Multi-level marketing is a form of business where the primary income is generated by employees recruiting other employees, rather than product sales to independent customers.
This stands in stark contrast to most standard businesses, where employees are rewarded for sales made to other businesses (B2B companies) or to consumers (B2C companies). Additionally, obtaining a higher rank within multi-level marketing companies depends on your ability to recruit others, rather than by appointment. MLMs that rely too heavily on recruitment rather than emphasizing direct sales generally fail over time because of the natural progression of pyramid schemes which are unsustainable in the long run.
History of Multi-Level Marketing
The first recognized MLM businesses in the United States were the California Vitamin Company (founded in the 1920s and later renamed Nutrilite in 1939), and the California Perfume Company (incorporated in 1909 and later renamed Avon Products in 1932).
In 1979, a landmark ruling involving Amway helped to legitimize the multi-level marketing industry. The FTC found that Amway was not operating as a pyramid scheme according to the strict statutory definition of one, but did order the company to stop deceiving its distributors about their income potential.
In 2016, the FTC levied a $200 million penalty against Herbalife for too heavily emphasizing recruitment over product sales. However, the FTC was careful to avoid calling Herbalife an outright pyramid scheme, which was seen as a victory for the MLM industry as a whole.
The Direct Selling Association, founded in 1910, is the national trade association (lobbying group) for its member firms. The DSA is comprised almost entirely of multi-level marketing companies, though companies like Tupperware, which utilizes direct selling but not multi-level marketing, left in 2013, citing the desire to distance itself from pyramid schemes. In 2012, the DSA succeeded in exempting multi-level marketing companies from consumer protection regulations included in the FTC’s “Business Opportunity Rule”. The ruling is considered to be the most important lobbying success in MLM industry history.
How to Tell if a Company is an MLM
At first glance, it can be very difficult to distinguish whether or not a company is an MLM. When talking with the person who is recruiting you, here are a few important questions to ask that can help give you insight into the type of company they are:
- What percentage of company revenue comes from sales to consumers, and sales to employees?
- Do distributors spend more time recruiting other distributors, or selling the product?
- What are the average monthly commissions for distributors in the bottom 33%, middle 33%, and top 33%?
- Is there an auto-ship of products required to become a distributor?
- Are they comfortable giving you the name of the company they work for, are do they require you to contact them through a personal/direct message on Social Media?
Popular Words in the Multi-Level Marketing Industry
There are a variety of terms used as synonyms for multi-level marketing, but many of them don’t fit the exact definition.
- Direct Selling: While MLMs focus almost exclusively on direct selling, this is not an accurate synonym because direct selling is simply the method by which distributors in MLMs sell products and/or recruit new members. Direct selling is the idea that sales people leverage their personal contacts and relationships, whereas salesmen at a normal company are often working with people that they don’t personally know. Multi-level marketing companies that have lasted many years or even decades have generally done a better job of emphasizing direct sales over recruiting.
- Retail Profit Pool (RPP): An investment scheme often employed by scammers to convince investors to pool their money in order to realize higher returns. While this methodology can be successfully employed by legitimate investment firms and professionals, MLM’s often use this as a front for a Ponzi scheme setup.
- High Yield Investment Program (HYIP): A type of Ponzi scheme that promises unattainable returns by paying previous investors with money from new investors. These schemes, like all Ponzi schemes, are unsustainable models in the long run.
- Network Marketing: When multi-level marketing distributors leverage their personal networks of family and friends to make sales and recruit new members.
- Pyramid Scheme: An unsustainable (and illegal) business model in which profits from new members are paid out to earlier members.
Top Multi-Level Marketing Companies
Due to the high attrition rates of distributors, most multi-level marketing companies don’t last longer than a year. However, some MLMs have lasted decades. You can find the top MLM companies of 2018 here.