How Multi-Level Marketing Works
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Establish a Parent Company
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A multi-level marketing arrangement, also called an MLM, is set up by a parent company that sells a product or service. The parent company is responsible for producing, supporting and disseminating the product or service. The main difference between an MLM company and a regular company is the advertising technique. Regular companies get the word out about their products and services through advertising campaigns using radio, television, and billboards. MLM companies choose to save money on advertising by using independent representatives to get the word out about their product offerings.
Independent Representatives
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The key players in a multi-level marketing organization are the independent representatives. These independent representatives pay to become resellers for the parent company. They are considered independent contractors who work for themselves. The main two goals of an independent representative are to 1) bring new independent representatives into the business and 2) sell the products or services being sold by the parent company to friends, family, and associates.
A multi-level marketing company is very similar to an affiliate chain in a way, only affiliates don't usually have to pay a fee to become associated with the company. Affiliates act as independent contractors who bring money to the company with new sales without needing to pay into the organization while independent representatives are in an at-risk situation, having invested money into the business. In a multi-level marketing organization, the business model is set up for the senior people at the company to make money from the fees collected from new independent representatives. The independent representatives also make money from signing up new reps and selling the services to family and friends.
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Advantages and Disadvantages
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Some multi-level marketing companies do well and create solid opportunities for representatives. Established MLM companies like Avon and Mary Kay have strong brand recognition and customers who actively seek out independent representatives for sales. When an MLM has a good product that consumers flock to, the success rate of the company and its representatives is high.
On the other hand, many MLMs are considered schemes (also called pyramid schemes) when they are set up to only make the top representatives rich, while lower level representatives spend money on business fees and work hard for little income. In many cases, independent representatives have a hard time selling the products and recruiting new representatives because they are avoided by family members, friends and associates. The independent representative's job is to constantly seek leads, so they must be persistent.
Many MLM products are inferior or cannot compete with similar, existing products that are being offered by traditional companies, so they are difficult to sell. In essence, a multi-level marketing company is only as strong as its product offering (see report from Fraud.org about MLMs and pyramid schemes under "Resources," below).
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