Multi Level Marketing
Multi-level marketing (MLM) is a business model that combines direct marketing with franchising.Multi-level marketing businesses function by recruiting salespeople (also called Distributors, Independent Business Owners, IBOs, Franchise Owners, Sales Consultants, Beauty Consultants, Consultants, etc.) to sell a product and offer additional sales commissions based on the sales of people recruited into their downline, an organization of people that includes direct recruits, recruits' recruits, etc. This arrangement is similar to franchise arrangements where royalties are paid from the sales of individual franchise operations to the franchisor as well as to an area or region manager, but in some MLM programs, there can be seven or more levels of people receiving royalties from one person's sales.
Multi level Marketing is not a very viable concept, even theoretically, nor is it a very profitable means of distribution for all parties involved in Multi level Marketing. This non-viability is basically caused by a heightened expectation of easy money. In fact the concept of Multi level Marketing is no longer new. It is also exempt from the normal rules of the market and the way goods and services are otherwise sold. Many companies have tried the concept of Multi level Marketing and most of them have failed.
Multi-level marketing has an image problem due to the fact that it is often difficult to distinguish legitimate MLMs from illegal pyramid or Ponzi schemes. MLM businesses operate in the United States in all 50 states and in more than 100 other countries, and new businesses may use terms like "affiliate marketing" or "home-based business franchising". However, many pyramid schemes try to present themselves as legitimate MLM businesses.
In the most legitimate MLM companies, commissions are earned only on sales of the company's products or services. No money may be earned from recruiting alone ("sign-up fees"), though money earned from the sales of members recruited is one attraction of MLM arrangements. If participants are paid primarily from money received from new recruits, or if they are required to buy more product than they are likely to sell, then the company is a pyramid or Ponzi scheme, which is illegal in most countries.
New salespeople may be required to pay for their own training and marketing materials, or to buy a significant amount of inventory. A commonly adopted test of legality is that MLMs follow the so-called 70% rule which prevents members "inventory loading" in order to qualify for additional bonuses. The 70% rule requires participants to sell 70% of previously purchased inventory before procuring new orders. There are however variations in interpretations of this rule. Some attorneys insist that 70% of purchased inventory should be sold to people who are not participants in the scheme, while many MLM companies allow for self-consumption to be a significant part of the sales of a participant . The Federal Trade Commission offers advice for potential MLM members to help them identify those which are likely to be pyramid schemes.[2
Companies have devised a variety of MLM compensation plans over the decades.
Unilevel or Stairstep Breakaway plans are the oldest and most popular. They feature two types of distributors -- managers and non-managers -- and three types of pay:
Baseshop overrides are overrides of managers from their subordinate non-managers, collectively called a baseshop. This is the same as any other sales organization.
Generational overrides are overrides of managers from the baseshop of managers who were previously their subordinate. Most plans compensate at least three generations of such managers.
Executive bonuses are commissions for managers who exceed a sales quota. For example, 2% of the total company sales revenue may go to a bonus pool that is shared monthly pro rata to managers who exceed $10,000 in that month.
Matrix Plans limit thewidth of each level in a distributor's group, forcing strong distributors to pile ("spillover") their recruits over people who did not sponsor them.
Binary plans limit the width of each level to two legs. Commissions are based on "cycles," where a distributor is paid a fixed amount whenever both legs achieve a certain number of sales units each. Commissions are paid incrementally when the sales volume in each leg matches.
Elevator or Matrix schemes feature a board or a list on which each distributor pays in one or more product units to participate. When a certain number of units have been paid in, the structure splits and the earlier participant receives consideration. The Matrix scheme article discusses the legality of this plan.
Criticism of MLM
The FTC issued a decision, In re. Amway Corp. in 1979, which indicated that multi-level marketing was not per se illegal. However, Amway was found guilty of price fixing (by requiring "independent" distributors to sell at the low price) and making exaggerated income claims.
The Federal Trade Commission advises that multi-level marketing organizations with greater incentives for recruitment than product sales are to be viewed skeptically. In April 2006, it proposed a Business Opportunity Rule intended to require all sellers of business opportunities—including MLMs—to provide enough information to enable prospective buyers to make an informed decision about their probability of earning money. FTC trade regulation rules usually take 1-1/2 to 3 years before a final rule is established.
Criticisms have been raised against MLM programs for being cult-like in nature. Many MLM programs feature intense motivational programs, which can be hard to distinguish from cult propaganda. Criticism of Amway as a cult have been regarded as largely baseless, though some of the "Independent Business Organizations" within Amway have been accused of operating as cults.
Another criticism is that MLM programs are set up to make most distributors fail, as there is a continued incentive to continue to recruit distributors even as the products have reached market saturation, thus causing the average earnings per distributor to continue to fall.
In India a few companies have introduced Multi level Marketing in a very large scale, by quoting and promising very high returns. A large number of the people belonging to the middle class population of India have joined into this dying business of Multi level Marketing by paying an entry fee into the business. This only goes to prove the wide spread reach of this failing concept in India.
Network marketing is also known as Multi-Level Marketing (MLM).It is a form of franchising based on the concept of word of mouth advertising. For example, what if you watch "Jurassic Park", you like the movie and you recommend it to your friends, who in turn tell their friends. At the end of the week or month, Walt Disney paid you a commission based on the number of people who paid to watch the show because of your recommendation! Wouldn't that be great?
Companies such as Walt Disney paid advertisers millions of dollars in advertising money. Network Marketing companies on the other hand, take this sum of money and instead of paying to advertising companies, pay this sum of money to independent distributors who help them to advertise via "Word of Mouth"!
Would you agree that franchises like MacDonald's and Kentucky Fried Chicken are hugely successful? The reason is that they are duplicating a successful system. But flash back to the early years and it was labelled as a scam!
Similarly Network Marketing uses the concept of franchising to let ordinary, common folks to run their own business with an easily duplicatable system but at a fraction of the capital investment and with minimal risk! Minimal risk because of the low capital investment required.
Network Marketing has been labelled by the National University of Singapore's Graduate Society as "The Wave of the Future"! Companies like IBM, AT&T, Colgate Palmolive & even Singapore's biggest local bank DBS, use network marketing to distribute their products.
Facts about network marketing
Network Marketing is a method of distribution and compensation that has been utilized in the United States for over 50 years and which is now spreading across the world. The Direct Selling Association (DSA), based in Washington, DC, represents the Network Marketing industry. The DSA has existed for more than 100 years.
There are in excess of 1,000 Network Marketing firms that distribute over $100 billion a year in goods and services. It is estimated that eight to ten million Americans are either part-time or full-time distributors. Tens of millions more are customers.
Myths about network marketing
Network Marketing does not work. The big guys make all the money off the little guys.Well, Network Marketing DOES work. What usually does not work is a particular company, product or distributor. You must decide for yourself whether you work or your chosen company works or the product works.
Let's consider the concept of big guys versus little guys. Usually the people who perpetuate this myth are those who define fairness in terms of everyone receiving the same benefits regardless of their contribution or effort.