Multi-level marketing (MLM), (also called network marketing[1][2][3][4][5], direct selling[6][3], referral marketing[7], and pyramid selling[8][9][10][11][12]) is a term that describes a marketing structure used by some companies In the United States, a company is a corporation—or, less commonly, an association, partnership, or union—that carries on an industrial enterprise." Generally, a company may be a "corporation, partnership, association, joint-stock company, trust, fund, or organized group of persons, whether incorporated or not, and any receiver, as part of their overall marketing strategy Marketing strategy is a process that can allow an organization to concentrate its limited resources on the greatest opportunities to increase sales and achieve a sustainable competitive advantage. A marketing strategy should be centered around the key concept that customer satisfaction is the main goal. The structure is designed to create a marketing and sales force by compensating promoters of company products not only for sales they personally generate, but also for the sales of other promoters they introduce to the company, creating a downline of distributors and a hierarchy A hierarchy (Greek: hierarchia , from hierarches, "leader of sacred rites") is an arrangement of items (objects, names, values, categories, etc.) in which the items are represented as being "above," "below," or "at the same level as" one another and with only one "neighbor" above and below each of of multiple levels of compensation in the form of a pyramid.
The products and company are usually marketed directly to consumers Direct selling is a retail channel for the distribution of goods and services. At a basic level it may be defined as marketing and selling products, direct to consumers away from a fixed retail location. Sales are typically made through party plan, one to one demonstrations, and other personal contact arrangements. A text book definition is: " and potential business partners by means of relationship referrals and word of mouth Word of mouth is a reference to the passing of information from person to person. Originally the term referred specifically to oral communication , but now includes any type of human communication, such as face-to-face, telephone, email, and text messaging marketing.[13]
MLM companies have been a frequent subject of controversy as well as the target of lawsuits. Criticisms have focused on their similarity to illegal pyramid schemes, price-fixing of products, high initial start-up costs, emphasis on recruitment of lower-tiered salespeople over actual sales, encouraging if not requiring salespeople to purchase and use the company's products, potential exploitation of personal relationships which are used as new sales and recruiting targets, complex and sometimes exaggerated compensation schemes, and cult-like techniques which some groups use to enhance their members enthusiasm and devotion. Not all MLM companies operate the same way, and MLM groups have persistently denied that their techniques are anything but legitimate business practices.
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Setup
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 company that produces the products or provides the services they sell. They are awarded a commission based upon the volume of product sold through their own sales efforts as well as that of their downline organization.
Independent distributors develop their organizations by either building an active customer base, who buy direct from the 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 company at wholesale Wholesaling, jobbing, or distributing is defined as the sale of goods or merchandise to retailers, to industrial, commercial, institutional, or other professional business users, or to other wholesalers and related subordinated services. In general, it is the sale of goods to anyone other than a standard consumer price.
This arrangement of distributors earning a commission based on the sales of their independent efforts as well as the leveraged sales efforts of their downline is similar to franchise Franchising is the practice of using another firm's successful business model. The word 'franchise' is of anglo-french derivation - from franc- meaning free, and is used both as a noun and as a verb arrangements where royalties are paid from the sales of individual franchise operations to the franchiser as well as to an area or regional manager. Commissions are paid to multi-level marketing distributors according to the company’s compensation plan. There can be individuals at multiple levels of the structure receiving royalties from a single person's sales.
Legality and Legitimacy
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 A pyramid scheme is a non-sustainable business model that involves promising participants payment primarily for enrolling other people into the scheme, rather than from any real investment or sale of products or services to the public. Pyramid schemes are a form of fraud try to present themselves as legitimate MLM businesses.[6]
The FTC states "Steer clear of multilevel marketing plans that pay commissions for recruiting new distributors. They're actually illegal pyramid schemes. Why is pyramiding A pyramid scheme is a non-sustainable business model that involves the exchange of money primarily for enrolling other people into the scheme, without any product or service being delivered. Pyramid schemes are a form of fraud dangerous? Because plans that pay commissions for recruiting new distributors inevitably collapse when no new distributors can be recruited. And when a plan collapses, most people-except perhaps those at the very top of the pyramid-end up empty-handed."[14]
In a 2004 United States Federal Trade Commission The Federal Trade Commission is an independent agency of the United States government, established in 1914 by the Federal Trade Commission Act. Its principal mission is the promotion of "consumer protection" and the elimination and prevention of what regulators perceive to be harmfully "anti-competitive" business practices, (FTC) Staff Advisory letter to the Direct Selling Association The Direct Selling Association is the name of several similar trade associations in the United States, United Kingdom, Australia, Malaysia, Singapore, and New Zealand that represent direct selling companies states:
Much has been made of the personal, or internal, consumption issue in recent years. In fact, the amount of internal consumption in any multi-level compensation business does not determine whether or not the FTC will consider the plan a pyramid scheme. The critical question for the FTC is whether the revenues that primarily support the commissions paid to all participants are generated from purchases of goods and services that are not simply incidental to the purchase of the right to participate in a money-making venture.[15]
The FTC warns "Not all multilevel marketing plans are legitimate. Some are pyramid schemes. It’s best not to get involved in plans where the money you make is based primarily on the number of distributors you recruit and your sales to them, rather than on your sales to people outside the plan who intend to use the products." [16]and states that research is your best tool and gives eight steps to follow:
- 1) Find — and study — the company’s track record.
