Multi-level
marketing (MLM)
is a marketing
strategy in
which the sales force is compensated not only for sales they personally
generate, but also for the sales of the other salespeople that they recruit.
This recruited sales force is referred to as the participant's
"downline", and can provide multiple levels of compensation.[1] Other terms for
MLM include pyramid
selling,[2][3][4][5][6] network marketing,[7][8][9] and referral marketing.[10]
Most commonly, the
salespeople are expected to sell products directly to consumers by means of
relationship referrals and word of mouthmarketing.[1] Some people use direct selling as a synonym for
MLM, although MLM is only one type of direct selling,
which started centuries ago withpeddling.[1][7][11]
MLM companies have
been a frequent subject of criticism as well as the target of lawsuits.
Criticism has focused on their similarity to illegal pyramid schemes, price fixing of products, high
initial start-up costs, emphasis on recruitment of lower-tiered salespeople
over actual sales, encouraging if not requiring salespeople to purchase and use
the company's products, potential exploitation of personal relationships which
are used as new sales and recruiting targets, complex and sometimes exaggerated
compensation schemes, and cult-like techniques which some groups use to enhance
their members' enthusiasm and devotion.[10][12]
In contrast to MLM
is single-level marketing, where the salesperson is rewarded for selling the
product directly to the consumer.[13]
Direct selling,
network marketing, and multi-level marketing
Network marketing
and Multi-level marketing have been described by author Dominique Xardel as being
synonymous, and as methods of direct selling.[1] According to
Xardel, direct selling and network marketing refer to the distribution system,
while the term "multi-level marketing" describes the compensation
plan.[1] Other terms that
are sometimes used to describe multi-level marketing include
"word-of-mouth marketing", "interactive distribution", and
"relationship marketing". Critics have argued
that the use of different terms and "buzzwords" is
an effort to distinguish multi-level marketing from illegal Ponzi schemes, chain letters, and
consumer fraud scams.[14] Some sources
classify multi-level marketing as a form of direct selling rather than being direct selling.[13][15][16]
The Direct Selling Association, a lobbying group for the
multi-level marketing industry, reported that in 1990 twenty-five percent of
members used MLM, growing to 77.3 percent in 1999.[17]Companies
such as Avon, Electrolux, Tupperware,[18] and Kirby all
originally used single level marketing to sell their goods and later introduced
multi-level compensation plans.[19] By 2009, 94.2% of
members were using MLM, accounting for 99.6% of sellers, and 97.1% of sales.[20] The DSA has
approximately 200 members [21] while it is
estimated there are over 1,000 firms using multi-level marketing in the United
History
It is generally
accepted that the first multi-level marketing plan was introduced in 1945 by
the California
Vitamin Company (shortly
afterwards to become Nutrilite).[13][23] The plan allowed
Nutrilite distributors with at least 25 regular customers to recruit new
distributors and draw a 3 percent commission from their sales. Unlike
traditional direct selling, this was an ongoing payment whenever the customer
re-ordered, allowing direct sellers to build a sales organization that could
generate a residual-like income.[23]
Setup
MLM binary tree structure. The
blue individual will receive compensation from the sales of the downline red
members.
Independent,
non-salaried salespeople of multi-level marketing, referred to as distributors
(or associates, independent business owners, dealers, franchise owners,
independent agents, etc.), 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
downline organization.
Independent
distributors develop their organizations by either building an active customer
base, who buy direct from the company, or by recruiting a downline of independent distributors
who also build a customer base, thereby expanding the overall organization.
Additionally, distributors can also earn a profit by retailing products they
purchased from the company at wholesale price.
Income levels
Several sources
have commented on the income level of specific MLMs or MLMs in general:
·
The Times:
"The Government investigation claims to have revealed that just 10% of Amway's agents in Britain make any profit,
with less than one in ten selling a single item of the group's products."[24]
·
Scheibeler, a high level
"Emerald" Amway member: "UK Justice Norris found in 2008 that
out of an IBO [Independent Business Owners] population of 33,000, 'only about
90 made sufficient incomes to cover the costs of actively building their
business.' That's a 99.7 percent loss rate for investors."[25]
·
Newsweek:
based on Mona Vie's own 2007
income disclosure statement "fewer than 1 percent qualified for
commissions and of those, only 10 percent made more than $100 a week."[26]
·
Business Students Focus on
Ethics: "In the USA, the average annual income from MLM for 90% MLM
members is no more than US $5,000, which is far from being a sufficient means
of making a living (San Lian Life Weekly 1998)"[27]
·
"While earning potential
varies by company and sales ability, DSA says
the median annual income for those in direct sales is $2,400."[28]
·
In an October 15, 2010
article, it was stated that documents of a MLM called Fortune reveal that 30
percent of its representatives make no money and that 54 percent of the
remaining 70 percent only make $93 a month. The article also states Fortune is
under investigation by the Attorneys General of Texas, Kentucky, North Dakota,
and North Carolina with Missouri, South Carolina, Illinois, and Florida
following up complaints against the company.[29]
·
A February 10, 2011 article
stated "It can be very difficult, if not impossible, for most individuals
to make a lot of money through the direct sale of products to consumers. And
big money is what recruiters often allude to in their pitches." [30]
·
"Roland Whitsell, a
former business professor who spent 40 years researching and teaching the
pitfalls of multilevel marketing": "You'd be hard-pressed to find
anyone making over $1.50 an hour, (t)he primary product is opportunity. The
strongest, most powerful motivational force today is false hope."[30]
Legality and
legitimacy
United States of America
MLM businesses are
known to operate in all 50 U.S. states of the United States of America.[citation needed] New businesses may
use terms such as "affiliate marketing" or "home-based business
franchising". Many pyramid schemes try to present
themselves as legitimate MLM businesses.[11] However, there are
people who hold that all MLMs are
essentially pyramid schemes even if legal.[10][31][32][33]
The U.S. Federal Trade Commission (FTC) states
"Steer clear of multilevel marketing plans that pay commissions for
recruiting new distributors. They're actually illegal pyramid schemes. Why ispyramiding dangerous? Because
plans that pay commissions for recruiting new distributors inevitably collapse
when no new distributors can be recruited. And when a plan collapses, most
people - except perhaps those at the very top of the pyramid - end up
empty-handed."[34]
In a 2004 Staff
Advisory letter to the Direct Selling Association, the FTC states:
Much has been made
of the personal, or internal, consumption issue in recent years. In fact, the
amount of internal consumption in any multi-level compensation business does
not determine whether or not the FTC will consider the plan a pyramid scheme.
