Multi-level marketing (MLM) businesses can sell products, services, or subscriptions. Associates earn commissions from their own sales and those of their recruits. MLMs can be successful, but some use questionable tactics. Associates pay fees to join and may advance to managerial status. MLMs that sell products usually make them themselves, while those that sell services market subscriptions. Some MLMs focus on recruiting new members and pay significant commissions for doing so. Many MLMs sell sales support materials and require associates to order business cards and stationery through the company. Due diligence is necessary before joining an MLM.
There are three types of multi-level marketing (MLM) businesses, based on their primary source of revenue: those that sell a product, those that sell a service, and those that sell subscriptions. MLM companies are attracted to potential salespeople because they can earn commissions not only from the sale of the goods or services they sell themselves, but also from the sales of those they recruit into the business. While many MLMs are highly reputable and successful businesses, some have employed questionable marketing and recruiting tactics, marring the reputation of the entire industry.
MLM businesses are generally regular businesses that sell products or services. Multi-level marketing is their approach to distribution and sales; instead of selling goods from a storefront or services from an office, they contract with private individuals to make their sales as independent contractors. Known by terms such as partners, distributors, representatives or affiliates, they reach potential customers in a variety of ways, including traditional advertising, online approaches and direct door-to-door sales. New associates typically pay significant fees to join the sales force and can sometimes advance to managerial status for a higher fee.
MLM Associates earn commissions on their own sales and earn minor commissions or replacement sales of those associates they have recruited into the firm. When an associate recruits a new associate, that new associate becomes part of the recruiter’s “downline,” which includes all of an associate’s recruits, as well as all of their own recruits. Most MLM compensation packages offer replacements for second, third and fourth generation hires, and some offer replacements for an associate’s entire downline.
MLM companies that sell products usually make the product themselves, but in some cases they will contract with a third party to manufacture it under the MLM label. Examples of such products include vitamins and nutritional supplements, cosmetics and beauty aids, cleaning and other household products, and other products that lend themselves to impulse and repeat purchases. While some associates will maintain product inventory for immediate delivery when a sale is made, most take orders and pass them on to the home office. Some companies ship orders directly to customers; others deliver bulk orders to associates, who hand-deliver them to customers. In both cases, member compensation is based on the dollar value of products ordered and paid for.
MLM businesses that sell services, on the other hand, don’t need inventory or recurring customer visits. Their associates market the company’s services in the same way as associates who sell products and are similarly compensated. Instead of selling a product, though, they’re selling subscriptions to the company’s service. However, very few commissions are paid for renewal memberships, so a member must constantly find new clients to maintain a good income. Service-oriented MLMs sell education plans online, buying club membership, legal services, financial services, and similar services.
The third type of MLM business sells memberships and can be more accurately classified as a pyramid scheme. These MLMs focus on recruiting new members and there is little focus on selling a product or service. These MLM companies pay members a significant commission for recruiting new members, providing an added incentive to seek income from a source other than the company’s product or service. Without an emphasis on making money from selling a service or product, such MLM businesses inevitably collapse.
Many MLM companies are very successful. Despite their success, however, most research indicates that most associates don’t make enough money from commissions and ignore expenses as well. Corporations, on the other hand, earn money not only from the sales of the products or services but also from the sign-up fees charged to new associates. Many MLMs also sell their associates a variety of sales support materials, such as presentation binders and other promotional materials, and even require business cards and other stationery to be ordered through the company.
The success of some of the big MLM companies has led to a huge range of imitators. Some of these copycat activities have sparked investigations, which have cast a shadow over the entire industry. Those considering joining an MLM should do their due diligence carefully before signing any deals or paying any fees.
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