What is MLM. Multilevel Marketing = scam?

Not all ethically questionable ways of earning money are prohibited. One example is multi-level marketing also known as MLM (Multilevel Marketing). MLM is a term known in marketing. This is a strategy that some companies use to sell their products and services. Multi-Level Marketing encourages existing scheme members to promote and sell the company's products to others.

Many of the MLM schemes are legal, but there are also cases where multi-level marketing works as a pyramid scheme, which also includes the investment field, cryptocurrency projects and related. As a result, many companies operating in an honest and legal way are treated as shady businesses. In today's text, we will explain what exactly MLM is and present examples of companies that operate according to this marketing strategy.

READ: Charles Ponzi - the creator of the famous financial pyramid

What is MLM (Multi Level Marketing)?

Multi-level marketing is a legitimate way to make money and is often used by businesses that want to use their existing customers as their "sellers". Thanks to this, the company operates on the principle of word-of-mouth marketing, which in theory should reduce sales and marketing costs. Of course, the level of these costs depends on how the company wants to implement its marketing strategies.

How does MLM work? The customer can be a contractor, distributor or promoter of the company's products. Very often, existing customers begin to be "missionaries" of the company's offer. As a result, they convince their acquaintances, friends or neighbors to buy the products. If a new person starts buying a product then "lead provider” receives a commission from the company on the generated sales. In addition, if the new customer brings another customer, the original customer will also receive a fraction of the value of his purchases from the next customer. This causes it to form "revenue pyramid", which is called by some "building passive income".

MLM Scheme. Source: wikipedia.org

The aforementioned pyramid means that the earlier you join MLM, the theoretically your income will be higher. Such a structure means that people who are at the top of the pyramid can achieve very high income, and people at the bottom are cash providers and do not generate positive cash flows from the MLM program themselves.

Due to the fact that the MLM strategy excludes giving a fixed salary to its "participants-sellers", this way of earning money is good for people who have an entrepreneurial streak. This character allows you to achieve your own sales goals, which allows you to generate satisfying earnings. However, if a shy and lazy person wants to make big profits from this marketing strategy, their chances will be close to zero.

Additional Information

Although the operation of multi-level marketing is legal, it is often considered controversial. This is due to the fact that its operation may resemble a financial pyramid. The reason is that reseller members are paid with the money of the people at the bottom of the pyramid.

How can you distinguish a legally operating company that bases its sales on multi-level marketing from a pyramid scheme? One easy way to tell the difference between the two is by persuading customers to increase sales. In a "healthy" approach, it is the company that sells the products to the end customer. However, strategies that "stuff" MLM participants with products are suspicious, which forces them to look for new customers. Suspicious companies tend to focus on recruiting new participants in the scheme rather than actually selling and improving the product.

There are a number of signals that indicate that the company operates on the basis of an illegal financial pyramid disguised as simple multi-level marketing. The Federal Trade Commission warns against companies that:

• They advertise the MLM method to their clients as a very fast way to generate staggering earnings
• They persistently encourage participants to focus on finding new customers
• Earnings depend on how many people you include in the structure, not on the value of the products sold
• They encourage to join the program without informing in detail about their product, which they intend to offer to customers
• The minimum values ​​of purchased products that need to be "sold" to other customers
• High training fees
• They operate on emotions and not on a reliable presentation of the offer
• Product distributors continue to purchase products that they find difficult to sell in order to qualify for a corporate award.

Multilevel Marketing - Examples

There are many examples of companies in the world that operate on the basis of the multi-level marketing strategy. Some of them are listed on stock exchanges.

Amway

It is a company that uses MLM strategies to sell its products. The company focuses on the sale of products from the health, beauty and home chemistry segments. Amway sells its products to over 100 countries around the world. The company's revenue in 2021 was $8,9 billion. The company is recognized as the largest multi-level marketing structure in the world.

Herbalife Nuturition

It is a company listed on the American Stock Exchange. Herbalife Nuturition was the hero of a great investor struggle when Bill Ackman began short selling the company's shares in 2012. The value of the short position was $1 billion. Ackman believed that the company's operations were a pyramid scheme and that the company was cheating its customers. Despite an investigation by the FTC in 2016, the company continued to operate. However, due to  Following the FTC's comments, Herbalife had to restructure its operations. Against Ackman came Carl Icahn. The dispute ended in a victory for Icahn, who made a long position on Herbalife shares of about $2018 billion. Bill Ackman has announced his withdrawal from the short position in XNUMX.

Herbalife itself sells products designed to help its customers lose weight. The company explains that it offers its customers the possibility of a refund if they are not satisfied with the product offer.

Medifast

Medifast is another company that operates in the MLM model and is listed on the stock exchange. The company's revenues in 2021 amounted to $ 1,5 billion, while the net profit was $ 164 million. The company sells slimming products and health products. The company sells smoothies, soups, bars, pancakes, puddings, etc.

As you can see, some companies operating in the multi-level marketing model have a very large scale of operation. These are not classic financial pyramids that grow quickly and fall even faster.

Is MLM for you?

Before deciding to participate in multi-level marketing, you should answer the following questions:

• Am I sure that the company is operating with integrity? - each "red flag" should be a warning signal and discourage participation in shady projects.
• Do I want to be a seller? – if you want to join MLM you must be a salesman. In addition to presenting the product offer, you will have to convince in some way to join the MLM scheme. If you don't have a gift to sell, you should look for another job.
• Do you have a good salesman? – make sure there is a market for the product. Chat with your friends and family. You can also read the opinions of people who have joined MLM (focus on negative feedback).
• Can you be systematic? – you must be aware that in order to achieve your financial goals  you will have to work hard and systematically to build a large enough network of customers. Only then will you be able to work less and still receive high wages.
• Will you be able to manage your time and money well? Every business activity has its risks. MLM business too. Although the initial outlays are small, scale-up requires considerable investment of time and money. After all, more than once you will have to incur high costs of reaching the customer without the guarantee of generating income. In addition, you will have to spend a lot of time improving your sales skills and managing after-sales activities (helping customers, motivating them to look for other customers).
• Have you already compared the product with the competition? – before deciding to join the MLM program, you should carefully examine whether the product you sell really gives any benefit to the end customer. The benefit can be either higher quality or lower price. Be skeptical about "miracle ingredients" or guaranteed results.
• Have you calculated the costs accurately? – it is worth checking whether there are any hidden costs, such as expenses for training materials or the cost of the training itself. Check whether some of these costs are not repeated, which puts the economic profitability of the activity under question.
• Have you read and understood all documents thoroughly? – read carefully the company's business plan, documents regarding remuneration conditions and costs. Also pay attention to the content of all documents you need to sign. Instead of acting on emotions, read the documents carefully and skeptically. If you are not sure whether you have understood the documents correctly, use a professional who will protect you from signing an unfavorable contract.

Multi-level marketing - summary

Key conclusions from the MLM strategy:

• Multi-level marketing is a legal activity in many countries. Some well-known companies build their sales strategies on MLM.
• Existing MLM members are encouraged to promote the product and sell it to others, thus increasing the company's pool of customers.
• The company pays members who "bring" more customers a percentage of the value of products purchased from a new participant in the scheme.
• The more people its member attracts to the MLM system, the greater the potential income from sales commissions.
• In the United States, multi-level marketing programs are investigated by the FTC (Federal Trade Commission) in terms of conducting legal activity. If the agency believes that the company operates in the model of a financial pyramid, it may prohibit legal activity.