- 2) Learn about the product
- 3) Ask questions
- 4) Understand any restrictions
- 5) Talk to other distributors (beware shills)
- 6) Consider using a friend or adviser as a neutral sounding board or for a gut check.
- 7) Take your time.
- 8) Think about whether this plan suits your talents and goals[17]
However there are people who hold that all MLMs are nothing more than pyramid schemes even if they are legal[7][18][19][20] rendering the whole issue of a particular MLM being legal moot.
Compensation plans
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Companies have devised a variety of MLM compensation plans over the decades.
- Unilevel plans This type of plan is often considered the simplest of compensation plans. As the name suggests, the plan allows a person to sponsor one line of distributors, called a "frontline." Every distributor the person sponsors is considered to be on that sponsor's frontline and there are no width limitations, meaning there is no limit to the amount of people one can sponsor in the frontline. The common goal of this plan is to recruit a large number of frontline distributors and then encourage them to do the same. This is due to the fact that commissions are normally paid out on a limited depth, which typically means sponsor can earn commissions on sales between 5 and 7 levels deep.[21]
- Stairstep Breakaway plans This type of multi-level marketing compensation plan is characterized by 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 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 commission level. This continues until the representative's sales volume reaches the top commission level and "breaks away" from their upline. From that point on, the new group is no longer considered part of his upline's group and the multi-level compensation aspect ceases. The original upline usually continues to be compensated through override commissions and other incentives.
- Matrix plans A matrix scheme, also known as a Matrix Site, Elevator Scheme, Escalator Scheme or Ladder Scheme, is a business model involving the exchange of money for a certain product with a side bonus of being added to a waiting list for a product of greater value than the amount given. Matrix schemes are also sometimes considered similar to Ponzi or pyramid This type of plan is similar to a Uni-Level plan, except there is also a 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 The Binary plan is an organizational plan used by multi-level marketing organizations wherein new organization members are introduced into a Binary Tree structure, or a left and a right subtree: 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.[22]
- Hybrid plan are compensation plans that are constructed using elements of more than one type of compensation plan.
Income levels
Several sources have commented on the income level of specific MLMs or MLMs in general:
- The Times: "The Government investigation claims to have revealed that just 10 per cent of Amway’s agents in Britain make any profit, with less than one in ten selling a single item of the group’s products."[23]
- Scheibeler, a high level "Emerald" Amway member: "UK Justice Norris found in 2008 that out of an IBO [Independent Business Owners] population of 33,000, 'only about 90 made sufficient incomes to cover the costs of actively building their business.' That's a 99.7 percent loss rate for investors."[24]
- Newsweek: based on Mona Vie's own 2007 income disclosure statement "fewer than 1 percent qualified for commissions and of those, only 10 percent made more than $100 a week."[25]
- Business Students Focus on Ethics: "In the USA, the average annual income from MLM for 90% MLM members is no more than US $5,000, which is far from being a sufficient means of making a living (San Lian Life Weekly 1998)"[26]
- USAToday: "While earning potential varies by company and sales ability, DSA The Direct Selling Association is the name of several similar trade associations in the United States, United Kingdom, Australia, Malaysia, Singapore, and New Zealand that represent direct selling companies says the median annual income for those in direct sales is $2,400."[27]
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Thu, 22 Jul 2010 13:02:02 GMT+00:00
Helium The most common misconception is that multi-level marketing is a scam. While some multi-level marketing techniques are scams out their, there are still some ...
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