What is MLM (Multi-Level Marketing) or Network Marketing, also referred to as Direct Selling, Party Plan, or Referral Marketing?
Definition: MLM or Network Marketing is a marketing strategy in which independent representatives (salespeople, distributors, associates, independent business owners, etc.) are compensated on a non-salaried, commission only basis, to make product sales and are also allowed to recruit others to build a network or sales team (downline) in a multi-level tiered structure.
There are many different types of MLM compensation plans, but in general, independent representatives earn a commission not only on the customer sales they personally generate, but also based on the customer volume generated by the sales organization (downline) they help to create.
The structure itself is a similar strategy used by many of the largest companies in the world. Many traditional sales organizations use a multi-level type structure where salespeople earn a commission thereby paying a smaller commission to their sales manager, then to their regional manager, district manager, up to the Vice President of Sales.
The difference from traditional sales is that in MLM, each independent representative has the right to recruit other representatives, who in turn have the right to recruit other representatives, etc. allowing virtually anyone to create a leveraged income with unlimited earning potential.
What is the Difference Between MLM and a Pyramid Scheme?
Not to be confused with a pyramid scheme, MLM is a legitimate industry doing business in all 50 States in the U.S.A. and over 100 countries worldwide.
An illegal pyramid scheme is any plan that promises income primarily based on recruiting other representatives to join the scheme rather than profits from the sales of genuine goods or services to customers.
A good rule of thumb is to ask this question… “Would a consumer actually purchase this company’s product or service if there were no business opportunity attached to it?” If the answer is no, this company may likely be a pyramid scheme.
Another sure sign of a pyramid is if a company (or its representatives) promotes the ability to earn income without having to make any product sales.If this is the case, they are operating as an illegal pyramid scheme and will eventually be shut down by government agencies. All legitimate mlm companies require product sales in order to earn commissions. Many illegal pyramid schemes promote “do nothing – make money” which is typically looked at as an investment scheme and is illegal.
Size of the MLM Industry
According to the U.S. Direct Selling Association in 2016:
A record 20.5 million people were involved in direct selling in the United States in 2016, a 1.5% increase from the previous year. These people are affiliated with direct selling companies, and are eligible to purchase products at a discount, and resell them at a profit. They are also eligible to sponsor others to do the same. 5.3 million are building independent businesses as direct sellers, meaning they are actively managing a customer base and possibly sponsoring others to do the same. 800,000 of these people are full-time and 4.5 million are part time. In addition, 15.2 million others receive a discount on products and services that they personally enjoy and use. Estimated direct retail sales of $35.54 billion in 2016 is the second most in direct selling history.
According to the World Federation of Direct Selling Associations in 2015:
Global 2015 sales volume reached $184 billion and the number of individual direct sellers was 103 million. This number of direct sellers does not reflect China as their figures were not reported. This sales volume represents a 7.7% growth from 2014.
History of MLM
If you trace it back you’ll actually find the California Vitamin Company. It was founded in the 1940’s. They sold vitamins and they discovered that if they incentivize their sales people to bring on other sales people, then they could create a lot more volume. That’s one of the first companies that we know of that had a true network marketing model.
Two of the top reps in the California Vitamin Company were Jay Van Andel and Rich DeVos who ended up creating and founding the Amway corporation. There was another company founded in the early 50’s called Abundavita, which was founded by Dr. J.B. Jones. One of the top distributors in that company was a man named Earl Shoaff. Earl went on to develop Nutri-Bio in 1957. If you heard the name Earl Shoaff before, then you know he was the mentor to Jim Rohn who was one of the most prolific personal development speaker, author, and trainer in the entire world. Jim Rohn was a catalyst for creating so many other amazing minds in the personal growth arena. A few more students of Jim’s include Jack Canfield and Tony Robbins!
So many of the most famous speakers, authors and thought leaders in the personal development industry originally came from network marketing.
Rich DeVos and Jay Van Andel founded Amway in 1959, and have since become the largest network marketing company in the world with over 8 billion a year in revenue! Many years ago, Amway fought the battles with the FTC and the government that made network marketing legal. If it wasn’t for Amway fighting the legal battles to make network marketing a viable profession then none of us in the industry would be here today.
Inventory loading (also called front-end loading). Stocking up on products to meet sales goals, a practice that is promoted with claims that it will push the new distributor to higher bonus and/or leadership levels quickly. In reality, it increases the risk of significant financial loss if sales do not occur.
Downline. The distributors recruited by a given distributor who receives commissions on their sales and the sales of the distributors they recruit.
Upline. Distributors who are above a given distributor in the MLM hierarchy and who receive commissions (overrides) from that distributor’s sales.
Top Countries by Revenue and Sales Force
Regions’ top 5 companies in sales volume in 2015 were as below:
North America: Amway (US), Avon (US), Herbalife (US), Mary Kay (US), Tupperware (US)
South America: Natura (Brazil), Belcorp (Peru), Yanbal (Peru), Fuxion Biotech (Peru)
Europe: Vorwerk (Germany), Oriflame (Switzerland), Telecom Plus (UK), Forbes Lux (Switzerland), PM International (Germany)
Asia / Pacific: Infinitus (China), Perfect (China), Tiens (China), New Era (China), DXN (Malaysia)