Multilevel Marketing (MLM)

What Is Multilevel Marketing (MLM)?

Multilevel marketing (MLM), or network marketing, is a marketing approach that depends on a non-salaried workforce selling the company's products and services (that represent the corporate identity and reputation), where the earnings of the participants come from a pyramid-shaped compensation system.

It is affiliate marketing on multiple levels that companies use to encourage current members or distributors to hire new independent distributors to promote and sell their products to other people, where a percentage of the new distributors' profit goes to the existing distributors who brought them. 

This is known as the “downline” of the existing distributors. Businesses that highly depend on sales to earn money adopt this strategy.

Distributors are not employees of the company in the MLM model. They are instead independent business owners that build their distributor networks to assist them in selling things. Such companies rely on this extensive network of independent distributors to earn revenue.

This sector of business is quite active. It is highly responsive to market shifts and mobility. Distributors must thus be trained and given the necessary tools. They will get greater persuasiveness and skill while dealing with the selling or marketing of the business opportunity and the good/service.

Yet, it may be an issue for too many distributors who need a sense of belonging or devotion to the organization. As a result, an MLM organization must plan the training curriculum to supplement the missing aspects of the distributor.

How Multilevel Marketing Works?

It works by the following means:

1. The company hires direct sales, distributors, and contractors on a commission base only (No fixed salary) who are responsible for selling and promoting the company products and services to their friends, family, network, and community.
2. Both in-person and online sales approaches are possible. For each sale, a commission is given to them. The higher the number of sales they make, the more money they earn.
3. These participants, in return, can hire new distributors or sales persons below them in a commission-based structure to sell the company's products and services to their network, repeat! There can be hundreds or even thousands of distributors and salespersons.
4. Each individual above a sales representative typically receives a percentage of the income when the sales representative at the bottom of the pyramid system closes a deal. 
5. Instead of receiving hourly compensation in MLMs, sales reps receive tiered commissions at every level. 
6. While finding new distributors is the main objective, the representatives also make money by promoting and selling the company's products, so he gets two sources of income while working as an independent distributor. 

This strategy works well for people who can meet their deadlines, strategies, and goals. Most of the time, these people have an entrepreneurial mindset and are skilled at networking with others to find new distributors and sell products.

MLM Example

Take a nutritional supplement company as an example that wants to make the product available to many people. So the company decided to hire Sara as an independent distributor;

1. Sara, in return, thought of hiring an additional five salespeople on a commission base to help her.
2. For better product distribution, these five distributors each hire five more members. As a result, there are now 30 distributors instead of just five. 
3. Therefore, those five distributors make money by selling the product directly to customers and receiving commissions from sales made through their downline groups.

To better understand how it works, let's imagine a pyramid. In our example, the direct marketing company hired Sara, the first independent distributor. Sara is now at the top of the pyramid.

Sara hired five independent distributors, employed five more independent distributors, and so on. This completes the pyramid on which Direct Marketing Company depends to sell its products.

The key component of the plan is that clients may be more likely to trust friends and acquaintances serving as representatives than strangers selling the products. 

People that use their communities as a source of customers can also discover that their friends and family are eager to support their business.

MLM Ways of Promotion

The stronger your marketing foundation, the more successful you will be in the long term, so you must search for several effective ways to promote or market MLM products or services. But first, let's check how you are going to profit from MLM.

Revenue streams:

The business may refer to you as an independent "distributor," "participant," or "contractor" if you enroll in an MLM program. Most MLMs state there are two main streams of revenue:

1. The first is the direct selling of the distributor of the product or service. Distributors who use direct selling do not use intermediaries in the supply chain and instead sell to customers directly.
2. The second is the commission paid from other salespersons whom the participant hired to sell the product.

Participants who have been recruited (as well as those that the recruit recruits) are referred to as one's downline distributors in the organizational structure of MLM firms.

When a distributor has a large downline, he can earn enough commissions (extra income) on the sales of the teams in his downline without the need to promote or sell the products and services himself, and that’s why existing distributors are motivated to expand their downline team, it is all about the commission-based revenue. 

MLM products can be promoted in multiple instances:

• Fairs: People coming to you is the greatness of events! People approach your booth and enquire for further information about your services and products, which are a thousand times preferable to pursuing individuals or approaching strangers.
• Online or physical events: If your business belongs to the mass market, you can go to almost any event and get many customers. But, if your product line belongs to a specific segmentation, you should participate in the events that your target market will attend.
• Social media marketing: Social networking will allow you to disseminate information about your brand, company, and all other important information that is vital for your circle and will aid in growing your MLM business. 
• Influencer marketing: Join social groups or business networks to engage with more people and get referrals. Increase your chances of connecting with new clients by selling to a wider community or collecting referrals from these contacts. 

Pros Of Multilevel Marketing

There are effective multilevel marketing businesses, and several people have successfully started their distribution channels. Here are some significant MLM business benefits that get plenty of interest.

1. Great opportunity for business owners

This is great potential for business owners and entrepreneurs. Starting an MLM business is simple and inexpensive. 

You can either create your own product/service and sell it through MLM strategy or quickly become a distributor for a business and earn a percentage by selling its services and recruiting people.

2. Cost Effective 

It allows you to reach a vast consumer base with little cost and effort in a large geographical area. 

Because it works in several layers of independent distributors, the company does not need to pay fixed salaries to the participants. They profit from sales commissions, which keeps MLM's sales expenses relatively cheap.

3. Flexible Schedule 

Participants in this marketing have complete control over their working hours. The work time can be adjusted to suit the needs of both the customer and the distributor. In brief, one can work from anywhere and at any time in the MLM business.

4. Soft skills development

This is a sales technique that supports the participant's communication skills growth. 

You develop personally from giving many presentations and working with many different customers face-to-face. A side benefit of MLM is hence personal growth. 

