and are compensated similarly. Instead of selling a product, though, they sell memberships to the company’s service. There’s very little commission paid for renewal memberships, however, so an associate must constantly find new clients to maintain a good income. Service-oriented MLMs sell online education plans, buying club memberships, legal services, financial services, and similar services.
The third type of MLM business sells memberships, and can more accurately be classified as a pyramid scheme. These MLMs concentrate on recruiting new associates, and there’s little attention paid to selling a product or service. These MLM businesses pay associates a significant commission for recruiting new associates, providing an added incentive to seek revenue from a source other than the company’s product or service. Without an emphasis on earning revenue from the sale of a service or product, such MLM businesses inevitably collapse.
Many MLM businesses are very successful. Despite their success, however, most research indicates that the majority of associates don’t earn enough from commissions and overrides even to pay their expenses. The companies, on the other hand, earn money not only from the sales of the products or services, but also from the from the sign-up fees charged to new associates. Many MLMs also sell their associates a wide range of sales support materials, such as presentation binders and other promotional material, and even require that business cards and other stationery items be ordered through the company.
The success of some of the large MLM businesses has led to a wide range of imitators. Some of these imitators’ activities have prompted investigations, which have cast a shadow on the entire industry. Those considering joining an MLM should carefully perform their own due diligence before signing any agreement or paying any fees.