WHAT IS AN MLM (Multi-Level Marketing) AND HOW DO THEY WORK

​Introduction

With the bad economy,many people are trying so hard to find a new way to make money to match the ever-rising bills. Very few have the luxury to think of going on a vacation, buying themselves a new car, or participate in other luxurious activities. All they think about is how to pay off the piling bills and join two-month ends. Until one day, a lost friend, a relative, or a video you stumble upon on the Internet offers an unheard-of opportunity. What you need to do is invest a chunk of your hard-earned cash into a given company, and then you will be able to make a six-figure income in less than a year.

Maybe you have a 9 to 5 job, or you need two jobs to make a decent living for yourself and your family. Perhaps you have dreamt of leaving your job, starting your own business, and finally, achieve your financial freedom. However, you don't have enough money to start a business from scratch.

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Rare are the people who haven’t heard from that person who had suddenly become rich. As you approach them and try to get the secret out, they will tell you that you need to invest a certain amount of many in an X company to buy a starter kit and sell their products in exchange for commission fees. Then, you will have to convince more people to do the same so that you can collect a percentage of their sales. Pretty catchy right?

If you haven't heard from it, this article will describe what MLM is and how it works.

​W​hat is Multi-Level Marketing?

Also called network marketing or pyramid selling, MLM is a marketing strategy in which a manufacturer hires independent salespeople or distributors to sell his products. The product owner will then encourage the existing distributors to bring more salespeople and get paid a percentage of the new hired guys’ sales. The sales group a current distributor recruits are commonly known as his “downline." The individual who recruited you is called your "upline.”

​There is no clear record of when MLMs emerged. However, many believe that this type of business has been around since the 1920s. For instance, Nutrilite (an American brand of minerals and vitamins) was developed in 1934; then, the firm was called California Vitamin Company

MLM is a business model used by some sales companies to encourage their salesmen/distributors to recruit new members. What makes MLM strategy attractive is that a single salesman's income includes his own sales, plus a percentage of his recruits' sales. X company’s representatives trying to hire you will tell you that you need to pay a sign-up fee, purchase the products yourself, and become a salesman. They will convince you that by selling the products to more people, you ought to get rich. Whereas in reality, the more distributers a company hires, the more money it makes.

Distributors are expected to sell goods directly to consumers using word of mouth marketing strategy or relationship referrals. The recruits are also incentivized to bring more people to join the distribution chain.When you hire other individuals, you will also be able to profit from your sales, plus a percentage of your recruits’ sales. Subsequently, the person who recruited you will earn a portion of your sales altogether. This way, distributors on the top of the pyramid can have multiple income mainstreams.

MLMs are strictly regulated by jurisdictions such as the FTC (the Federal Trade Commission). The FTC is a US government independent agency in charge of protecting consumers from misleading business practices.

How Does MLM Work?

The MLM business strategy is that of a company that sells products/services through partners. Instead of paying the distributors a fixed salary, the salespeople will work in exchange for commissions. The majority of MLMs distributors are the company's customers.

In an MLM business type, the product owner will convince his customers to spread the word about their products or services to other people and earn a commission. The more consumers or distributors you bring, the higher your earnings. Customers can join as distributors and move up from level to level as they hire other salespeople. As you imagine, the commission grows as you move to the next level.

For example, let's say that person A is struggling to find customers for his handmade pieces of jewelry and decides to hire his three jobless cousins to help him find buyers. They all agree that Person A will collect a small portion of each of his cousins’ sales in exchange for the job. The product owner also requires them to hire more people to reach more clients. To incentivize them, he lets them collect a percentage of their recruits' sales. As a result, as his cousins earn more money, person A will get even richer.

When you bring in your sales, the owners have to deduct their earnings and the part of your recruiter. As a result, distributors at the bottom of the pyramid end up with insignificant gains.

Therefore, every participant works hard to be at the top of the pyramid, although very few get to make a decent living out of this business. As people compete to make more sales and recruit more salespeople, the company's owners and shareholders are accumulating more and more money.

In an MLM, you can make money mainly by selling the products; however, recruitment offers more profit. In a pyramid scheme, on the other hand, they focus on recruitment only.

Difference Between a Legit MLM and a Pyramid Scheme

MLMs are similar to illegal pyramid schemes. They present the same business structure and recruitment strategies. As a result, it very hard to tear them apart.

The significant difference is that Pyramid schemes focus more on recruitment than on selling an actual product. They will ask you to invest a certain amount of money, bring more people, then get the original amount plus interest. When your recruits bring in more individuals, you will get a percentage from each of the recruits.Businesses using this model tend to market the program instead of marketing the product or service.

In a pyramid scheme, you will hear something like if you bring five more salespeople, you will have a brand new car or X amount of money. Moreover, when your five distributors bring more people, you will make even more money.  At the moment, you may think that this is the breakthrough you have been waiting for; you get to make thousands of dollars, from the comfort of your home, only by managing your team of salesmen.