Cons Of Multilevel Marketing 

Several reasons have marked MLM business as a failed method of gaining money, and people are now looking to explore alternatives. Below is a summary of several drawbacks.

1. Little Income

This generates relatively little income compared to traditional companies. Making money for the participants in MLM is more challenging because of the intense competition among the companies.

Another obstacle for the participants is their challenge in hiring new salespersons and purchasing these products.

2. Slow growth rate 

It takes time for such businesses to turn a profit and succeed. Conducting presentations and recruiting people to join your organization takes time. This, however, fails to ensure that the work succeeds in its goal. Either people accept the proposal or reject it.

3. Lack of training and support 

This only requires participants to be qualified. Additionally, the businesses do not give the participants any special training. This leads to a workforce that is underequipped.

To succeed in business, one needs to be knowledgeable about company strategies and shifting market values. A company's backbone is its skilled employees, so the company will suffer greatly if this condition isn't met.

4. Scams

In the industry, there are numerous Multilevel Marketing companies. However, there are several scams involved in this industry. People are wary of such scams and are hesitant to work for them.

Multilevel Marketing vs. Pyramid Scheme

At first glance, distinguishing between an MLM and a pyramid scheme might be difficult.

MLM and Pyramid Schemes may look the same when talking about growing the business by recruiting multiple layers of participants in a pyramid system. But in reality, a multilevel marketing business and a pyramid scheme are not the same.

MLM can be considered a legal, legitimate business model, but pyramid schemes are shady, illegal scams that use money from downlines to pay the people at the top.

The goal of MLM is to sell products. The idea of MLM is that the larger the network of distributors, the more products/services the company can sell.

Unlike MLM, the pyramid scheme focuses only on recruitment rather than sales. There may be a low-value product, or no actual product at all to sell, nor a real investment with a pyramid scheme.

Be wary of scams:

The Securities and Exchange Commission (SEC) has taken emergency action to stop illegal pyramid schemes that violate federal securities laws, including schemes disguised as MLM programs. Look for the following signs of a pyramid scheme:

• No genuine product or service, promises of high returns in a short time period, easy money, or passive income.
• No demonstrated revenue from retail sales.
• Buy-in required.
• Complex commission structure
• Emphasis on recruiting.

Multilevel Marketing Vs. Traditional Marketing

Depending on your company's goals, either traditional marketing or network marketing is a viable choice, and each works completely differently. Let's discover the difference between the two methods:

A) Multilevel marketing

Multilevel marketing swiftly takes over the corporate world. Nowadays, almost every significant business has affiliate referral and compensation programs. 

And this not only expands the market for your products but also enables you to sell more and generate more revenue.

Every MLM participant is considered an owner. They are all paid on commission. Unlike typical businesses, MLM firms establish and manage their sales force by recruiting and inspiring individual distributors to sell their products and attract other distributors.

B) Traditional Marketing

Would have never even considered this a few years ago. Many business owners are now abandoning their conventional business methods and entering the multilevel marketing industry.

In a wholesale or retail business, the owner recruits staff and pays them a fixed salary to promote their products/services. Regardless of how many products employees sell, they get paid the same amount.

Key terms in MLM/network marketing

In the MLM industry, you will frequently meet technical terminology that has distinct meanings from their daily language counterparts.

1. Plan

Lists all of the several methods salesmen may generate money. The plan also demonstrates how pay varies with sales volume and the number of partners recruited. Reputable organizations make the plan as clear to their staff as feasible.

2. Sponsor

A person who hires another individual into the company.

Recruit or partner: An individual recruited into the business by a sponsor. The sponsor profits from the partner's sales.

3. Distributor

Most multilevel marketing companies refer to their members as distributors rather than sales agents.

4. Downline

Everyone beneath a distributor, whether members recruited by the distributor or fresh recruits registered by these members. Every distributor earns money from the sales of their downline.

5. Upline

All distributors in the hierarchy above a member's sponsor. The chain of command runs up to the Head of Sales. Upline distributors receive income on sales made by downline partners.

Multilevel Marketing Case Studies

The MLM is a legal marketing technique that aims to expand the market for its products and services. Even though MLM is restricted by a slow growth rate and lack of personnel training, it still is one of the most preferred methods of marketing for the growth opportunities it offers.

The following are some of the top US multilevel marketing businesses:

• Tupperware is one of the most well-known MLM businesses in the world. The company, established in the United States in 1938, has reached a degree of brand recognition for its whole product category — plastic food storage containers — that is only rivaled by businesses with traditional distribution methods, such as Scotch tape or Hoover vacuum cleaners. Every minute, more than 40 Tupperware parties are held across the globe.
• Avon is a cosmetics brand with around 6 million representatives and $5.7 billion in annual revenue. It ranks as one of the biggest MLM businesses in the world. Avon Products, Inc. was purchased by Natura & Co, a cosmetics company that also owns The Body Shop brand, in the early 2020s.
• Herbalife is one of the biggest dietary supplement multilevel marketing firms. It was started in California in 1980, and as of this writing, there are approximately 2.3 million independent distributors worldwide.
• Amway is the world's most extensive network marketing business, with about $9 billion in annual revenue. Over 3 million distributors sell health, beauty, and home care products in over 100 countries. The company was founded in Michigan in 1959.

Using these strategies, businesses like Mary Kay, Nu Skin, Vorwerk, and Young Living also sell consumer goods successfully in the USA.

Researched and authored by Sara Nasrallah | LinkedIn

Reviewed by Rohan Joseph Sajan | LinkedIn

Free Resources

To continue learning and advancing your career, check out these additional helpful WSO resources:

• Cornering the Market
• Quality Management
• Revenue Enhancement
• Types of Businesses
• Value-Based Pricing