A Complete Guide of Multi-Level Marketing Business Model

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SoftwareSuggest

Senior editor

Parul Saxena

Chief editor

Last updated: May 21, 2021

Multi-level marketing (MLM) is definitely not a recent phenomenon. We’ve all been there. We get a call from a friend who suddenly wishes to reconnect. When the meeting takes place, the friend suddenly goes into raptures about how working for a certain company has certainly changed his/her life. Jargons are thrown around, with an earnest attempt to make it all seem legitimate. You either find yourself being intrigued or wary of how it all sounds too good to be true.

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Often viewed as a scam, MLM or Network Marketing is a very misunderstood business model. However, there is no denying that there are some very successful businesses based on this model out there. In this article, we will attempt to understand Multi-Level Marketing better and even bust a few myths around it along the way.

Statistics

Just to put things into perspective and establish the legitimacy of MLM, let’s take a look at some statistics. 

There are about 22 big players in the MLM arena that have gone on to generate annual revenue of over USD 1 billion. 

The top 3 MLM businesses in the world are:

  • Avon Products, Inc. which was founded in 1986. Avon has registered annual sales worth $11.3 billion and has over 6.5 million sales associates. Avon, as you may already be familiar, offers various beauty products, jewellery, and fashion garments.
  • Amway, founded in 1959, is another familiar name in this arena. With annual sales of $10.9 billion, it has over 3 million sales associates selling cosmetic products, and even wellness, food and beverage products.
  • Herbalife Ltd. was founded in 1980. Herbalife has annual sales to the tune of $4.8 billion and has 2.7 million sales associates. Herbalife products include cosmetics, personal care and hygiene items and also nutritional supplements. In 2016, Herbalife mired in allegations regarding a fraudulent business model, however, an investigation by the FBI could not find sufficient evidence to validate the same.

While these three organizations are some of the biggest players in the market, there are many more out there. In 2016, the Direct Selling Association found that 20.5 million people in the U.S.A. participated in direct selling and had total sales worth $35.54 billion to their credit. It also found that over 74% of Americans had purchased goods or services through direct selling.

Not just the U.S., MLM sales numbers worldwide are also staggering. The World Federation of Direct Selling Associations had over $189,641 millions in sales in 2017. While the United States and China are the top two MLM global markets, with 18% market share each, they are followed by Germany and Korea, each with a market share of 9%. Close on their heels is Japan with 8% and then Brazil with 6%.

What is Multi-Level Marketing Business Model?

MLM companies are essentially focussed on building and managing a sales force. They recruit independent distributors and motivate them to sell their products and even further recruit more independent distributors. It is a marketing strategy, based on which the distributor’s own income typically includes their own sales and they are also usually also entitled to a percentage of the sales revenue from the group that they recruit. 

This is not to say that MLM-based companies are not focussed on offering great products. Such companies may simply extend an option to their customers, where they can sign up as a distributor to sell their products. The sign-up fee could be the price paid to purchase their products.

How Does Multi-Level Marketing Differ from Traditional Marketing?

Here are the two key differences between multi-level marketing and traditional marketing:

  • Sales/Distribution

It all comes down to the supply chain. Traditional marketing involves a longer supply-chain cycle. A product is typically passed on from a distributor to a wholesaler. The wholesaler then passes on the product to a retailer who eventually sells the product to the end customer. An MLM company, on the other hand, circumvents the process by directly selling to the customer. MLM companies also claim that by shortening the supply chain, they are able to pass on the cost savings to their consumers.

  • Marketing/Advertising

Companies usually employ various media outlets to advertise and market their products. MLM companies use their recruits to advertise their product. They also tend to hold aggressive recruitment drives.

Terms Associated with Multi-Level Marketing

Let’s familiarise ourselves with some terms that are commonly used in multi-level marketing:

  • The Plan: MLM companies offer a ‘plan’. This plan outlines the marketing metrics involved in selling the products.
  • Sponsor: A sponsor is a person who recruits another person into the business and even trains them. 
  • Recruit: The person introduced to the business by a sponsor is called a recruit.
  • Downline: Your recruits, as well as those further recruited by them, are referred to as the ‘downline’.
  • Upline: The upline refers to the sponsors that introduced the downline to the business. 
  • Compensation Plan: The ‘plan’ talks about how the product will be sold. The ‘compensation plan’ talks about how the independent distributors will earn money in the form of commissions and bonuses as a result of not just introducing new recruits but also from the sales they make.
  • Network Marketing: Multi-level marketing is also commonly known as network marketing.

Pyramid Schemes v/s Multi-Level Marketing

Multi-level marketing is also usually confused with pyramid schemes, which is also why they have acquired a bad reputation over time. A pyramid scheme is a scam wherein there are no products in the equation. To be paid, all you need to do is recruit new members. It requires you to deceive your friends and family by making them believe that they stand to earn huge amounts of money. They further deceive more people and the network continues to grow. No products change hands. You are promised a part of the joining fee for every new recruit you introduce to the company. So, what you essentially do is get people to pay money to earn a portion of that.

Network marketing, on the other hand, is an ecosystem that involves multiplying sales efforts as products are sold. Users get products. Recruiters earn a commission, not just for introducing new people to the business but also for selling the products. The emphasis is not just on the recruitment but also the product. Here, you earn money in an ethical manner by selling products and motivating your recruits to do the same as well. 

