Multi-level
marketing (MLM), also known as Network Marketing,
is a business-distribution model that allows a parent company to
market its products directly to consumers by means of relationship
referrals and
direct selling.
Independent, unsalaried salespeople
of multi-level marketing, referred to as distributors (or associates,
independent business owners, dealers, franchise owners, sales consultants,
consultants, independent agents, etc.), represent the parent company and are
awarded a commission based upon the volume of product sold through each of their
independent businesses (organizations).
Independent distributors develop
their organizations by either building an active customer base, who buy direct
from the parent 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 parent company at wholesale price.
Distributors earn a commission
based on the sales efforts of their organization, which includes their
independent sale efforts as well as the leveraged sales efforts of their
downline. This arrangement is similar to
franchise arrangements where royalties are paid
from the sales of individual franchise operations to the franchisor as well as
to an area or region manager. Commissions are paid to multi-level marketing
distributors according to the company’s compensation plan. There can be multiple
levels of people receiving royalties from one person's sales.
It is sometimes difficult to
distinguish legal and reputable MLMs from illegal
pyramid or
Ponzi schemes. MLM businesses operate in the
United States in all 50 states and in more than 100 other countries, and new
businesses may use terms like "affiliate marketing" or "home-based business
franchising". However, many pyramid schemes try to present themselves as
legitimate MLM businesses.
In the most legitimate MLM
companies, commissions are earned only on sales of the company's products or
services. No money may be earned from recruiting alone ("sign-up fees"), though
money earned from the sales of members recruited is one attraction of MLM
arrangements. If participants are paid primarily from money received from new
recruits, or if they are required to buy more product than they are likely to
sell, then the company may be a
pyramid or
Ponzi scheme, which is illegal in most
countries.
New salespeople may be asked to pay
for their own training and marketing materials, or to buy a significant amount
of inventory. A commonly adopted test of legality is that MLMs follow the
so-called 70% rule which prevents members "inventory loading" in order to
qualify for additional bonuses. The 70% rule requires participants to sell 70%
of previously purchased inventory before placing new orders with the company.
There are however variations in interpretations of this rule. Some attorneys
insist that 70% of purchased inventory should be sold to people who are not
participants in the business, while many MLM companies allow for
self-consumption to be a significant part of the sales of a participant.
The
European Union's
Unfair Commercial Practices Directive explictly
includes self-consumption as legitimate.
Companies have devised a variety of
MLM compensation plans over the decades.
Stairstep Breakaway plans This type of plan
is characterized as having representatives who are responsible for both personal
and group sales volumes. Volume is created by recruiting and by retailing
product. Various discounts or rebates may be paid to group leaders and a group
leader can be any representative with one or more downline recruits. Once
predefined personal and/or group volumes are achieved, a representative moves up
a step. This continues until the representative..."breaks away" from their
upline. From that point on, the new group is no longer considered part of his...upline's
group - hence they are a "breakaway".
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Stairstep Breakaway plans are not level based.
Unilevel plans This type of
plan is often considered the simplest of compensation plans. Uni-Level plans pay
commissions primarily based on the number of levels a recipient is from the
original representative who is purchasing the product. Commissions are not based
on title or rank achieved. By qualifying with a minimum sales requirement,
representatives earn unlimited commissions on a limited number of levels of
downline recruited representatives.
Matrix plans This type of plan is similar
to a Uni-Level plan, except there is a also limited number of representatives
who can be placed on the first level. Recruits beyond the maximum number of
first level positions allowed are automatically placed in other downline (lower
level) positions. Matrix plans often have a maximum width and depth. When all
positions in a representative's downline matrix are filled (maximum width and
depth is reached for all participants in a matrix), a new matrix may be started.
Like Uni-Level plans, representatives in a matrix earn unlimited commissions on
limited levels of volume with minimal sales quotas.
Binary plans: A binary plan is a multilevel
marketing compensation plan which allows distributors to have only two
front-line distributors. If a distributor sponsors more than two distributors,
the excess are placed at levels below the sponsoring distributor's front-line.
This "spillover" is one of the most attractive features to new distributors
since they need only sponsor two distributors to participate in the compensation
plan. The primary limitation is that distributors must "balance" their two
downline legs to receive commissions. Balancing legs typically requires that the
number of sales from one downline leg constitute no more than a specified
percentage of the distributor's total sales.
Hybrid plans are
compensation plans that are constructed using elements of more than one type of
compensation plan.
