Multi-level marketing facts for kids
Multi-level marketing (MLM), also known as network marketing, is a way of selling products or services. In this system, a company's money comes from a large group of people who sell products but don't get a regular salary. Instead, these sellers earn money in two main ways. First, they get a commission from selling products directly to customers. Second, they earn money from the sales made by other people they have convinced to join the company. These new sellers, and anyone they recruit, are called a downline.
MLM salespeople are expected to sell products to regular customers. But, they are also strongly encouraged to get more people to join the company as sellers. These new recruits become part of their "downline" team. However, studies show that most people who join MLM companies, often more than 99%, actually lose money. Even so, MLM companies keep going because they encourage people to believe they can earn a lot of money, even if it's very unlikely. Because of these issues, some places have made MLM illegal or have very strict rules for it, seeing it as similar to an illegal pyramid scheme.
Contents
What is Multi-Level Marketing?
Multi-level marketing is also known by other names like "pyramid selling," "network marketing," and "referral marketing." These terms all describe the same business model.
How Multi-Level Marketing Works
Setting Up Your Business
In MLM, people who join are called "distributors" or "independent business owners." They are allowed to sell the company's products or services. They earn money in two ways:
- They make a profit from selling products directly to customers.
- They get a commission from the company based on how many products they sell, and how many products their "downline" team sells.
Distributors grow their business by either finding many customers who buy products directly from the company, or by recruiting new distributors. These new distributors then also build their own customer base and recruit others. All the people recruited, directly or indirectly, form a salesperson's "downline." This "downline" creates the multi-level structure that gives MLM its name.
What Happens to Participants?
Most people who join MLM companies do not make much money, or they even lose money. One study looked at 27 MLM companies and found that, on average, 99.6% of people lost money. This happens because the few people at the very top of the MLM structure earn a lot of money. To do this, the many people below them must lose money after paying for their expenses. MLM companies often show off the success of these top earners to encourage everyone else to keep trying, even if they are losing money.
How Companies Make Money
Many MLM companies earn billions of dollars each year. However, most of this profit comes from the money lost by the majority of their sellers. Only a small part of these profits goes to the few individuals at the very top of the MLM pyramid. The companies often highlight the earnings of these top few at big meetings and events. This creates the idea that anyone can become financially successful in MLM. This idea is then used to attract more people to join, even though it's very unlikely for most to succeed.
The MLM business model relies on most participants losing money. This money then becomes the income and profit for the MLM company. The company shares only a small part of this with the few people at the top. For everyone else, their financial losses become the company's gains and the gains of the top earners.
The Promise of Financial Freedom
MLM companies often don't focus on their products. Instead, they focus on the idea of "financial freedom" or "the lifestyle you deserve." They promise that joining MLM can lead to a better life. This is sometimes called "selling the dream."
While they talk about the chance of success, MLM companies usually include small print that says people should not expect to earn as much as the top earners. They rarely mention how likely it is for people to fail or lose money when they join.
MLM and Pyramid Schemes
Some places have made MLM illegal because they see it as a type of pyramid scheme. For example, China has banned it. In other places where MLM is legal, many illegal pyramid schemes try to pretend they are legitimate MLM businesses. Because most MLM participants don't make a profit and often lose money, some experts believe all MLM companies are a type of pyramid scheme, even if they are not legally banned.
MLM companies are designed to make money for the company owners and a few people at the top. The U.S. Federal Trade Commission (FTC) says that some MLM companies are indeed illegal pyramid schemes because they take advantage of their members.
Common Criticisms and Lawsuits
Companies that use the MLM business model have often faced criticism and lawsuits. Some common complaints against MLM companies include:
- They are very similar to illegal pyramid schemes.
- They sometimes control the prices of products.
- They might have secret deals that benefit only a few people at the top.
- They often have high starting costs for new members.
- They focus more on getting new people to join than on selling products to customers.
- They often encourage or require members to buy and use the company's products.
- They use personal friendships and family ties to sell products and recruit new members.
- Their ways of paying commissions can be very confusing and seem exaggerated.
- They sometimes make false claims about their products.
- The company and top sellers make a lot of money from selling training materials, event tickets, and advertising to their members.
- Some groups use techniques that are similar to those used by cults to make members very enthusiastic and loyal.
