What is multi-level marketing and how does it work?

Multi-level marketing (MLM) businesses are rampant in the US – in fact, more than 10 million women in the US have been approached about buying or selling from an MLM.

And, while many consider MLMs predatory and, well, a little sleazy, they usually aren’t illegal. MLM (sometimes also called “direct marketing”) resemble the illegal Pyramid Scheme. It’s important to understand the difference so you can protect yourself.

What is an MLM?

A multi-level marketing company, or MLM is a type of direct sales. It’s a business where independent representatives sell services or products from a company to Consumers. Independent representatives not only sell the products but in some cases recruit and train other representatives who want to start their own business and subsequently sell products as well. Income earned from an MLM comes in the form of commission on personal sales and a percentage of sales earned by the representatives that are recruited under the individual.

Why are MLMs not illegal?

MLMs are not illegal because they are a potentially attractive business opportunity for a lot of people. Participants with an MLM don’t have to start a business from scratch. Instead they can sell supplies or services from a company that’s already set up and in some cases offers training on how to sell.

In order for an MLM to be perfectly legal it must:

Offer a quality product or service
Have income earned from sales of products and services
Have a focus on sales and not solely on recruitment

An MLM distributor, consultant, or contractor–bear in mind that different companies call them different titles–makes money by selling products or services, and in some cases signing people up who also want to sell those products or services.

If you sign up to be a distributor you make commissions from the products you sell or the services you sell but you also have the opportunity to recruit other people below you and help them sell things too. Those people you recruit are considered to be in your “down line” and the person who recruited you is in your “upline”. Those people in your downline earn income by selling products or services as well. But when they sell something, you get a percentage of their sales too, and if they recruit people, they get a percentage of those sales.

Is an MLM and pyramid scheme the same thing?

An MLM and a pyramid scheme are not the same thing although they look very similar.

Unfortunately, there are some MLM opportunities that are not legitimate business opportunities but are pyramid schemes disguised as MLM opportunities.

Unlike multi-level marketing, pyramid schemes focus on recruiting and they want to recruit as many people as possible to become distributors. They offer opportunities to make money by recruiting more people and achieving new levels of success when it comes to your recruits.

The biggest difference is that an MLM is perfectly legal in America if it meets with the three qualifications listed above, but pyramid schemes are not.

It is important to know that pyramid schemes have only one purpose: to get your money and then force you to recruit other people so that they can get their money.

This differs from an MLM where the purpose of the company is to move a product. The theory behind an MLM is that the bigger the network of distributors, basically the more people you can recruit in and around your sales, the more products the entire business. yourself included, will be able to sell.

Pyramid schemes usually:

Require you to invest a large amount of your money up front in order to get started. They might call this an inventory charge but legitimate MLM opportunities won’t require a large start up cost out of your pocket.
Won’t offer inventory buy backs if you can’t sell it. Legitimate MLM companies by comparison will offer a buyback for at least 80% of the inventory you purchase if you can’t sell it.
Won’t normally focus on the consumer demand for the product or service and will talk a lot about getting people to sign up instead. Remember that legitimate MLM companies are designed to move a product or a service just like any other business.
Offer commissions specifically for recruiting new members and have a plan that’s designed so that the majority of your income is made by recruiting new people instead of selling the company products.