Multi-level marketing (MLM/network marketing/matrix marketing) is a marketing structure used by businesses where a sales force is created by compensating promoter(s) [distributor(s) or any number of terms used] of company products not only for sales generated personally, but also for the sales of other promoters they introduced to the company, creating a down-line of distributors and a hierarchy of multiple levels of compensation.
Distributors represent the company that produces the products or provides the services they sell. They are awarded a commission based upon the volume of product sold through their own sales efforts as well as that of their down-line organization. One of the draws or hook to MLM, distributors can buy wholesale, sell retail, and recruit other distributors who can do the same.
This arrangement is similar to franchise arrangement--commissions are paid to distributors according to the company’s compensation plan; individuals can be at multiple levels of the structure receiving royalties from a single person's sales.
If a plan offers to pay commissions for recruiting new distributors, watch out! This is pyramiding, a multilevel marketing plan should only pay commissions for retail sales of goods or services, not for recruiting new distributors. Pyramid schemes are defined as plans which concentrate on commissions earned for recruiting new distributors and which generally ignore the marketing and selling of products and services.
MLM businesses are legal; also known as "affiliate marketing". However, many pyramid schemes try to present themselves as legitimate MLM businesses. [Pyramiding is illegal in most states, to remain legitimate a company that uses multi-level marketing has to make sure commissions are earned only on sales of the company's products or services if they cross state boundaries. With pyramiding money is received from new recruits, or they are required to buy more product than they are likely to sell.]
Another key to legality of MLMs is the 70% rule--prevents members from "inventory loading" in order to qualify for additional bonuses. The 70% rule requires participants to sell 70% of previously purchased inventory before placing new orders with the company. In most cases distributors may be asked to pay for their own training and marketing materials, or to buy a significant amount of inventory; hence, the 70% rule. As for the FTC, are the revenues generated from purchases incidental to the right to participate?
Criticism of MLMs:
When one looks at MLM, it has to be remembered where it all began. What started it all?
The most prominent case concerning MLMs, In re Amway Corp., 93 F.T.C. (1979), determined that multi-level-marketing was not an illegal activity. [Amway was found guilty of price fixing.] The roots of multi-level-marketing are intertwined with those of the Amway Corporation and its Nutrilite product line; the concept originated during the early 1930s. First ran afoul of the law in 1947: FDA accused Lee S. Mytinger and William S. Casselberry of misbranding. Potential customers were being given a booklet, "How to Get Well and Stay Well" which claimed the Nutrilite product line as a cure all for what ever ails you. (A 1951 Court case permanently forbid anyone who sold Nutrilite products from referring to any of the booklet.) Some time in the 1950's Rich DeVos and Jay Van Andel formed a new company, the American Way Association, later renamed Amway.Two points form from the FTC:
- multi-level marketing organizations with greater incentives for recruitment than product sales are to be viewed skeptically
- the practice of getting commissions from recruiting new members is outlawed in most states as "pyramiding"
MLM's are also criticized for being unable to fulfill their promises for the majority of participants, the success rate for breaking even or even making money are far worse than other types of businesses.
From the US Postal Inspection Service:
Fraudulent pyramid schemes typically violate the Postal Lottery Statute (Title 18, United States Code, Section 1302). They contain all three elements of a lottery: prize (expectation of monetary or other gain from participation in the pyramid); chance (the monetary return you may receive from your participation is entirely up to chance, that is, dependent on the efforts of those below you in the pyramid), and consideration (the fee you pay to become a distributor).
Seven tips from the FTC when deciding on a MLM:
- Avoid plans that includes commissions for recruiting additional distributors
- Beware of plans that ask new distributors to purchase expensive inventory
- Use caution if the plan(s) claim you will make money through continued growth of your "down-line"
- Beware of plans that claim to sell miracle products or promise enormous earnings
- Beware "decoy" references paid by a plan's promoter to describe their fictional success in earning money through the plan
- Don't pay or sign any contracts insist on taking your time to think over a decision to join
- Do your homework! Check with your local Better Business Bureau and state Attorney General about any plan you're considering
Some online resources, in other words use common sense:
- THE OPPORTUNITY TEST--Were you approached primarily on the basis of the actual value and need for the products or for the opportunity? Keywords to watch for "getting in on the ground floor," or "riding the wave" of opportunity.
- THE MARKET REALITY TEST--MLM recruiters point to the huge growth potential of their programs without considering the normal dynamics of supply and demand. Key point: Is an up-line of five or more levels of distributors allowed; market saturation.
- THE PRODUCT TEST--could the products be sold successfully on their own merits without going through a MLM distribution system? Is the focus on legitimate products of value to consumers? Are the products priced competitively? And other things.
- THE COMPENSATION TEST--Can you as a distributor make a good income for the time you spend selling the products without recruiting a single person? Or is the commission paid by the company for selling the products so low that you have to recruit a down-line in order to earn a significant income?
- THE INCOME DISCLOSURE TEST--If an MLM recruiter touts huge income figures of top distributors, request that the company disclose average payout to distributors by percentiles (highest 1%, second highest 1%, and so on to the lowest 1%), so that you can determine your chances of success. (Another acid test of the profitability of an MLM distributorship is to ask the person recruiting you to show you his/her last year’s tax return.)
- THE PAY TO PLAY TEST--Find out how high the expectation is for you to purchase products, services, training, etc., over a period of time, in order to be a serious participant. In other words, what will it cost you to play the game?
- THE PRICE TEST--Are the company’s wholesale prices low enough to allow a respectable profit? Or are retail prices so high that they must be sold at wholesale to achieve any volume?
- THE GOLDEN RULE TEST--How did you feel about the way you were recruited to do the business, and how do you feel about approaching your family and friends in the same way?
- THE TIME FREEDOM TEST--If a recruiter promises that by working hard for a brief time period you will never have to work again, ask what percent of their top distributors are no longer actively involved with the company and never attend opportunity meetings.
- THE HONESTY TEST--Has the recruiter been devious or up front in his or her inviting attempts? And can the products and opportunity be sold without making exaggerated product and income claims? Ask for validation of each of the claims made.
- THE CREDIBILITY TEST--MLM promoters who don’t command respect themselves may lean heavily on the credentials or character of others involved in the opportunity.
- THE SUPPORT TEST--Does the company offer an adequate support infrastructure to handle a temporary burst of volume? Will your up-line be there when you need them, or do they have a history of jumping ship when the next hot MLM deal comes along?
As you can see there really are no get rich schemes out in the world. Always use caution and I can't say it enough--DO YOUR HOMEWORK!!!
An interesting article to look over.