Are Multi-Level Marketing Businesses Successful?

Pyramid schemes have definitely earned MLM businesses a bad name over time. However, they are also unpopular because of the high rate of failure. Most people get carried away in a recruitment drive and expect to get rich overnight. They do not understand what committing to the marketing plan fully entails. Since the initial investment is considerably low, it is also easier to walk away from the business. 

At the end of the day, an MLM business is like any other business. If recruits work hard, commit to the marketing plan and do what it takes, these businesses can be very successful. Like any other business, MLM businesses also must identify and target the correct market for their products and strategically sell to that market.

Types of Multi-Level Marketing

1. Uni-level Plans: Uni-level plans are fairly simple. The focus is on the initial tier of sellers. You can enroll as many people as you like under you in this initial tier. In other words, there are no width limitations. You earn from everything that they buy or sell. There are, however, depth limitations. Some companies allow you to earn from those enrolled by your recruits, up to a certain tier. Some companies simply do not and restrict you to the initial tier. Due to the limited nature of this plan, it is more popular as a part-time work option, for those looking to make a quick buck. 

2. Binary Plans: A binary plan, on the other hand, does not have any depth limitations but has width limitations. They usually allow you only two direct recruits. These recruits are in turn allowed to recruit another two people directly under them. The company calculates the earnings of both the streams and you receive your pay based on the revenue generated by the lower performing stream.

3. Forced Matrix Compensation Plans: This plan sets a limit on the width as well as the depth. Companies usually follow a 4-by-5 matrix. This means that you need four people in your frontline and stand to get paid for up to five tiers.

4. Breakaway Plan: If you as a distributor, achieve a certain level of success, this plan allows you to break away from your upline. This means bigger payments for you and smaller payments for your recruiter. Payments to your recruiter do not completely stop, but become smaller. 

Why is Multi-Level Marketing So Popular?

There are many factors that contribute to the popularity of multi-level marketing. They are carefully constructed programs with attractive rewards. Mary Kay created a trend of awarding their top performers pink Cadillacs. This did not just motivate existing recruits to work harder but also attracted potential recruits to Mary Kay much easily. Another thing that hugely works in its favour is that multi-level marketing requires a much smaller investment than a typical business would.

Here are some other factors that are contributing to its popularity today:

1. Supplemental Income

People are living much longer than they generally did. The average life expectancy has increased significantly over time. Retirement plans and pension schemes, more often than not, are very underfunded. There is, therefore, an increasing need to create supplemental income for the older generation. It is also popular among stay-at-home parents who would like to contribute to the overall income of their household. 

2. Activity/Engaged

It is not just about income. People are a lot healthier in their advanced ages than they were earlier. Being involved in an MLM business gives them an opportunity to lead full lives even in their later years. Again, the same logic can be applied to stay-at-home parents.

3. Balanced Reward-Compensation Structure

Unlike typical corporate jobs, there is no scope for being overpaid or underpaid for any reason in this business model. Anything you earn is directly proportional to your efforts. 

4. Networking in the New-Age

The world is much smaller. Globalization and social networking have made it much easier to connect with people. It is much easier to operate an MLM business today than it was earlier when huge efforts had to be invested in identifying suitable prospects.

5. Unparalleled Growth

MLM over time has become just as seemingly legitimate and popular as franchising. It is being looked at with renewed interest. It has more growth potential and awareness today than it ever did. Some might say that network marketing is reaching a stage of maturation.

How Can Businesses Make Multi-Level Marketing Model A Success?

Any successful MLM business has a solid marketing team at its very core. Also, a common mistake among businesses that adopt the MLM strategy is that they motivate people by dangling the money carrot in front of them. They do not work on building genuine and sincere enthusiasm about their organization or their products. If the only thing that your recruits are excited about are those commission cheques, they will be more likely to cut corners and deceive people to earn more. Eventually, the company will develop a bad name over time.

Since MLM businesses have such a sketchy reputation, it is especially important to ensure that your business is fully compliant and adheres to government rules and regulations.

Most importantly, it is important to recruit the right people. When you hire people that are hardworking, relentless and excited about your company and its products, they will share that enthusiasm with others too. This will not just result in more sales, but also more recruits.

How Can MLM Software Help?

We have already discussed the types of multi-level marketing plans. They each come with their own complexities. Managing the widths and the various tiers, ensuring correct and timely pay-outs are extremely crucial for the success of an MLM business. Direct selling businesses can be very difficult to manage and control. Sometimes, it is beyond human effort to manage it manually, especially when the business operates at a global level. Multi-level marketing software can help control and monitor activities much easier. One cannot escape technology and continue to maintain a competitive edge in the long run.

Conclusion

Multi-level marketing or network marketing businesses continue to remain hugely successful and very popular. Today, they are subjected to far more regulations and scrutiny than they ever were. They are far more legitimate and ethical today. One cannot ignore the success of organizations like Amway and Mary Kay, given their vast global network with billions of distributors. Like any other business, an MLM business requires relentless hard work and patience. Rewards are sure to follow, if people do not expect success overnight and are willing to commit to the cause.

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