Multi-Level Marketing: The Future or Folly?

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Multi Level Marketing (MLM). Also known as Network Marketing or Direct Marketing, and even commonly (incorrectly) referred to as Pyramid Schemes, this type of business entity either has enthusiastic fans or raging critics. Today I will attempt to define exactly what multi-level marketing is, debunk some common myths, and arm you with some warning signs of the "bad seeds" of the industry.

Fundamentally, MLM can be a viable form of doing business. Let's compare the MLM structure to that of a conventional business.

Conventional Business

Structure

A standard corporate business structure has a President or CEO at the top, who inevitably gets paid the most of anybody in the company, and who calls all the shots. Below the CEO you have VPs, Assistant VPs, departmental heads, and sub-departmental heads. Each of the key players has assistants and teams to help them do their jobs. And the further the employees are removed from the CEO in terms of responsibility or title, the less they are paid. At the bottom rungs are the many support staff, who are the "worker bees" of the organization, and are typically paid the least.

In fact, you could often draw up a corporate employment structure to look like a pyramid.

Marketing

For a conventional business to market their product, they have extensive sales and marketing departments and budgets. They advertise to their market using strategically placed ads on tv, in magazines and newspapers, billboards, movie theatres, and on it goes.

If they are lucky, their product will catch fire with the right market and word of mouth will do the rest of the work. But they still have to maintain a presence in the advertising world in order to keep new customers walking in the door.

And of course, the cost of all this (often expensive) advertising is ultimately passed on to the customer through the cost of the product.

Compensation

Most corporate employees have standard salaries, plus occasional profit-sharing incentives depending on the company.

The only employees with variable income might be the sales staff, who are actively pushing the company's products and who can receive commissions for sales they make. All of the salaries and commissions are of course factored into the cost of the product.

MLM

Structure

Although many MLMs have a corporate executive staff similar to the structure above, there is another structure entirely designed to market and distribute the products in lieu of advertising and sales departments.

A friend, colleague, or new acquaintance tells you about a business they are involved in that sells "ABC Widgets". They identify that they are a distributor of the product, and if you become interested, you yourself can become a retail customer or distributor. Being a distributor entitles you to become the CEO of your own distribution network. You can distribute to one person, three, or a million depending on your network and the effort you put into it. Your customers can in turn choose to be just regular retail customers, or if they like what they see, they too can become distributors just like you.

As CEO of your distribution network, your responsibilities are threefold:

• sell the product
• recruit new distributors
• develop and assist your distribution organization

Marketing

Because the fundamentals of MLMs are based on word of mouth, there is rarely much if any advertising budget required. There is also no sales staff on the payroll, since the distributors are in effect the sales department.

Compensation

The distributor's compensation depends entirely on the organization they build. A legitimate MLM company will pay the distributor in three basic ways:

• Commission on products you sell to your retail customers and buy yourself
• Commission on products your distributor sells to their own customers
• Commission on products they sell to their distributors, and so on down the line up to five to seven levels down from you. (Note, in order for a legitimate MLM to be financially viable, your compensation has to stop after a certain number of levels down from you).

And similar to conventional business structure and sales departments, bonuses can become payable to sales staff/distributors who meet and exceed certain benchmarks.

The compensation structure of MLMs gets more complicated with achievement levels, bonus structures, and sometimes pricing points (eg: retail and wholesale), all of which vary from company to company. Becoming familiar with the structure can be daunting, and the shrouds of confusion can cause many people to be sceptical.

WHY MLMs FUNDAMENTALLY WORK

Sales Pitch Bunker

These days we are bombarded with advertising for anything and everything. Everywhere we look, everything we read, even movies we watch and telephone calls we receive, are all sales pitches for one product or another service.

As a society we have effectively become desensitized to this barrage of sales pitches, and have retreated into our safe little bunkers against sales. We are sceptical about a new miracle formula or revolutionary this-that-or-the-other that we see on tv. And so we should be too.

But if a friend tells us to eat at this restaurant or see that movie, we'll probably take their advice and race out to see it. We assume they are telling us out of genuine interest, and since we are hearing it from a real live person and not a squawk box, we listen.

Some conventional companies have tuned into this, and have developed referral programs to provide consumers with incentive (in the form of rebates, discounts, or cash) to refer friends and family to their product or service. So although we still trust that our friends are telling us about the product out of genuine interest and because they are a happy customer themselves, they are also now being compensated for it.

MLMs are not fundamentally different from this. They tap into the power of direct marketing, word of mouth referrals, and people using their networks (hence the term "network marketing").

Cost-Effective Sales

Some critics of MLMs will suggest that the compensation structures of MLMs aren't viable for the business. How can an MLM afford to pay a commission to six or seven different people for one product sale?

Conventional businesses build the following (among other things) into the cost of products:

• Sales department salaries and commissions
• Advertising costs
• Retail property overhead (this is huge)

MLMs don't have any of the above costs, and so can instead channel the same money towards their own distribution force commissions - hence the ability to pay higher commissions and to multiple people.

In fact, some business gurus would go so far as to say that the wave of the future is in MLM marketing structures. Properly structured, legal MLMs that is. With a history of illegal operations and shady companies in the industry though, it is hard to pick out the good ones from the bevy of schlock out there.

