Multi-level marketing is a strategy which some companies use to sell their products or services. It relies on the services of a non-salaried sales workforce rather than conventional marketing methods such as advertising. Multi-level marketers, like most companies, derive their revenue from the sale of products and services. The salespeople then earn in either one or both of two ways. The first of these is the profits that are earned from selling the company’s products or services. This is similar to the standard retail practice of buying goods and then selling them at a higher markup. What sets MLM companies apart from other companies which use commissioned salespeople is that participants also get a cut of the money made through the wholesale purchases of any other members that they recruited.
According to the United States’ Federal Trade Commission, at least 99% of people who join MLM companies lose money. So you may ask yourself why these MLM companies are still so popular when prospective salespeople are faced with such bleak prospects. The answer is that the participants are continuously encouraged to hold onto the belief that they can achieve large returns. This is often achieved through the parading of their “more successful” peers. The low likelihood of getting high returns, on the other hand, is often downplayed.
The fine line which MLM companies walk upon
Most MLM companies get accused of being pyramid schemes at some point. Sometimes these accusations come from regulatory authorities. Even the biggest of these companies, with better reputations than their fly-by-night kin, have had legal scuffles in the past. In most cases, it is very difficult to tell a pyramid and an MLM scheme apart. Sometimes this is by design as most pyramid schemes use ML marketing as a facade to avoid trouble with the law or to dupe people into participating. Most sources advice that one of the easiest ways to spot a real multi-level marketing opportunity is measuring how much emphasis is placed on selling products as opposed to recruiting new members—if the operation seems to be more interested in recruitment than sales, then it is most likely a pyramid scheme. This test is not foolproof since an MLM company that is using aggressive growth tactics to penetrate a new territory can then qualify as a pyramid scheme.
The best examples
Due to the very nature of multi-level marketing, its similarity to pyramid schemes and the damning statistics that show that this is an industry that in general, exploits people who just want to earn a living, it is very difficult to find controversy-free examples of MLM companies. I have instead chosen two that appear to sell actual products. Both of these are companies have stood the test of time, are very profitable and sell mainstream products. If you want to start an MLM operation these are two of the companies in a very short list which you should at least try to emulate.
Avon
This is the fifth-largest beauty products company in the world and has over 6.4 million sales representatives. It also happens to be the second-largest direct-selling enterprise in the world right after Amway. The company produces and sells beauty products, jewellery, accessories and clothing. Avon regularly reports multi-billion-dollar revenues from the sell of its products. The MLM strategy has worked very well for Avon.
Amway
In 2018, Amway reported sales of over $8 billion. The company uses MLM to market and sell its health, beauty and home care products. However, despite its age and size it too has failed to avoid the controversies that seem to be never too far away from MLM companies. It has been investigated by institutions such as the earlier mentioned Federal Trade Commission for alleged pyramid scheme practices.
The worst ones (names not mentioned)
If our two best examples of these firms have failed to avoid notoriety what can we expect from the “worst” and what criteria does one use to classify an MLM company in such a negative light? Well, to begin with, a lot of these companies sell shady products and some have sales pitches that have evident pyramid scheme undertones.
These companies also offer products whose combined market sizes do not justify nor warrant the large numbers of salespeople which are roped in to peddle and sell their products. Oftentimes this makes these salespeople the main customers of these companies as they are often stuck with inventory that they have paid for but are unable to sell. These companies also happen to have brand awareness that is disproportionately high compared to the number of sales that their products generate.
In Zimbabwe, these companies (none of which I will mention by name) have hundreds of representatives who promote their products on social media and WhatsApp. Most sell herbs and other health supplements. Some of these products make extreme claims about what they can do. One of the most popular of these products claims to combine the functions of almost every medicine in your average pharmacy. Some of the claimed benefits include curing conditions which even modern medical science does not have easy answers to, such as cancer and diabetes. These are very easy to sell to Africans whose traditional medical remedies are similarly based on herbs and other plants.
These also happen to be the kind of MLM operations which are cautionary tales waiting to happen for both their owners and salespeople. Needless to say, modelling your businesses’ MLM strategy after these would be a bad idea.
Bad and good reasons for using an MLM strategy
One of the most obvious bad reasons for using an MLM strategy is as a means of passing off your pyramid scheme as a legitimate business operation. Most of what we think are multi-level marketing companies are just thinly disguised pyramid schemes which use overpriced and useless products to justify the movement of money. Another bad reason for using this strategy is to find a channel through which you can sell your unethical or otherwise shady products. Many companies are using their networks of marketers to unquestioningly push dubious products.
It is also possible to just use MLM as an alternative to traditional retailers, distributors and wholesalers. MLM will allow you to penetrate foreign markets without having to enter complicated negotiations and contracts with foreign companies. You can also use this strategy to jump-start your company if you are having trouble getting retailers and wholesalers to carry your product(s).
I feel like there is no good reason to be part of a MLM. They’re all scams and the purpose is the expansion of the company and not the actual product. I wish the article elaborated more on what the differences are between the two schemes.
Thanks for the feedback. In future we will strive to make the distinction clearer. MLM is not a scam in itself, it’s a credible structure which just happens to be very useful to pyramid scheme type scams.