What Is MLM Marketing?
Multilevel marketing, often referred to as MLM or (incorrectly) as MLM marketing, is a marketing sales structure that has been much criticized. While its proponents often advertise it as a get-rich-quick method, opponents cite its inherent tendencies to take advantage of the newest people in. Most multilevel marketing structures have a high turnover rate in sales staff that increases as the company ages.
Other People Are Reading
-
MLM Defined
-
Multilevel marketing is a business marketing scheme in which salespeople profit both from the sale of products and from new salespeople they have recruited. A typical marketing plan works like this: The first sales manager goes out and recruits salespeople to become his "downstream," the folks whose commissions will feed his bonus. New salespeople get 25 percent commission on everything they sell, while the manager who recruited them receives five percent commission on their sales as a bonus. This tier of salespeople recruits new salespeople. The new recruits in the third tier get 25 percent on sales---just like everyone else---while the person who recruited them gets five percent bonus and the top sales manager who began the recruiting receives two percent; each person receiving bonuses from this third tier is the third tier's "upstream."
MLM schemes often advertise the possibility of getting a strong "downstream" feeding a hefty bonus as a way to have a great income for little work.
Examples
-
Avon and Mary Kay are both examples of very successful MLM schemes. Their sales staff are recruited from ordinary women who like their cosmetics. These women are given basic training that mostly consists of information on how to fill out sales sheets or use some specialized products. Unlike many MLM schemes, Avon and Mary Kay sales staff do not purchase and have on hand a stock of product but rather order from a catalog, but sales staff are recruited and advance through the standard commission plus downstream bonus seen in every MLM scheme.
Amway (or Quixtar or Amway Global---the name keeps changing) uses a similar MLM scheme, but distributors are encouraged to purchase product to keep on hand by deep discounts on bulk purchases. Amway was sued by the FTC for unfair trade practices in 1975 but prevailed.
-
MLM Vs. Pyramid Schemes
-
MLMs are often compared to pyramid schemes, but they are not. A pyramid scheme either sells nothing and instead depends on the contributions of new recruits to pay established members, or it sells items of little real value, depending on new recruits for the bulk of its profit. For example, Bernard Madoff was selling fraudulent investments, using new investors to pay off earlier ones; when his scheme was revealed, there was nothing of value in his "business" to give to bilked investors.
MLMs are not pyramid schemes. A legitimate MLM will buy back unused product; it depends on sales to the consumer, not the purchases of new distributors, for the bulk of its profits; and it focuses on selling a product, not recruiting distributors, as its business model.
MLM Legality
-
According to attorney Jeffrey Babener, 70 percent of a MLM company's products must be purchased by customers and not distributors in order for it to be deemed legitimate instead of a veiled pyramid scheme. In 1979, Amway prevailed after a four-year legal battle with the FTC when it proved that 70 percent of their product was indeed sold to consumers who were not distributors.
Beyond that ruling and related case law, MLM companies are only loosely controlled by federal and state law governing corporations. Their unique structure means distributors are independent contractors and have essentially no legal protection provided the company is staying on the right side of the 70 percent ruling.
Criticisms
-
Critics of multi-level marketing cite four flaws. First, market saturation dictates that at some point, the people recruited last will not find a market. Second, the pyramid structure is a constant temptation to focus on recruiting people, not marketing a product. Third, MLM exploits and emphasizes the natural greed of humans, encouraging immoral and unethical practices in getting sales. Finally, the initial focus on selling product to friends and family causes relational problems. Most legitimate companies using a MLM structure to sell their products have mechanisms in place to minimize these problems.
-
References
- Photo Credit finance pyramid image by Anatoly Tiplyashin from Fotolia.com
