Multi-level marketing

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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.^[1] Other terms for MLM include pyramid selling,^{[2][3][4][5][6]} network marketing,^[7][8][9] and referral marketing.^[10]

Most commonly, the salespeople are expected to sell products directly to consumers by means of relationship referrals and word of mouth marketing.^[1] Some people use "direct selling" as a name for MLM, although MLM is only one type of direct selling, which started centuries ago with peddling.^[1][7][11]

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.^[10][12]

In contrast to MLM is single-level marketing, where the salesperson is rewarded for selling the product directly to the consumer.^[13]

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.^[1] According to Xardel, "direct selling" and "network marketing" refer to the distribution system, while the term "multi-level marketing" describes the compensation plan.^[1] 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.^[14] Some sources classify multi-level marketing as a form of direct selling rather than being direct selling.^[13][15][16]

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.^[17] Companies such as Avon, Electrolux, Tupperware,^[18] and Kirby all originally used single level marketing to sell their goods and later introduced multi-level compensation plans.^[19] By 2009, 94.2% of members were using MLM, accounting for 99.6% of sellers, and 97.1% of sales.^[20] The DSA has approximately 200 members ^[21] while it is estimated there are over 1000 firms using multi-level marketing in the US alone.^[22]

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).^[13][23] 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."^[24]
• 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."^[25]
• 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."^[26]
• 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)"^[27]
• 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."^[28]
• 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.^[29]
• 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." ^[30]
• "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."^[30]

Legality and legitimacy

USA

MLM businesses operate in all 50 states^{[citation needed]}. New businesses may use terms such as "affiliate marketing" or "home-based business franchising". Many pyramid schemes try to present themselves as legitimate MLM businesses.^[11] However, there are people who hold that all MLMs are essentially pyramid schemes even if legal.^{[10][31][32][33]}

The United States Federal Trade Commission states "Steer clear of multilevel marketing plans that pay commissions for recruiting new distributors. They're actually illegal pyramid schemes. Why is pyramiding dangerous? Because plans that pay commissions for recruiting new distributors inevitably collapse when no new distributors can be recruited. And when a plan collapses, most people - except perhaps those at the very top of the pyramid - end up empty-handed."^[34]

In a 2004 Staff Advisory letter to the Direct Selling Association, the FTC states:

Much has been made of the personal, or internal, consumption issue in recent years. In fact, the amount of internal consumption in any multi-level compensation business does not determine whether or not the FTC will consider the plan a pyramid scheme. The critical question for the FTC is whether the revenues that primarily support the commissions paid to all participants are generated from purchases of goods and services that are not simply incidental to the purchase of the right to participate in a money-making venture.^[35]

The FTC warns "Not all multilevel marketing plans are legitimate. Some are pyramid schemes. It's best not to get involved in plans where the money you make is based primarily on the number of distributors you recruit and your sales to them, rather than on your sales to people outside the plan who intend to use the products."^[36] and states that research is your best tool, giving eight steps to follow:^[36]

1. Find — and study — the company’s track record
2. Learn about the product
3. Ask questions
4. Understand any restrictions
5. Talk to other distributors (beware of shills)
6. Consider using a friend or adviser as a neutral sounding board or for a gut check
7. Take your time
8. Think about whether this plan suits your talents and goals

Criticism

The FTC issued a decision, In re Amway Corp., in 1979 in which it indicated that multi-level marketing was not illegal per se in the United States. However, Amway was found guilty of price fixing (by effectively requiring "independent" distributors to sell at the same fixed price) and making exaggerated income claims.^[37][38]

The FTC advises that multi-level marketing organizations with greater incentives for recruitment than product sales are to be viewed skeptically. The FTC also warns that the practice of getting commissions from recruiting new members is outlawed in most states as "pyramiding".^[39] In April 2006, it proposed a Business Opportunity Rule intended to require all sellers of business opportunities—including MLMs—to provide enough information to enable prospective buyers to make an informed decision about their probability of earning money. In March 2008, the FTC removed Network Marketing (MLM) companies from the proposed Business Opportunity Rule:

The revised proposal, however, would not reach multi-level marketing companies or certain companies that may have been swept inadvertently into scope of the April 2006 proposal.^[40]

