Multi-level marketing

From Wikipedia, the free encyclopedia

Multi-level marketing (MLM) is a marketing strategy in which the sales force is compensated not only for sales they personally generate, but also for the sales of others they recruit, creating a downline of distributors and a hierarchy of multiple levels of compensation.Other terms for MLM include pyramid selling, network marketing, and referral marketing.

Most commonly, the salespeople are expected to sell products directly to consumers by means of relationship referrals and word of mouth marketing. Some people use direct selling as a synonym for MLM, although MLM is only one type of direct selling, which started centuries ago with peddling.

MLM companies have been a frequent subject of criticism as well as the target of lawsuits. Criticism has 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.

In contrast to MLM is single-level marketing, where the salesperson is rewarded for selling the product directly to the consumer.

Direct selling, network marketing, and multi-level marketing

"Network Marketing" and "Multi-level Marketing" have been described by author Dominique Xardel as being synonymous, and as methods of direct selling.According to Xardel, "direct selling" and "network marketing" refer to the distribution system, while the term "multi-level marketing" describes the compensation plan. Other terms that are sometimes used to describe multi-level marketing include "word-of-mouth marketing", "interactive distribution", and "relationship marketing". Critics have argued that the use of different terms and "buzzwords" is an effort to distinguish multi-level marketing from illegal Ponzi schemes, chain letters, and consumer fraud scams. Some sources classify multi-level marketing as a form of direct selling rather than being direct selling.

The Direct Selling Association, an American industry body, reported that in 1990 twenty-five percent of members used MLM, growing to 77.3 percent in 1999.Companies such as Avon, Electrolux, Tupperware,and Kirby all originally used single level marketing to sell their goods and later introduced multi-level compensation plans.By 2009, 94.2% of members were using MLM, accounting for 99.6% of sellers, and 97.1% of sales. The DSA has approximately 200 members  while it is estimated there are over 1000 firms using multi-level marketing in the US alone.

History

It is generally accepted that the first multi-level marketing plan was introduced in 1945 by the California Vitamin Company (shortly afterwards to become Nutrilite).The plan allowed Nutrilite distributors with at least 25 regular customers to recruit new distributors and draw a 3 percent commission from their sales. Unlike traditional direct selling, this was an ongoing payment whenever the customer re-ordered; allowing direct sellers to build a sales organization that could generate a residual-like income.^[23]

Setup

Independent, non-salaried 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 price.

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% of Amway's agents in Britain make any profit, with less than one in ten selling a single item of the group's products.

§  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

§  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.

§  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)"

§  USA Today has had several articles:

§  "While earning potential varies by company and sales ability, DSA says the median annual income for those in direct sales is $2,400.

§  In an October 15, 2010 article, it was stated that documents of a MLM called Fortune reveal that 30 percent of its representatives make no money and that 54 percent of the remaining 70 percent only make $93 a month. The article also states Fortune is under investigation by the Attorneys General of Texas, Kentucky, North Dakota, and North Carolina with Missouri, South Carolina, Illinois, and Florida following up complaints against the company.

§  A February 10, 2011 article stated "It can be very difficult, if not impossible, for most individuals to make a lot of money through the direct sale of products to consumers. And big money is what recruiters often allude to in their pitches.

§  "Roland Whitsell, a former business professor who spent 40 years researching and teaching the pitfalls of multilevel marketing": "You'd be hard-pressed to find anyone making over $1.50 an hour, (t)he primary product is opportunity. The strongest, most powerful motivational force today is false hope."