What Is Multi-Level Marketing (MLM) – Companies, Tips & Scams

multi-level marketingMulti-level marketing first appeared on the U.S. scene in the 1940s. Carl Rehnborg, an American businessman, sold a product called Nutrilite, which was said to relieve a variety of ills including allergies, asthma, and irregular heartbeat. His customers told their friends about the products, and the friends then wanted to buy Nutrilite. Rather than selling directly to friends of friends, Rehnborg began to give his customers a commission for every product they sold.

Years later, two friends, Rich DeVos and Jay Van Andel, became Nutrilite distributors. However, fearing the collapse of Nutrilite due to legal concerns over the misleading aspect of the Nutrilite handbook, they began their own company, the American Way Company, which later became Amway – one of the biggest and most successful MLM companies to date.

What Is a Multi-Level Marketing Business?

A multi-level marketing business is a tiered, commission-based business. Sales associates not only sell the product themselves, but if other sales reps join the company beneath a sales person, the sales rep also earns a commission for each sale the new sales rep makes. Thus, salespeople have two possible income streams: Their own sales, and a percentage of the commission made from other sales reps.

Multi-level marketing companies generally do not advertise in mainstream media; instead, they rely on word-of-mouth sales. The more sales a representative can generate, the more people learn about the product and become interested in buying it. Therefore, multi-level marketing companies are good for those who are outgoing and have a large circle of friends and family to whom they can sell.

Examples of Multi-Level Marketing Companies

There are multi-level marketing companies operating in all 50 states. Many companies use this sales model, including:

  • Amway (health, beauty, and home care products)
  • Avon (anti-aging skincare, cosmetics, and fragrances)
  • Mary Kay (skincare products, cosmetics, and fragrances)
  • MonaVie (acai berry health juice)
  • Shaklee (health and home care products)
  • The Pampered Chef (high-quality kitchen and pantry tools)

Benefits of Multi-Level Marketing Companies

If you are considering joining a multi-level marketing company, there are several benefits:

  1. You Can Set Your Own Hours. As you are self-employed, you can set your own hours. For instance, if you are selling Pampered Chef merchandise, you will likely have a party to show the items to potential clients. However, if your son has a soccer game on Thursday, you can instead choose to set the party for Friday. You have a great deal of flexibility to work around your schedule.
  2. Low Overhead. With many multi-level marketing companies, you can work from home, so your overhead is low.
  3. Your Success Depends in Large Part Upon You. You decide how much time you want to put into your business. If you have a month where you need more money, you may want to spend more time on the business and increase sales to generate more income. If you have a busy month personally, you can limit the amount of time you spend on the business.
  4. Most Companies Are Instantly Recognizable. Most multi-level marketing companies, especially ones such as Avon, Mary Kay, and The Pampered Chef, are household names, so most potential clients are already familiar with the products.

many multi-level marketing companies sell cosmetics

Criticism of Multi-Level Marketing

There are plenty of critics of multi-level marketing companies. Multi-level marketing relies on both direct sales and recruitment of new members, but both are hard to obtain if you join the business late and there is little financial reward.

  1. The Market May Be Saturated, so Direct Sales Can Be Difficult to Make. Everyone knows about Avon, and chances are that there are many sales representatives already in your area. If you decide to sell Avon, you will be directly competing against those sales reps who already have established clients and territories. With multi-level marketing companies, making money before the market is saturated is easier than making money as a sales rep after others become established.
  2. Those Who Join a Company Late Need to Recruit More Members to Make Sales Due to Market Saturation. For these individuals, making money can become a losing proposition. Newsweek investigated MonaVie, a multi-level marketing company that sells an acai berry drink for $40 a bottle, and reported that, “According to MonaVie’s 2007 income disclosure statement…more than 90% of their sales team were considered ‘wholesale customers,’ whose earnings are mostly discounts on sales to themselves. Fewer than 1% qualified for commissions and of those, only 10% made more than $100 a week.”
  3. Those at the Top Reap Profits by Earning Commission for Those Below Them. According to Newsweek, “For a $39 initiation fee and responsibility for sales of at least eight bottles of MonaVie a month, people can retail the product and build their own sales tree, which is where the big money is. In two years, distributors Diane Whitaker and Sherry Nafziger have built a 30,000-person tree, earning them up to 20% of every sale – which is more than $1 million each in annual commission.” Compare those numbers to the people who signed up below them and are not making any money due to market saturation.
  4. Multi-Level Marketing Companies Require That New Salespeople Buy Their Own Products to Sell. Typically, new salespeople also have to buy an expensive start-up package, otherwise known as an “initiation fee.” Often, those who join the company late cannot even sell the items in the starter package. In fact, Newsweek reports that MonaVie’s dropout rate is around 70%, according to a top recruiter.

Legal Considerations

Many compare multi-level marketing companies to pyramid schemes, which are illegal. According to Robert Fitzpatrick in his post, Ten Big Lies of Multi-Level Marketing, “Recent court rulings are using a 70% rule to determine an MLM’s legality: At least 70% of all goods sold by the MLM company must be purchased by non-distributors.” Several large multi-level marketing companies fall outside these guidelines and are only functioning because they have not yet been investigated by the FTC.

However, the FTC does seem to carefully monitor claims that multi-level marketing companies make regarding the health benefits of their products. In 2007, according to Newsweek, “The FDA warned MonaVie about medicinal claims on its website and, in an email to Newsweek, says it’s satisfied with the company’s response.”

multi-level marketing can allow you to set your own hours

Considerations When Joining a Multi-Level Marketing Company

Many multi-level marketing companies are well-established, and as a new distributor, you may not be able to make a sustainable living. However, if you are considering joining a multi-level marketing company, try to make the following determinations before signing up:

  1. How Long Has the Company Been in Business? The longer a company has been in business, the lower you are on the sales team, so you will probably make less in commission from other sales associates you can get to join. Also, the market may be saturated, so you are likely to have a difficult time selling the product.
  2. How Many Salespeople Make a Decent Amount of Money From the Business? You must determine yourself what a decent amount is. If you would like to make $1,000 a month in sales, determine how many members of the sales force are able to do that.
  3. How Much Money Is Made via Direct Sales and Through Other Salespeople’s Commission? Remember, according to the FDA, 70% of the money generated should be through direct sales. If the company you are considering joining doesn’t have that percentage of direct sales, you may want to avoid joining.
  4. How Much Is the Start-up Package? Start-up packages can range from $39 for MonaVie to several hundred dollars for Shaklee. How much are you willing to invest in your new business venture? Remember, there is a very real chance that you will not be able to recoup the money you spend.
  5. Do You Have an Existing Customer Base to Whom You Can Sell? Multi-level marketing companies largely rely on word-of-mouth sales rather than overt advertising. If you have a large family or circle of friends, are they interested in buying the product? If so, that may make your job easier in the beginning. Ideally, they would then tell their friends and family, and your client pool would expand.
  6. How Do You Feel About Selling to People You Know? Your customer base, at least initially, is likely to be friends and family. How do you feel about selling to them? If this makes you uncomfortable, you will probably struggle with starting your business. However, if you believe in the product and think it is a good one, you will probably do well selling it.

Final Word

There is no such thing as a get-rich-quick business – such claims are merely work from home scams. While many people have been successful working for multi-level marketing companies, the majority of them are those who join the business early and have a large sales team underneath them so they can earn commission from those associates’ sales. If you are considering joining a multi-level marketing company, do your research carefully. You may find that multi-level marketing is not right for you.

Have you ever had any experience working for a multi-level marketing company? Would you recommend it to others?