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

By Melissa Batai

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?

(photo credit: Shutterstock)

Melissa Batai
Melissa is a former college instructor who recently quit her job to be a stay home mom with her three children ages 7, 2 and 1. She is a personal finance writer for several online publications, and she blogs at her own blog, Mom's Plans, where she documents her family's journey to live a fulfilling life on less and Dining Out Challenge, where the motto is, "Never pay full price to dine out again." She enjoys cooking, writing, reading, and watching movies.

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  • WealthBoy

    Very nice job touching on the key issues with bad MLMs. When a product is marketed using MLM, there are really two things being marketed simultaneously. The product and the MLM opportunity itself. Unfortunately, when the product doesn’t work as advertised and provides no value to customers, the product still continues to be sold because the MLM opportunity can still be marketed effectively. This is the biggest problem with bad MLMs and I would say this makes them borderline (illegal) pyramid schemes. If a product is marketed using traditional marketing and it doesn’t work, people simply won’t buy it. However, the marketing of the MLM opportunity regardless of the validity of the product is what makes them so pervasive and persuasive.

    • Erik Folgate

      You hit the nail on the head. There are definitely more bad ones than good ones, but I also wanted to point out that they aren’t ALL illegal schemes.

      • http://www.lillepunkin.com/ Melissa

        Yes, it is wise to be cautious when deciding to work with a MLM, but there are some that are legit and have been around for years.

        • Nerislacks

          Organo Gold is one of the best MLM that’s out at this moment. It’s a very new company and coffee is the number one thing people are purchasing at this moment. To learn more please feel free to contact me at [email protected]

          It’s all about the power of 2!

  • sanspur

    Not all mlm companies are bad. I belong to a new company – one24. I have only been in it two months and have made $125.00. Doesn’t sound like much, but it builds over 24 months. This is not a get rich quick scheme. The founder is the same man who brought out Herbalife. One 24 has a healthy drink called NatraBurst with 30+ superfoods in it. I drink it daily and have more energy than I have ever had. I like the company and the concept.

  • Joyce

    I just went to an orientation for Metro Public Adjustment, Inc. where you get $450 after 6 hrs of training, 3 approved claims, and passing exam for Adjuster license in Md. Having a hard time telling if this is a legitimate MLM. Is anyone familiar with the company?

    • Derrick Dunham

      I am looking to get into this….can you contact me with more info?
      [email protected]

    • Mauri Cesare

      Did you find any more information regarding this? My boyfriend just decided to get involved with this company as well, and the first thing I thought was “scam”. Please let me know if you found any further information at [email protected]
      Thanks!

    • Kyle

      Metro is the real deal i have a friend who’s making over 15k a month with them

  • Derrick Dunham

    I am looking to get into this….can you contact me with more info?
    [email protected]

  • Jeff

    I can speak personally about Metro. Metro is a class organization offering property owner’s a needed service. I’ve had 25+ years of sales experience working for major corporations selling in a traditional “direct” sales model and there are just few differences between Direct & MLM . Both sales models are good and service different needs for businesses. Technology has changed our world and we now have more choices. Even the traditional direct only sales companies are implementing untraditional sales models to complement sales. Has the internet changed the way people buy products and services, absolutely! Regarding MLM criticisms’, anyone can join and MLM business which is good and bad. Overall MLM is very similar to direct sales in that individuals are rewarded for their sales achievements. The statement “early to join” are the high income earners. That may have some merit but it’s not unique to MLM. That applies to any new innovative company or individual that 1st to go to market. I see many new marketers’s coming into a MLM business and excel and earn a big paycheck. It’s all about how well they connect with people and their work ethic. Yes there may be a higher turnover rate with new MLM marketer’s but again that true in a direct sales model. The 1st year in any sales job is tough. You learning the business and product. As a result people who are new to sales find the first 6months to a year more than they can afford. Its boils down to the old 80/20 rule. 80% of sales are generated by 20% of the sales force. Since MLM companies usually have an open door partner or employment policy there may be a higher turnover rate. Lastly regarding market saturation. I left the office products business because of market saturation. Product margins continued to drop yr. after yr. and commission did the same. Competition in the office products market was fierce not unlike other sales. It wasn’t unusual to have 6 different sales reps from different companies selling the same product to the same single business. It was very ugly! I will not want to return to a shear direct sales company. MLM offers many more advantages.

  • JCollazo

    Do your home work! there are bad companies! but don’t let that steal your dreams from the good companies out there, good luck.

  • Lizardbreath

    I can also testify to Metro. This company is straight forward. You will WORK or you won’t make anything. You do have to start out with friends and family but if your friends and family are supportive and recommend you to their friends, you can grow your business. Metro tells the truth. The market is not saturated as a very low percentage of people utilize a public adjuster. I also use (don’t sell) Pampered Chef and most people LOVE that product so you can make money – or earn gifts. I have a small home so I don’t sell that and don’t know how much work is involved but love the products and go to any party I can get invited to. Back to Metro, I’m just starting out so I can’t testify to tons of money, but I can see how you can do well if you spend the time and are talented at getting people interested. My first presentation brought a man who had a negative view of Metro (due to online reviews), had stated he would NOT sign up or purchase anything from me (we don’t sell anything) but by the end of the presentation, he not only spoke of a claim but he spoke joining the team. He found Metro to be real and a worthy company.

  • shanky frnd

    Hi I have joined one of the best companies…If any body intrested pls let me know…….would be happy to share ….thanks

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