Direct Selling vs. Network Marketing
"Network marketing" and "multi-level marketing" (MLM) are often used to mean the same thing. They are both types of direct selling. Direct selling means selling products directly to customers, often outside of a regular store. Some people say that MLM is just one way of doing direct selling. Other terms like "word-of-mouth marketing" are also used. Critics argue that these different terms are used to make MLM seem different from illegal Ponzi schemes or scams, even if they are very similar.
The Direct Selling Association (DSA), a group that supports the MLM industry, reported that in 1990, only 25% of its members used the MLM model. By 2009, this number grew to over 94%. Many well-known companies like Avon and Tupperware started as traditional direct selling companies. Later, they added multi-level payment plans and became MLM companies.
A Look at Income Levels
Many reports and studies have looked at how much money people actually make in MLM companies:
- The Times newspaper reported that in one large MLM company, only 10% of sellers in Britain made any profit. Less than one in ten sold even one product.
- An expert on a major MLM company found that out of 33,000 sellers, only about 90 earned enough to cover their business costs. This means about 99.7% lost money.
- Newsweek reported that in one MLM company, less than 1% of sellers earned commissions. Of those, only 10% made more than $100 a week.
- A study found that in the USA, the average yearly income from MLM for 90% of members was no more than $5,000. This is not enough to live on.
- USA Today reported that the average yearly income for direct sellers is $2,400.
- Documents from one MLM company showed that 30% of its sellers made no money at all. Of the remaining 70%, most made only $93 a month before expenses. This company was later found to be an illegal pyramid scheme.
- A former business professor who studied MLM for 40 years said that most people would be lucky to make $1.50 an hour. He said the main "product" sold in MLM is the "opportunity" itself, which is often a false hope.
- A 2018 survey of over 1,000 MLM sellers found that most (60%) earned less than $100 in sales over five years. 20% never made a single sale. Most sellers earned less than 70 cents per hour. Nearly 32% of those surveyed went into credit card debt to pay for their MLM involvement.
Is MLM Legal?
Bangladesh
In 2015, the government of Bangladesh banned all types of MLM businesses, both local and foreign.
China
Multi-level marketing was introduced to mainland China in the 1970s and 1980s. However, the Chinese government banned it in 1998 due to social, economic, and tax problems. New rules in 2005 made it clear that having a "downline" of recruits is illegal. This means that while direct selling is allowed in China, multi-level marketing is not. Some MLM sellers try to get around this ban by setting up businesses in Hong Kong, where it is legal, and then selling and recruiting in mainland China.
Saudi Arabia
MLM is banned in Saudi Arabia. Religious leaders have issued a ruling (fatwa) against it. Because of this, MLM companies like Amway and Herbalife sell their products in Saudi Arabia through regular online sales, not through MLM.
United States
MLM businesses operate in all 50 U.S. states. Some sources say that all MLM companies are basically pyramid schemes, even if they are legal. The state of Utah is known as a major center for MLM companies.
The U.S. Federal Trade Commission (FTC) warns people to "Steer clear of multilevel marketing plans that pay commissions for recruiting new distributors. They're actually illegal pyramid schemes." The FTC explains that these plans eventually fail when no new distributors can be found, and most people lose their money.
The FTC also advises that if a multi-level marketing company gives more rewards for recruiting new people than for actually selling products, it should be viewed with suspicion. They warn that getting commissions just for recruiting new members is illegal in most states.
Some experts have described MLM groups as similar to cults or as businesses full of misleading and unfair practices. They say MLM often uses personal relationships to make money. In China, people trying to rescue others from these schemes have even been attacked.
Critics also say that MLM companies cannot fulfill their promises for most people. They claim that the chance of breaking even or making money in MLM is much worse than in other types of businesses. Some even say that modern MLM companies are just legal pyramid schemes.
Religious Views
Islam
Many Islamic religious scholars and groups, including those in Saudi Arabia, believe that MLM is not allowed (haram). They argue that MLM involves tricking others into joining, and that the way money is made is similar to forbidden practices in Islam.
See also
In Spanish: Marketing multinivel para niños
- Binary option
- Destiny Group
- List of multi-level marketing companies
- Saradha Group financial scandal
- Tiens