The critical question for the FTC is whether the revenues that primarily
support the commissions paid to all participants are generated from purchases
of goods and services that are not simply incidental to the purchase of the
right to participate in a money-making venture.
The Federal Trade
Commission warns "Not all multilevel marketing plans are legitimate. Some
are pyramid schemes. It's best not to get involved in plans where the money you
make is based primarily on the number of distributors you recruit and your
sales to them, rather than on your sales to people outside the plan who intend
to use the products."[36] and states that
research is your best tool, giving eight steps to follow:[36]
1.
Find — and study — the
company’s track record
2.
Learn about the product
3.
Ask questions
4.
Understand any restrictions
6.
Consider using a friend or
adviser as a neutral sounding board or for a gut check
7.
Take your time
8.
Think about whether this plan
suits your talents and goals
Criticism
The Federal Trade
Commission issued a decision, In re Amway Corp.,
in 1979 in which it indicated that multi-level marketing was not illegal per se in the United
States. However, Amway was
found guilty of price fixing (by effectively
requiring "independent" distributors to sell at the same fixed price)
and making exaggerated income claims.[37][38]
The FTC advises
that multi-level marketing organizations with greater incentives for
recruitment than product sales are to be viewed skeptically. The FTC also warns
that the practice of getting commissions from recruiting new members is
outlawed in most states as "pyramiding".[39] In April 2006, it
proposed a Business Opportunity Rule intended to require all sellers of
business opportunities—including MLMs—to provide enough information to enable
prospective buyers to make an informed decision about their probability of earning
money. In March 2008, the FTC removed Network Marketing (MLM) companies from
the proposed Business Opportunity Rule:
The revised
proposal, however, would not reach multi-level marketing companies or certain
companies that may have been swept inadvertently into scope of the April 2006
proposal.[40]
Walter J. Carl
stated in a 2004 Western
Journal of Communication article
that "MLM organizations have been described by some as cults (Butterfield,
1985), pyramid schemes (Fitzpatrick & Reynolds, 1997),[41] or organizations
rife with misleading, deceptive, and unethical behavior (Carter, 1999), such as
the questionable use of evangelical discourse to promote the business (Hopfl
& Maddrell, 1996), and the exploitation of personal relationships for
financial gain (Fitzpatrick & Reynolds, 1997)".[41][42] In China,
volunteers working to rescue people from the schemes have been physically
attacked.[43]
MLM's are also
criticized for being unable to fulfill their promises for the majority of
participants due to basic conflicts with Western cultural norms.[44] There are even
claims that the success rate for breaking even or even making money are far
worse than other types of businesses:[45][46][47] "The vast
majority of MLM’s are recruiting MLM’s, in which participants must recruit
aggressively to profit. Based on available data from the companies themselves,
the loss rate for recruiting MLM’s is approximately 99.9%; i.e., 99.9% of
participants lose money after subtracting all expenses, including purchases
from the company."[45] In part, this is
because encouraging recruits to further "recruit people to compete with
[them]"[10] leads to
"market saturation."[12]
Another criticism
is that MLM has effectively outlived its usefulness as a legitimate business
practice. The argument is that, in the time when America was a series of
relatively small, isolated towns and rural areas not easily accessible to small
companies, MLM was a useful way to let people know of and buy products or
services. But the advent of internet commerce, with its ability to advertise
and sell directly to consumers, has rendered that model obsolete. Thus, today,
nearly all modern MLMs ostensibly sell vastly overpriced goods and services (if
there even is a real product or service involved at all) as a thin cloak of
legitimacy, while their members are driven to recruit even more people into the
MLM, effectively turning these programs into pyramid schemes.[32]
Because of the
encouraging of recruits to further recruit their competitors, some people have
even gone so far as to say at best modern MLMs are nothing more than legalized pyramid schemes[10][31][32][33] with one stating
"Multi-level marketing companies have become an accepted and legally
sanctioned form of pyramid scheme in the United States"[31] while another
states "Multi-Level Marketing, a form of Pyramid Scheme, is not
necessarily fraudulent."[33]
In October 2010 it
was reported that multilevel marketing companies were being investigated by a
number of state attorneys general amid allegations that salespeople were
primarily paid for recruiting and that more recent recruits cannot earn
anything near what early entrants do.[48]
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