Multi-level marketing is one of the most controversial marketing types. A lot of people who don’t even know what is multi-level marketing are somehow doing it. Interestingly, 25% of people make money from multilevel marketing. However, the chances of making decent money from multilevel marketing are minimal as only 0.5% of participants earn $100K or above.
So, what is multi-level marketing, how does it work, and why it is so controversial?
What is Multi-Level Marketing?
Multi-level marketing (MLM) is a selling technique where individuals (known as promoters or distributors) sell products to the general public mostly via word of mouth. Persons selling an MLM product earn a commission per sale and they can recruit more people. Each promoter makes money from his/her sales and sales generated by the recruiters:
Eventually, all the people involved earn a certain percentage of sales their recruiters make. This transforms into a structured chain of promoters leading to exponentially increasing the salesforce of the company.
Paul Kotler argues that multilevel marketing isn’t marketing rather a sales technique. In fact, it is direct sales with an additional feature of recruiting more salespeople. Generally, a company’s salesforce is hired, trained, and managed by the company itself. In the case of MLM, this isn’t the case. Anyone can become a salesperson and start selling and recruiting more people.
The probability of making money from multi-level marketing is very low. The top tier earns a lot of money while others lose their money:
However, the focus of MLM isn’t on making money rather on selling products. A lot of people join MLM to make money but it isn’t essentially the purpose of the company. It sells real products that have demand.
For example, Avon is a leading direct sales company that uses MLM strategy to promote and sell its products. It generated $5.57 billion in annual sales worldwide in 2019.
Multi-level marketing is a marketing strategy that is widely used around the world and is legal in most parts of the world.
How Multi-Level Marketing Works?
MLM starts from the company that is at the top level. It hires distributors for selling products who are allowed to recruit more people at the second layer. This is known as a downline. The distributor is paid a certain commission from all the sales generated by recruits in his/her downline. These people in the downline can recruit more people, thus creating their downlines too. The person at the top of the chain gets a cut for sales generated by everyone in his/her downline, however, the commission percentage reduces significantly as the chain grows.
All the individuals in multi-level marketing have their downlines and everyone earns a certain commission whenever someone from his/her downline makes a sale.
People who want to join and become a recruiter must purchase the product (or hold a certain amount of inventory). You can’t join MLM without buying the product. And this is how the company and everyone above a person earn money.
The inventory a recruiter holds can or cannot be repurchased by the company. There are some MLM companies that will repurchase stock from their distributors at a very reduced price.
Multi-level Marketing vs. Pyramid Scheme
MLM is often confused with a pyramid scheme and both are used interchangeably. However, these two are different. A pyramid scheme works exactly like multi-level marketing where people add others to their downlines and earn a cut from all the sales generated by their downlines. However, there is no product in a pyramid scheme.
There is no real product in a pyramid scheme whereas multilevel marketing involves a real product that people buy to join the program.
People join a pyramid scheme to earn money and invest a heavy amount to join the scheme.
The idea, on the surface, looks quite promising. You invest money, convince a few friends to invest money too, and convince them to bring more people. Pyramid schemes are aimed at making people rich with high claims and are illegal in the USA. FTC calls the pyramid scheme a scam.
Multi-Level Marketing vs. Affiliate Marketing
Not too often, but people compare MLM with affiliate marketing claiming that the company pays you a certain commission per sale in both models.
This isn’t the case.
There is a lot of difference between the two.
You act as a standalone affiliate marketer with no downline. You only make money from sales that you generate. Even if you convince a friend or family member to join a company’s affiliate program, you’ll not receive any cut or share from their sales.
In the case of MLM, you have to recruit people to grow your downline and you receive a cut from all the sales generated by your downline.
Affiliate marketing has a single layer where you work directly with the company. MLM has several layers and it continues to grow exponentially.
Multi-Level Marketing vs. Referral Marketing
Referral marketing works like MLM as it utilizes customer’s networks for sales. However, there are certain differences between the two.
First, there aren’t any levels or layers in referral marketing. The customer recommends the product to a friend and gets a reward from the company. There is no reward for downline:
Even if some companies use levels, there is always a limit to it. For example, some companies will pay you a cut for sales up to 3 levels only.
In the case of MLM, levels and layers grow exponentially without any limit.
Second, referral marketing purely relies on product and customer satisfaction. Customers don’t necessarily promote a product due to reward rather they promote it because they love using it:
This isn’t always the case in MLM where some people use it for making money and might not be interested in the products at all.
Third, the reward isn’t always in the form of money in referral marketing. In most cases, companies give discounts or rewards that are redeemable with the same company. Here is an example from the Dropbox referral program:
It offers extra space to the customers as a reward instead of money. However, MLM focuses on cash rewards.
Multi-level marketing is a great marketing strategy that a lot of businesses are using successfully. As long as you are selling real products, MLM is fine and legal. However, when there isn’t any product or service involved, it gets risky.
To be successful with multilevel marketing, you have to have great products with demand and a long-term MLM strategy that will help you drive sales. Company reputation and credibility play a major role in the success of multilevel marketing. If you are new, it will get really hard to recruit people as MLM and pyramid schemes are usually considered the same by the general public and it gets really hard to tell your target audience that you aren’t a scammer.
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