Definition
Multilevel Marketing (MLM) is a sales strategy where existing distributors or salespeople earn commissions in two ways: firstly, by selling the product directly to consumers and secondly, by recruiting new salespeople and earning a percentage of their sales. These new recruits are referred to as the distributor’s “downline”. MLM is often associated with direct selling and network marketing strategies.
Phonetic
The phonetic pronunciation of “Multilevel Marketing” is: [ˈmʌltiˌlevəl ˈmɑːrkɪtɪŋ].
Key Takeaways
1.
Structure and Operation
Multilevel marketing operates on the basis of recruitment, where individuals are recruited into a ‘downline’ , and their sales or recruitment efforts contribute to benefits of those above them. Therefore, the profits in MLM largely come from the recruitment process, rather than from product sales to customers.
2.
Risks and Criticisms
Multilevel marketing companies have often been scrutinized and criticized for their likening to pyramid schemes. The primary risks involve losing money due to the aspect of recruitment over product sales, misleading marketing tactics and high initial costs.
3.
Importance of Research
With the potential risks involved, it’s vital for prospective participants to thoroughly research an MLM opportunity before becoming involved. Understanding both the compensation structure and the product or service being sold can help individuals make an informed decision.
Importance
Multilevel Marketing (MLM) is an important business/finance term because it designates a marketing strategy where the sales force is compensated not only for the sales they personally generate, but also for the sales of others they recruit, creating a downline of distributors and a hierarchy of multiple levels of compensation. This strategy is significant because it offers individuals a chance to start their own business with relatively low startup costs, and it emphasizes the power of network-based sales and word-of-mouth marketing. Balancing this, however, are criticisms and concerns related to the potential for pyramid schemes since profitability often relies heavily on recruitment of new members rather than product sales. Understanding MLM can assist in recognizing the structure, opportunities, and potential pitfalls of such business models.
Explanation
Multilevel Marketing (MLM), often referred to as network marketing or direct sales, is essentially a business model that relies on a network of distributors for the growth of the enterprise. The core purpose of MLM is to sell products or services through individual-to-individual sales within a person’s network. The model emphasizes not just on selling the company’s products, but also on the recruitment of individuals, who recruit further members. Given its hierarchical structure, it encourages its network of salespeople to establish their own businesses by selling the company’s products and recruiting more salespeople.MLM is used by companies as a strategy to reach a broad customer base while minimizing advertising costs. Distributors in an MLM organization earn incomes through direct sales of products to customers, but more significantly, they earn via commissions on the sales made by their ‘downline’ distributors, the network of individuals they’ve managed to recruit. This creates a stream of passive income once a substantial network has been built. MLM allows companies to leverage the personal relationships and network marketing skills of their distributors to grow their customer base, which is why it is often associated with well-known companies selling health, beauty, and homecare products.
Examples
1. Amway: Since 1959, it has been one of the leaders in multilevel marketing and provides opportunities to individuals to have their own business. Distributors earn income from their own sales and from sales of people they recruit into the company, forming a downline of distributors.2. Avon: Another popular example in cosmetics, perfume and toy industry. Avon works on a door-to-door model, requiring representatives to personally sell products to individuals. These representatives also recruit and train new team members and earn a percentage of their sales.3. Herbalife: It’s a company that sells nutritional products including vitamins and smoothie mixes through a multilevel marketing model. Individuals sell these products and recruit others to become sellers under them in a tiered system. This way, they receive a percentage of the sales from their downline in addition to their own sales.
Frequently Asked Questions(FAQ)
What is multilevel marketing?
Multilevel marketing (MLM), also known as network marketing, is a business model where independent agents sell goods and services from a company directly to consumers. They earn commissions on their sales as well as on the sales of other agents they have recruited.
How does multilevel marketing work?
In MLM, agents earn income through direct sales of products or services and through the commission they receive from sales made by their recruited agents, also known as their ‘downline’. This forms a hierarchy of multiple levels of compensation.
Is multilevel marketing the same as a pyramid scheme?
While they may appear similar due to their hierarchical structure, multilevel marketing is not the same as a pyramid scheme. The key difference lies in the fact that MLMs generate revenue from product sales, either through direct sales or sales by their recruited members. Pyramid schemes, on the other hand, primarily generate revenue from recruitment of new members, who pay upfront costs.
What are some examples of multilevel marketing companies?
Some well-known examples of multilevel marketing companies include Amway, Herbalife, Avon, Mary Kay, and Tupperware.
Can you make money with multilevel marketing?
Yes, some people do make money with MLM, often through hard work and dedication. However, success rates are varied and a significant percentage of people may make little or no money, or even lose money, especially those at the lower levels of the sales structure.
What skills are required to succeed in multilevel marketing?
Some key skills for success in MLM include sales skills, interpersonal communication, networking ability, motivation, and the ability to recruit, lead, and train a team.
What are the risks and challenges of multilevel marketing?
Risks and challenges of MLM include the potential for income loss, market saturation, damage to personal relationships, and the time and effort required for sales and recruitment. It is crucial to understand these risks and challenges before joining an MLM.
Are all multilevel marketing companies legal?
While there are many legal and legitimate multilevel marketing companies, not all MLMs operate within the law. Those that primarily earn their money through recruitment rather than product sales may be illegal pyramid schemes, which are banned in most countries.
How can one get involved in multilevel marketing?
To get involved in multilevel marketing, one typically starts by purchasing a starter kit and joining an existing network under a sponsoring distributor, who is also responsible for training and mentoring the new recruit.
: How can I tell whether an MLM opportunity is legitimate or a scam?
: Legitimate MLMs primarily generate profits from product sales—not recruiting. Be wary of companies that require upfront costs to join, promise highly lucrative returns with minimal effort, lack a tangible product or service, or focus more on recruitment than selling products.
Related Finance Terms
- Downline
- Upline
- Network Marketing
- Direct Sales
- Recruitment Commission
Sources for More Information