Walter J. Carl stated in a 2004 Western Journal of Communication article that "MLM organizations have been described by some as cults (Butterfield, 1985), pyramid schemes (Fitzpatrick & Reynolds, 1997),^[41] or organizations rife with misleading, deceptive, and unethical behavior (Carter, 1999), such as the questionable use of evangelical discourse to promote the business (Hopfl & Maddrell, 1996), and the exploitation of personal relationships for financial gain (Fitzpatrick & Reynolds, 1997)".^[41][42] In China, volunteers working to rescue people from the schemes have been physically attacked.^[43]

MLM's are also criticized for being unable to fulfill their promises for the majority of participants due to basic conflicts with Western cultural norms.^[44] There are even claims that the success rate for breaking even or even making money are far worse than other types of businesses:^[45][46][47] "The vast majority of MLM’s are recruiting MLM’s, in which participants must recruit aggressively to profit. Based on available data from the companies themselves, the loss rate for recruiting MLM’s is approximately 99.9%; i.e., 99.9% of participants lose money after subtracting all expenses, including purchases from the company."^[45] In part, this is because encouraging recruits to further "recruit people to compete with [them]"^[10] leads to "market saturation."^[12]

Another criticism is that MLM has effectively outlived its usefulness as a legitimate business practice. The argument is that, in the time when America was a series of relatively small, isolated towns and rural areas not easily accessible to small companies, MLM was a useful way to let people know of and buy products or services. But the advent of internet commerce, with its ability to advertise and sell directly to consumers, has rendered that model obsolete. Thus, today, nearly all modern MLMs ostensibly sell vastly overpriced goods and services (if there even is a real product or service involved at all) as a thin cloak of legitimacy, while their members are driven to recruit even more people into the MLM, effectively turning these programs into pyramid schemes.^[32]

It is because of this encouraging recruits to further recruit their competitors, some people have even gone so far as to say at best modern MLMs are nothing more than legalized pyramid schemes^{[10][31][32][33]} with one stating "Multi-level marketing companies have become an accepted and legally sanctioned form of pyramid scheme in the United States"^[31] while another states "Multi-Level Marketing, a form of Pyramid Scheme, is not necessarily fraudulent."^[33]

In October 2010 it was reported that multilevel marketing companies were being investigated by a number of state attorneys general amid allegations that salespeople were primarily paid for recruiting and that more recent recruits cannot earn anything near what early entrants do.^[48]