COMMON MLM MYTHS

MLMs are pyramid schemes

In fact, the conventional corporate business structure smacks more of a pyramid scheme than a legitimate MLM does. With the lone CEO at the top being paid the most and the "worker bees" at the bottom stuck on their ladder rung with no hope of exceeding the CEO's income or stature, you have a pyramid.

A true MLM distributor's income is entirely dependant on their efforts expended. You could be a distributor and sign me on to become a distributor myself. Shortly thereafter you may fall out of interest with the company or family obligations could get in the way of your business efforts. I on the other hand, might choose to go gangbusters with it. Although you are technically above me since you brought me on, I can exceed your income and stature within the company by building a stronger network of my own. You will of course be paid a percentage of what I make, but ultimately I will make more money than you for my efforts.

In fact, some MLMs will build in a protective measure against the "slackers" who recruit winning distributors since the slackers are probably not contributing to the success of their winning distributor's business. So the company will cap off the income the slacker can make, or sometimes cut them out of the loop entirely.

The difference between a pyramid scheme and an MLM is product. A legitimate MLM has a viable line of products to sell, with real and ongoing customers. A pyramid often won't have a real product, or one that is marketable. Or there may be a product, but it is a one-time purchase, is not marketable, or is unreasonably expensive.

MLMs are illegal

MLMs are in fact not illegal. Pyramid structures however, are illegal.

MLMs are Get Rich Quick Schemes

It is hard work, and a full-time job if you want to get rich. You are not only servicing your own customers, managing sales and inventory, but recruiting new distributors, and training and assisting your distribution network. You are effectively your own CEO, and unless you personally hire a support staff to help you (which many successful distributors will do), you are wearing many hats.

The people you see in MLMs who have made huge amounts of money and are "living the life" on beaches around the world have invested years of hard work to get where they are, and continue to work in order to reap the benefits.

MLMs aren't viable due to Market Saturation

True - if everybody in the market is a customer or distributor, then there's nobody left to recruit and the people who were the last to buy in are duped. But show me a company that has total market saturation. Even (non MLM) corporate juggernauts manage to keep their businesses viable by continuing to develop products, change lines, and reinvent themselves. A legitimate MLM should also be doing the same.

SIGNS YOU NEED TO RUN AWAY

It's a big bad world of shady or illegal companies out there, so if you are being recruited (even if it is a friend or family member - they may not understand what they're involved in), you should do some due diligence before jumping in with both feet.

You don't really know what the product or service is.

If you can't define exactly what the product or service is, and who the market is, then it is likely that most of the money is made through recruiting which makes it a pyramid scheme and henceforth illegal in many part of the world. Without something to sell, there really is no viable business.

You are promised amazing riches with little to no effort.

Nothing in life is free, so beware of such enticements. Even legitimate MLMs may talk about the lavish lifestyle it affords in their recruitment process, but after a little digging you should find that there will be work involved.

You receive commissions just for recruiting new members.

Watch out! No money should be made by either the company or distributors for signing up new members. Read below for more on this.

You have to pay a significant amount of money to just become a distributor or member.

The fee to become a distributor should only cover the company's administrative expenses in signing you up, the welcome kit, and any marketing materials or supplies you receive.

If you are forced to pay huge fees or buy massive product packages just to get involved or learn more about the company, take it as a warning sign.

Now, some legitimate companies have extensive product lines and encourage their distributors to buy bundle packages of these products themselves, but it shouldn't be mandatory. The best sales people and distributors will be enthusiastic users themselves, not users out of necessity.

They have no inventory buy-back policy.

If you are required to warehouse your own inventory, a legitimate company should be willing to buy back at least a substantial percentage of your inventory if you can't sell it or choose to get out of the business. Better yet - look for a company that doesn't require you to carry inventory at all by instead using direct sales.

FOOD FOR THOUGHT

What is drawing you to the MLM in question?

Are the products truly revolutionary? Or priced well? Or high quality enough to warrant buying them through this system? Or are you more enticed by promises of lavish lifestyles of rich and fame and working from your beach villa?

Take off the Rose-Coloured Glasses and See Through the Sales Pitches

If you are being actively recruited (even by a legitimate MLM), you will inevitably hear an argument like this:

"If you recruit six distributors, each of whom, in turn, recruit six others, and carry the process through nine steps, here is what your organization will look like":

LEVEL MEMBERS

1 6

2 36

3 216

4 1,296

5 7,776

6 46,656

7 279,936

8 1,679,616

9 10,077,696

This diagram above is absolutely true, and if it worked this way, you'd be a superstar. The reality though, is that your six new distributors will all be different people. Some will go gangbusters with the business and recruit more than six people, while others won't do a thing with it.

Another reality is that recruiting even six members can be difficult. With so many negative stigmas around MLMs and common myths and associations with pyramid schemes, anybody actively recruiting for an MLM has their work cut out for them. That is why so many MLMs have personal development seminars and regular pep talks - to keep the interest level high and skin thick.

It's a tough job to work in an MLM, but the rewards for those who choose the right company and apply the right skills and techniques with a huge dose of perseverance can be big.

The FTC has some great tips on evaluating an MLM opportunity here.