Business

What Is An MLM (Multi-Level-Marketing Company)?

Many people have heard of the term “MLM” but are still not completely sure what it means. MLM stands for Multi-Level Marketing and is sometimes also called network marketing or referral marketing. Companies with an MLM structure do not have traditional retail or online sales. Instead, they sell products exclusively through their network of ‘distributors’, who buy the product in bulk from the company and then sell the products to individual customers. It is up to the distributors to market their products and find buyers – the parent company does not have any direct contact with the customers.

It is important to realize that MLMs are not franchises, though they may sound similar. With a franchise, you own a business and are fully responsible for everything involved with that business. As an independent distributor, you are effectively a reseller of the company’s products, and the difference between your purchase cost and selling price is the profit you keep for yourself.

Distributors usually will sell to people they know, like friends and family, who may have an interest in the product. However, a key component of a distributor’s revenue is not in the sales they make themselves, but in recruiting other people to also sign up as new distributors for the company.

For every new distributor, you can bring into the company (generally called you’re ‘downline’), you will get a percentage of the sales made by that new person and anyone that they may sign up in the future. So, the more people you sign up, and the more people they sign up, the more money you are making off other peoples’ sales. As a result of this structure, most people who make good money in MLMs do so by having a large number of people under them in the company. 

MLM Diagram

Let’s look at a quick example of how MLM participants may generate revenue. Assume you are participating in an multilevel marketing business that pays you a 20% commission on sales you refer and a 5% commission on sales made by downline participants (people you refer).

If you sell $50,000 worth of product and your downline participants sell a total of $200,000 worth of product, you will make $20,000 ($10,000 commission on your sales + $10,000 commission on your downline distributors’ sales).

Commission structures will vary by company and there may be different rewards at different tiers, but this is the general business strategy behind an MLM business venture.

Let’s take a closer look.

Brief History of MLMs

Brief History of MLMs

It is not completely certain when or how multi-level marketing as a business model started, but generally, it is thought to have started with a company called Nutrilite (originally The California Vitamin Company) in the 1940s. The founder, Carl Rehnborg, started the business to sell nutritional supplements that he first learned about in China.

After a few years of managing the company through traditional direct selling, he moved to a multi-level marketing model to increase sales. Later, two ‘consultants’ working at Nutrilite started their own company: Amway. Amway is one of the longest-running MLM companies, and eventually bought a controlling interest in Nutrilite in 1972 and took full ownership in 1994.

Since these first few companies, the MLM industry has grown exponentially and globally. It is now a multi-billion-dollar market. There are hundreds of MLM companies, and they are present in just about every country around the world. For example, the MLM company Herbalife has a market capitalization of over $6.5 billion, annual revenue of over $4 billion, and sponsors over 190 sporting events and professional athletes like Cristiano Ronaldo. 

How MLMs Have Evolved with Technology

MLM Technology

MLMs have definitely changed a lot since Nutrilite and the 1940s. In the past, most distributors just sold products to their friends and family, and maybe even went door-to-door to sell to strangers. This direct sales approach is at the heart of an MLM business.

But with the invention of the internet and especially social media, MLMs have gone digital. With platforms like Facebook, Twitter, Snapchat, and Instagram distributors can market their products to anyone and everyone around the world. Some of you may even have seen friends who have joined an MLM updating their status with the products they have available. Some distributors are finding that social media has allowed them to become more successful than they ever could have been with traditional MLM selling.

Technology allows for even better tracking, making multilevel marketing similar to affiliate marketing. Some multilevel marketing companies will utilize digital tracking that allows participants to earn commissions from sales and recruits made from their referral links.

Many independent distributors who are participants in MLM companies will their own business online and create their own unique MLM strategy. For example, some distributors will create online stores and market these stores as if they were their own eCommerce businesses.

MLM business models have changed a lot over the past few decades. What started as word-of-mouth marketing and direct selling has evolved into a digital business through which product sales can be generated both online and offline.

How Much Money Can You Make With MLMs?

Making Money with MLMs

So, how much money can you actually make as an MLM distributor? Well, this is a hard question to answer. How much money you make depends largely on how much time you put into selling the product, and how many people you are able to recruit to work under you. Keep in mind, recruiting new distributors is not a one-and-done deal – you then have to provide support and guidance as your downline learns the business. Being an MLM distributor is very flexible, but it’s still a lot of work.

For most people, being an MLM distributor does not make that much money. One study quoted in the Washington Post showed that 60% of distributors made less than $500 in profit over five years and that on a per-hour rate they were making about $0.70 in sales (not including expenses).

So, does this mean no one makes money with MLMs? Definitely not. In fact, some people actually make millions each year through their MLM. The key differentiator is the number of people they have recruited in their downline. Since distributors get a percentage of all sales made by their downline, the difference between having one or two people under you and have a few hundred people under you can be millions of dollars a year.

Most MLMs have different status levels within the company based on how many people you recruit, and how much you and everyone under you sell in total. As an example, in the MLM company LuLaRoe in 2015, 284 people qualified for the ‘coach’ level and earned an average bonus of $210,000 – and that’s not even the highest rank in the company!

