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Multi-Level Marketing (MLM): Pyramid Schemes?

Multi-Level Marketing

Multi-Level MarketingI’m sure Multi-Level Marketing has been around since ancient days. Send out street urchins to sell stuff and take a big chunk of their income. Get them to recruit other homeless kids and let them have a share of what their protegé earns.

But Multi-Level Marketing (or MLM) is big business now, with one estimate* putting it at around the US$200 billion per annum mark, worldwide.

So, we have to ask:

  • What is Multi-Level Marketing?
  • How does it work?
  • Is it a good way to earn a living (here’s a spoiler: no)?
  • And how do you spot an MLM scheme if offered one?

What is Multi-Level Marketing?

Multi-Level Marketing is selling goods or services through a network of distributors or sales agents. These agents also earn an income from the efforts of any new agents they recruit. 

So, as a sales agent, or distributor, you can earn money in two ways:

  1. Your own sales
  2. A share of the revenue earned by agents you have recruited

The proportion of income from each source is important in understanding the nature of the MLM scheme.

Definition of Multi-Level Marketing

In the USA, the Federal Trade Commission defines Multi-Level marketing as:

Multi-level marketing is one form of direct selling, and refers to a business model in which a company distributes products through a network of distributors who earn income from their own retail sales of the product and from retail sales made by the distributors’ direct and indirect recruits. Because they earn a commission from the sales their recruits make, each member in the MLM network has an incentive to continue recruiting additional sales representatives into their ‘downlines.’

Downlines and Uplines

The agents an MLM marketer recruits are their ‘downline’. A share of any money these distributors earn goes to you. And if they recruit agents, your recruits earn a share of the revenue from their recruits. And you earn a share of that.

For the distributors at the bottom of the MLM downline, everyone above them is taking a share of their revenue. Those people are their ‘upline’.

How Does Multi-Level Marketing Work?

Clearly, the small number people at the top of the pyramid – the top of the upline – earn a lot of money from the huge spread of downline distributors.

The greater the focus on recruiting and the less on sales… the more alarm bells should ring for you. Because, the more you will rely on the endeavours of others. But, this also means some will be reaping a greater reward from your own efforts.

Therefore, as an MLM distributor, you have two roles:

  1. Sell to end consumers
  2. Recruit further sales people

Why is MLM Attractive?

The attractions of Multi-Level Marketing are: 

  1. Big promise of unlimited earnings – inc passive income from your downline and attractive bonus rewards
  2. Low sign-up cost – cheaper than starting your own business
  3. More autonomy than being employed

Where do you find Multi-Level Marketing?

You’ll find plenty of MLM players in:

  • Financial services
  • Cosmetics
  • Kitchen accessories
  • Health and nutritional supplements
  • Reselling of utility services
  • Books and stationery
  • Home cleaning products

Is Multi-Level Marketing a Good Way to Earn a Living?


Next question…

Okay, some detail…

Well, let’s start with the three attractions we listed:

  1. Big promise of unlimited earnings – inc passive income from your downline and attractive bonus rewards
    A tiny proportion of MLM distributors make money, and most make nugatory amounts.Even in the best managed, most reputable MLM brands, median incomes are very low compared to national salary levels for all but the elite few. It is those high earners – at the tops of their pyramids – who are held up by the MLM companies as the role models to aspire to. But simple statistics make it clear that your chances of reaching that level are very low. Most will earn incomes that are insufficient to meet their needs.
  2. Low sign-up cost – cheaper than starting your own business
    But your up-front costs may well exceed any money you earn.
    How? Because many MLM schemes compel distributors to buy a minimum quantity of stock before they can qualify for commissions or bonuses. Also, new downline recruits need to pay for training, sales materials, and motivational conferences.
  3. More autonomy than being employed
    It’s true that you are not employed. But neither do you have any security of income nor employment rights.And many MLM distributors feel trapped by the money they have invested in stock and training but cannot recoup from sales. Often their best (for them) recourse is to try to sell others on becoming distributors to build their own downline. At least, that way, they can get a share of the new inductee’s training fees and stock purchase. But when it proves hard to recruit, often they approach friends and family, desperate to recover some of their costs. They don’t do it to exploit their loved ones, but that’s what they are doing. And that can damage relationships.

Is this Legal?

Multi-Level Marketing is illegal in some jurisdictions. It is heavily regulated in others.

At best, MLM schemes are legitimate but controversial. Everything hinges on the ethics of the company concerned. The greater the emphasis on recruitment and the less on selling, the more you should be concerned.

What Else are Multi-Level Marketing Schemes Known as?

You’ll find them loosely referred to as many things, the most common of which are:

  • Pyramid selling
  • Network Marketing
  • Social Selling
  • Referral Marketing

So, How do I Spot a Multi-Level Marketing Scheme?

If you are tempted by an appealing-sounding business opportunity, how can you tell if it’s likely to be a multi-level marketing scheme? The offer may come via an email, or from a poster by the roadside. Or it may come from a friend or family member, who needs to recruit a downline to recover some of their investment.

Here are seven tell-tale signs that should put you on your guard. Don’t invest without careful research:

  1. Promise of either a large income or some extra money, by working from home
  2. Need to invest in stock or training to get you started (or both). Oh yes, and what about that fabulous motivational extravaganza of a distributor conference you can go to – maybe at a reduced fee?
  3. You’ll earn even more by recruiting your own agents, who will earn you money while you relax at home.
  4. There’s a complex payment structure that takes a while to get your head around. But don’t worry, it has a professional-sounding name, like a ‘marketing plan’.
  5. The products are great. They are as good as or better than leading brands. Yet, strangely, you can’t buy them in the shops or from leading online retailers. Hmmm.
  6. The person selling you the dream may not be rich yet, but they can point to a few fabulously successful people who have huge incomes and regular massive bonuses. You can be just like them one day.
  7. As my dad used to say ‘if it sounds too good to be true… it is.’

What is Your experience of Multi-Level Marketing?

We’d love to hear your experiences, ideas, and questions. Please leave them in the comments below.

* 2018 estimate by the World Federation of Direct Selling Associations is that worldwide MLM sales were over US$190 billion. The main markets (63%) are:

  • US (18%)
  • China (18%) – now very heavily regulated
  • Korea (10%)   
  • Germany (9%)
  • Japan (8%)
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