See also

• List of multi-level marketing companies
• Pyramid scheme
• Passive income

Notes

1. ^ ^{a b c d e} Xardel, Dominique (1993). The Direct Selling Revolution. Understanding the Growth of the Amway Corporation. Blackwell Publishing. pp. 1–4. ISBN 978-0631192299. 
2. ^ Edwards, Paul (1997). Franchising & licensing: two powerful ways to grow your business in any economy. Tarcher. pp. 356. ISBN 0874778980. 
3. ^ Clegg, Brian (2000). The invisible customer: strategies for successive customer service down the wire. Kogan Page. pp. 112. ISBN 074943144X. 
4. ^ Higgs, Philip; Smith, Jane (2007). Rethinking Our World. Juta Academic. pp. 30. ISBN 0702172553. 
5. ^ Kitching, Trevor (2001). Purchasing scams and how to avoid them. Gower Publishing Company. pp. 4. ISBN 0566082810. 
6. ^ Mendelsohn, Martin (2004). The guide to franchising. Cengage Learning Business Press. pp. 36. ISBN 1844801624. 
7. ^ ^{a b} Vander Nat, Peter J.; Keep, William W. (2002). "Marketing Fraud: An Approach for Differentiating Multilevel Marketing from Pyramid Schemes". Journal of Public Policy & Marketing 21 (1): 139–15. doi:10.1509/jppm.21.1.139.17603. 
8. ^ Mendelsohn, Martin (2004). The guide to franchising. Cengage Learning Business Press. p. 36. ISBN 1844801624. 
9. ^ Kitching, Trevor (2001). Purchasing scams and how to avoid them. Gower Publishing Company. p. 4. ISBN 0566082810. 
10. ^ ^{a b c d e} Carroll, Robert Todd (2003). The Skeptic's Dictionary: A Collection of Strange Beliefs, Amusing Deceptions, and Dangerous Delusions. John Wiley & Sons. pp. 235–36. ISBN 0471272426. http://www.skepdic.com/mlm.html. Retrieved 2009-06-29. 
11. ^ ^{a b} "Pyramid Schemes". FTC. May 13, 1998. http://www.ftc.gov/speeches/other/dvimf16.shtm. Retrieved 2009-06-24. 
12. ^ ^{a b} "What's Wrong With Multi-Level Marketing?". Vandruff.com. http://www.vandruff.com/mlm.html. Retrieved 2009-06-29. 
13. ^ ^{a b c} (Edwards, Paul; Sarah Edwards, Peter Economy (2010) Home-Based Business For Dummies, 3rd Edition pg 38-39 Wiley ISBN 978-0-470-53805-0
14. ^ Charles W. King; James W. Robinson (2000). The New Professionals. Prima Publishing. p. 80. ISBN 0-7615-1966-1. 
15. ^ "Person to person" sales plans... "dream" opportunity or business nightmare? Amway Ad LIFE Feb 27, 1970
16. ^ Brown Caryne (1992) "Door-to-door Selling Grows Up" Black Enterprise Vol. 23, No. 5 (Dec 1992); Page 76
17. ^ Michael L. Sheffield (Feb/Mar 1999), "Comp Plan Conversion: Direct Sales to MLM Compensation Plans", Direct Sales Journal, http://www.sheffieldnet.com/srn_artice4.html  (citing Neil Offen, president of the Direct Selling Association)
18. ^ Zoe Brennan (January 18, 2007). "How Tupperware has conquered the world". The Daily Mail. http://www.dailymail.co.uk/femail/article-429672/How-Tupperware-conquered-world.html. Retrieved May 19, 2009. 
19. ^ Edwards, Paul; Sarah Edwards, Peter Economy (2009) Home-Based Business for Dummies Wiley
20. ^ US Direct Selling in 2009. Direct Selling Association. 2010. http://www.dsa.org/research/industry-statistics/09gofactsheet.pdf. 
21. ^ "Direct Selling Organization Membership". Direct Selling Association. http://www.dsa.org/forms/CompanyFormPublicMembers/search?action=find. Retrieved April 29, 2011. 
22. ^ Zig Ziglar; John P Hayes, PhD (2001). Network Marketing for Dummies. Hungry Minds. ISBN 0-7645-5292-9. 
23. ^ ^{a b} Richard Poe (1999). Prima Publishing. ISBN 0-7615-1752-9. 
24. ^ Brown, David (November 27, 2007). "Marketing group merely ‘selling a dream’". The Times. http://business.timesonline.co.uk/tol/business/industry_sectors/media/article2951266.ece. Retrieved July 13, 2009. 
25. ^ Berkowitz, Bill (Jan 28, 2009). "Republican Benefactor Launches Comeback". Inter press service. http://ipsnews.net/wap/news.asp?idnews=45588. Retrieved July 11, 2009.  (in reference to BERR vs Amway (Case No:2651, 2652 and 2653 of 2007) in point of objectionability"c")
26. ^ Tony Dokoupil (August 2, 2008). "A Drink’s Purple Reign". Newsweek. http://www.newsweek.com/id/150499/page/1. Retrieved 2009-07-17. 