So, if you want to earn money in an MLM, you need to remember that you don’t make all that much money by direct selling. If you are just looking for part-time work, then there’s no problem. You can probably make a few hundred dollars a month working at an MLM if you are willing to put in the hours. But if you are looking to make enough to support yourself then you should be ready to recruit some people to the company. The more people you recruit, the more money you make.

It should also be noted that you can lose money when running MLM businesses. Most MLM programs require participants to purchase inventory before joining the program. This is why participants are always trying to recruit new members. Every new member has to purchase the product, which benefits the referrer. That said, if you don’t sell your initial inventory, the initial purchase equates to lost money.

If you want to earn money from an MLM business, you need a sound business strategy and business plan. MLM participants are essentially independent business owners. While recruiters may make the business model seem easier than it is, MLM participants should remain grounded and approach the venture like any other business venture.

Are MLMs Legit?

So, now we come to the burning question that most of you are wanting to answer: are MLMs legitimate businesses? More specifically, are they pyramid schemes? There has certainly been a lot of talk around this point in the last few years, and even a documentary called Betting on Zero that looked into various allegations at Herbalife. 

The short answer is that MLMs are not inherently illegal pyramid schemes. Companies like Amway and Mary Kay have been operating for decades, and pyramid schemes are almost never able to last that long. However, it is also true that the MLM business model is very vulnerable to becoming an illegal pyramid scheme if its owners are looking for a quick buck.

The core issue is that, for most MLM companies, when a new distributor is recruited and their ‘upline’ (the person who recruited them) is given a percentage of their sales, these sales are based on bulk purchases of product from the company – not final sales to customers. In other words, if your downline buys $1,000 of product from the company, you as their upline get a percentage of that purchase even though they have not yet sold anything to actual outside customers.

This compensation plan is what differentiates MLM businesses from other direct sales businesses (and gives the MLM industry a bad reputation at times). Since a majority of money is made from a participant’s downline network, some participants will engage in deceptive business practices to recruit new participants (i.e. using unethical sales tactics or flat out lying).

Now, as long as the company’s products are actually getting sold to customers, there is no issue. Distributors are still resellers, and the business can continue as long as customers want to buy the product. However, it is not hard to see where this can go awry: what guarantee is there that distributors are actually selling products? Well, for many companies: there is none. This is why so many MLM companies are accused of being pyramid schemes. One way companies can protect themselves from this risk by either basing upline commission sharing on sales to outside customers, which some MLMs already do.

Conclusion

So, MLMs are not pyramid schemes, though some pyramid schemes disguise themselves as MLMs. But this shouldn’t concern you as much as you might think. As with any business opportunity you look into, you need to do thorough due diligence, talk to people involved in the company, and make sure you understand what it is you will be doing. Keep in mind, there are many people for whom MLMs have been a great opportunity. If you are considering working with a multilevel marketing company, do your research first. Read reviews from other participants, check out the company’s products, and determine whether or not the multilevel marketing company is legitimate.

Sources:

  1. “Multi-Level Marketing Businesses and Pyramid Schemes.” FTC.gov, Federal Trade Commission, Oct. 2019, www.consumer.ftc.gov/articles/0065-multi-level-marketing-businesses-and-pyramid-schemes.
  2. Juneja, Prachi. “Brief History of Multi-Level Marketing.” Management Study Guide, Management Study Guide, www.managementstudyguide.com/multi-level-marketing-history.htm.
  3. “The History of Network Marketing.” Network Marketing HQ, Network Marketing HQ, 24 Aug. 2019, www.networkmarketinghq.co.uk/education/history-network-marketing/.
  4. “Open Up a World of Opportunity.” Herbalife, Herbalife, 2020, https://business.herbalife.com/en-US/landing_ds?s=hl.
  5. “Herbalife.” Yahoo Finance, Yahoo Finance, 17 January 2020, https://finance.yahoo.com/quote/HLF/.
  6. “Herbalife Financials.” Yahoo Finance, Yahoo Finance, 17 January 2020, https://finance.yahoo.com/quote/HLF/financials?p=HLF.
  7. Singletary, Michelle. “Perspective | Why Multilevel Marketing Won’t Make You Rich.” The Washington Post, WP Company, 27 Sept. 2018, www.washingtonpost.com/business/2018/09/27/why-that-multilevel-marketing-business-is-probably-not-going-pay-off/.
  8. Peterson, Hayley. “LuLaRoe Consultant Claims She Was Urged to Stop Paying Bills and Pawn Her Car as She Went Broke Selling Leggings.” Business Insider, Business Insider, 7 Aug. 2017, www.businessinsider.com/how-much-money-lularoe-consultants-make-2017-8.

Kevin Martin

Kevin is an ambitious entrepreneur that is obsessed with all things related to finance. From a young age, Kevin has always been involved with side hustles ranging from online selling to freelance work. Over the years, Kevin graduated from side hustles and started launching multiple online and offline businesses. Kevin is a serial entrepreneur who loves starting new businesses and exploring all things related to business and finance. He is constantly looking for new ways to save money, invest money, and create income streams.

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