Multi-level marketing as a business model is increasingly becoming controversial particularly in terms of allegations of pyramiding schemes resulting in large losses for its investors (i.e., distributors). Many of these serious allegations have been proven true by federal and state authorities in the United States, such as in the case of USANA and Amway. Yet these companies are still in operation and, thus, continuing to lure people into their fold.
Is Multi-Level Marketing A Pyramid Scheme?
What Do you think? But you may think that we’re assailing the integrity of MLM companies and attacking the viability of their business models. Let’s take a look at the answers to the basic question every individual interested in earning should ask before making their investments: What is Multi-level Marketing About?
Multi-level marketing (MLM) is a sales and marketing strategy used by many direct sales companies wherein the salespeople, often called distributors, are compensated in two ways – first, for the sales they generate on their own and, second, for the sales made by the people they recruit. The “original distributor” is known as the upline while his/her recruited salespersons are called his/her downlines. The result: Multiple compensation levels, most of which accrue to the uplines.
Other names for MLM business models are network marketing, pyramid selling, and referral marketing. No matter the name, however, the business model remains the same – the companies exploit their members to gain high passive incomes for a few people at the expense of many. In fact, the U.S. Federal Trade Commission (FTC) has asserted that some MLM companies are actually Illegal Pyramid Schemes!
Please watch what John Oliver said about MLM, very interesting video. Enjoy!
Break Down of the Business Model
Let’s take a closer look at the MLM business model to understand the assertions made by federal and state authorities about the non-legitimacy of MLM companies.
First, MLM companies are likely to get less than 70 percent of their total sales from purchases made by ordinary consumers – or to put it more appropriately, by people who aren’t connected as distributors (i.e., uplines and downlines) to the company. The 70 percent rule is used by federal and state authorities in determining whether a company is engaged in a pyramid scheme or not.
If 70 percent or more of the products are sold to and purchased by consumers, then the company’s likely a legitimate multi-level marketing company. If it’s less than 70 percent, then it can be operating a pyramid scheme disguised as a legitimate MLM operation. Emphasis must be made that pyramid schemes are illegal in the United States while many countries, such as China, actually consider MLM schemes as illegal.
Second, the business model itself is similar to a pyramid scheme while still keeping their operations legal – or at least, as legal as it can possibly be under the anti-pyramiding and unfair trade practices laws. Distributors, who are non-salaried independent participants, earn income in three ways:
- Sell the company’s products or services in return for an immediate retail profit from sales made to customers;
- Get commissions from the company for the sales generated; and
- Earn from the sales made by their downlines
The independent distributors must then adopt either or both these marketing strategies to increase their income:
- Build their own active consumer network with customers regularly buying the products directly from the company; and/or
- Recruit independent distributors as part of their downline organization who, in turn, build their own active consumer network and so the company expands its market presence.
The largest MLM companies maintain the appearance of legitimacy by selling legitimate products and services for promotion by the uplines and downlines. But the cards will come tumbling down when the façade is stripped to reveal the large-scale exploitation of the downlines.
Think about it: When you’re at the bottom of the pyramid as a new downline, you’re sharing most of your earnings (i.e., commissions) with the uplines. You have to recruit hundreds of people so that you can move up the pyramid, so to speak, and earn a full-time living. But even with hundreds of downlines, your income is but a small fraction of the income earned by the owners of the MLM company and their buddies.
You aren’t also running your own business and being your boss, in stark contrast to the promises made by MLM recruiters. You have to rely on your downlines to promote and sell the products such that, if they stop selling, you will stop earning. You can’t even pick the types of products and services that you can promote, a bummer when you may not even patronize them as a consumer.
Other troubling things about MLM schemes are:
- Fixing the price of their products and services
- Compelling prospective recruits to make high initial monetary investment for entry (i.e., the money is for the product and marketing kits)
- Emphasizing the need for recruitment of downlines with actual sales generation taking a backseat
- Requiring distributors to become regular users of the products and servicesEncouraging the exploitation of personal and professional relationships in the pursuit of higher recruitment rates and product sales
- Encouraging the exploitation of personal and professional relationships in the pursuit of higher recruitment rates and product sales
- Emphasizing the complex compensation packages, most of which exaggerate the possible income
- Telling distributors that their incomes will increase by buying into training events and materials
- Leading members of a cult-like organization to enhance their devotion to the brand
What then is a better alternative to MLM? You should seriously consider affiliate marketing, particularly with Wealthy Affiliate!
Affiliate marketing isn’t just A legitimate way to earn a living – you will be surely rewarded for your time, energy and effort, as well as your small initial investment in a website. This is because affiliate marketing is performance-based since the affiliate marketer will be rewarded for each visitor or customer brought in by his/her online and offline marketing efforts.
The benefits of becoming an affiliate marketer are numerous including but not limited to:
- You don’t have to build a downline organization. Your marketing efforts are geared towards encouraging target customers to visit and/or purchase the products and services of the companies.
- You don’t have to be limited in your choices of products and services. You can make your own network of companies, promote a few or several of their products on your website, and change your matrix as needed.
- You don’t have to rely on the efforts of others to increase your income. Your savvy marketing methods coupled with your drive and determination are the main determinants of your success. You will likely be provided by the companies with support, such as marketing materials, but your reliance on the success of others will be a thing of the past.
The bottom line: Affiliate marketing is the wave of the future! You should try it out now and see what happens.
I hope you enjoy the reading and If you have your own thought regarding this article (MLM) please share below.