You will then pay a considerable amount of money for the membership and a kit if supplements that you will try to sell to more consumers. The minute you receive the package, you hop on the phone, looking for potential consumers or distributors. You can try and reconnect with old friends, your family members, the grocery store, your neighborhood, or any other community. The major problem here is that you will have to compete with hundreds of other distributors trying to make a breakthrough from this type of business. The odds are that the person you contacted is already doing the same thing and have hired all your mutual friends. At this point, the chances of getting your money back are starting to get slim.

In a pyramid scheme, unfortunately, money goes to the people on the top; instead of those doing the work. Only a small number of distributors earn a meaningful income because people at the bottom struggle to find recruits.Worse, when these businesses recruit new people, they only portray the riches of those at the top of the pyramid to keep you motivated.

Below are a few signs to look for before signing up for an MLM program:

  • ​MLM’s products have similar prices as the goods from traditional retail outlets. On the contrary, pyramid schemes charge an enormous amount of membership fees. They might even charge you an additional amount for the starter kit or sales training courses. In some cases, there might not be a product to sell at all, or they are offering low-quality products. You should be aware of companies that pressure you into buying a huge inventory that will just end up sitting in your garage.
  • ​A legit MLM doesn’t pay distributors for only recruiting new salespeople. Members have to sell the products before moving up levels.
  • ​Pyramid scheme’s companies claim to sell products that work miracles, such as powders that will make people lose weight in less than a week, and other exaggerated claims.
  • ​It is better to look for companies that have been around, at least for five years or longer.
  • ​Many company representatives will pressure you in signing right away and try to talk you out of doing any research or talking to others. When you meet with one, don’t be afraid to ask for the details of the company, the compensation plan, etc. If he becomes hesitant is his answers, he doesn't want you to be informed of the business practices; you should consider it a red flag.
  • ​Last, you should look at the company’s complaints on the Internet and how the representatives dealt with them. If they responded and offered to fix the problems, you can take it as a good sign.

​Top 5 MLM Companies in 2019

These companies support vast networks of distributors in the US and many other countries in the world. Theyoperate under the MLM business model, encouraging people to sell various types of merchandise from beauty products to dietary supplements, personal care, etc.

1. Amway. Founded in 1959 in Ada, Michigan, Amway is an MLM company that sells a wide range of products, including cosmetics, food and beverage, home appliances, kitchenware, and personal care. In 2018, Amway registered over $8 billion in sales. The corporation currently operates in over 100 countries around the globe.

2. Herbalife Nutrition is a global MLM company that produces and sells nutritional supplements for weight loss and general personal care. Herbalife Nutrition was founded in 1980 by Mark Hughes. It has its headquarter in Los Angeles, California. The corporation is present in more than 90 countries through an extensive network of independent distributors. In 2018, Herbalife made $4.5 billion in sales.

3. Avon. The global beauty company was founded in 1886 in London, UK. The MLM company recruits salespeople that will sell jewelry, beauty products, clothing, and other accessories in exchange for a commission. In 2018, Avon had $5.5 billion in annual sales.

4. Tupperware Brands Corporation was launched in 1946 by Earl Tupper in Florida, USA.  Tupperware Brand mostly focuses on household and kitchen products like food containers, cutlery, microwaves, etc. On top, they also sell beauty and personal products. Tupperware’s annual sales amounted to $2.2 billion in 2018.

5. Mary Kay is another famous American MLM company. Mary Kay Ash founded it in Texas in 1963. Mary Kay sells cosmetic products in approximately 40 countries in the world using a network marketing model. In 2018, the company reported $3.25 billion in annual sales.

​Conclusion

MLM is a legit business model, meaning that not all MLMs are scams. This type of business is booming all over the world, and many times individuals end up losing money because they jumped onto an opportunity with no information about the company. However, you need to be extra careful before you put your hard-earned dollars to waste. You need to take some time and research the MLM company before you sign-up for any program.

People enter MLMs with the belief that they can make massive returns and live the lifestyle of their dreams in just a few months like it is magic. Contrary to what many people, MLMs are not a way to make lazy money. To make money in an MLM type of company, you need to put in the work, find and enroll as many customers as possible. You will have to get out there and meet new people.

Studies conducted by the FTC revealed that at least 99% of the MLMs participants lose money
​.Therefore, if you receive an offer that sounds too good to be true, you should take it home to think about instead of making quick decisions that will leave you in ruin.

Briefly, an MLM can be a great source of income. Besides the earnings from your sales, you will also get commissions from the people in your downline. Nonetheless, you have to do your research before you invest both your time and money. More importantly, beware of MLMs that have been recently involved in lawsuits.


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