27. ^ Ryan (Editor), Leo; Wojciech, Gasparski (Editor); Georges, Enderle (Editor) (2000). Business Students Focus on Ethics (Praxiology): The international Annual of Practical Philosophy and Methodology Volume 8. New Jersey: Transaction Publishers. pp. 75. ISBN 0765800373. 
28. ^ Peterecca, Laura (September 14, 2009). "What kind of business do you want to start?". USAToday (Gannett Company): pp. 4B. http://www.usatoday.com/printedition/money/20090914/smallbizweek114_st.art.htm. Retrieved Sept 14, 2009. 
29. ^ O'Donnell, Jayne (October 15, 2010). "Fortune Hi-Tech: American dream or pyramid scheme?". USAToday (Gannett Company): pp. 6B. http://www.usatoday.com/money/companies/2010-10-15-multilevelmarketing14_CV_N.htm. Retrieved October 1, 2011. 
30. ^ ^{a b} O'Donnell, Jayne (February 10, 2011). "Multilevel marketing or 'pyramid?' Sales people find it hard to earn much". USAToday (Gannett Company). http://www.usatoday.com/money/industries/retail/2011-02-07-multilevelmarketing03_CV_N.htm. Retrieved April 5, 2011. 
31. ^ ^{a b c} Coenen, Tracy (2009). Expert Fraud Investigation: A Step-by-Step Guide. Wiley. p. 168. ISBN 0470387963. 
32. ^ ^{a b c} Ogunjobi, Timi (2008). SCAMS - and how to protect yourself from them. Tee Publishing. pp. 13–19. 
33. ^ ^{a b c} Salinger (Editor), Lawrence M. (2005). Encyclopedia of White-Collar & Corporate Crime. 2. Sage Publishing. p. 880. ISBN 0761930043. 
34. ^ "FTC Consumer Alert; Lotions and Potions: The Bottom Line About Multilevel Marketing Plans". FTC. January 2000. http://www.ftc.gov/bcp/edu/pubs/consumer/alerts/alt057.shtm. Retrieved 2001-03-26. 
35. ^ Kohm, James A. (January 14, 2004) (reprint). RE: Staff Advisory Opinion - Pyramid Scheme Analysis. Federal Trade Commission. http://www.mlmwatchdog.com/files/FTC_Letter.pdf. 
36. ^ ^{a b} Facts for Consumers; The Bottom Line About Multilevel Marketing Plans and Pyramid Schemes Federal Trade Commission
37. ^ Richard Eisenberg (June 1, 1987). "The Mess Called Multi-Level Marketing With celebrities setting the bait, hundreds of pyramid-style sales companies are raking in millions, often taking in the gullible". CNN Money. http://money.cnn.com/magazines/moneymag/moneymag_archive/1987/06/01/83883/index.htm. 
38. ^ In re Amway Corp., 93 F.T.C. (1979).
39. ^ "Multilevel Marketing Plans". FTC Consumer Alert. November 1996. http://www.ftc.gov/bcp/edu/pubs/consumer/invest/inv12.shtm. Retrieved 2008-05-07. 
40. ^ "FTC Press Release". http://www.ftc.gov/opa/2008/03/busrule.shtm. 
41. ^ ^{a b} "FalseProfitsHomePage". Falseprofits.com. http://www.falseprofits.com/. Retrieved 2010-03-05. 
42. ^ Carl, Walter J. (2004) "The Interactional Business of Doing Business: Managing Legitimacy and Co-constructing Entrepreneurial Identities in E-Commerce Multilevel Marketing Discourse" Western Journal of Communication, Vol. 68.
43. ^ Hu Yongqi. "Going against the slippery slope of a pyramid scheme". China Daily. http://www.chinadaily.com.cn/usa/2010-07/29/content_11068997.htm. 
44. ^ Bloch, Brian (1996) "Multilevel marketing: what's the catch?" Journal of Consumer Marketing 13:4 pp. 18-26.
45. ^ ^{a b} Taylor, Jon M. (2002). "Comparing Recruiting MLM’s with No-product Pyramid Schemes, and with Gambling". Consumers Awareness Institute. http://www.mlm-thetruth.com/blog/consumer-guides/shocking-statistics/. Retrieved 2011-04-28. 
46. ^ FitzPatrick, Robert L. (August 4, 2002). "The 10 Big Lies of Multi-Level Marketing". Consumers Awareness Institute. http://www.mlmwatch.org/01General/10lies.html. Retrieved 2009-06-25. 
47. ^ Cruz, Joan Paola; Camilo Olaya (2008) "A System Dynamics Model for Studying the Structure of Network Marketing Organizations"(peer reviewed paper that refers uses Taylor as references)
48. ^ "Multilevel marketing or 'pyramid?' Sales people find it hard to earn much". USAToday. 10 February 2011. http://www.usatoday.com/money/industries/retail/2011-02-07-multilevelmarketing03_CV_N.htm. Retrieved 3 March 2011. 

External links

• Federal Trade Commission article