What is Multi-Level Marketing About?

What is Multi-Level Marketing About? – Your Ultimate MLM Guide

Are you looking to learn What is Multi-level Marketing About? You have come to the right place!

Multi-level Marketing (MLM) is one of the most popular, and at the same time, the most controversial business model.

It is also often referred to as direct selling, network marketing, referral marketing, and our beloved Wikipedia even name it pyramid selling.

Naturally, this is an individual decision of each person – whether to engage in network marketing or not, but before you accept it, you need to understand what it really is.

So, what is the essence of network marketing, what are its pros and cons, what does the term mean?

Let’s get into the things right now!


What is Multi-Level Marketing? – Definition and Historical Retrospective

Today, all over the world you can call the millionaires who earned their money through the network marketing system. It is authorized and legal, and due to high-income potential advertised, it attracts a lot of population.

The marketing system is considered very similar to the “financial pyramids”, although there are common features, these are completely different areas in the business.

 

What is Multi-Level Marketing About? - Differencies Between Network Marketing, Direct Sales, MLM and Pyramid Scheme

 

Network marketing or MLM is such a way to promote products, the essence of which is to ensure that product information passes from person to person. A consumer buys goods from a large manufacturer.

The main feature of the MLM business model is that there are no large intermediaries who conduct bulk purchases and then sell goods. All products have a low cost (in theory, but that’s not always the case in reality).

In addition, in this way, the manufacturer saves on mass advertising, renting premises for a store, or creating an online store. These savings, it pays to its network of distributors, (in the form of a percentage of the sale, or commission) who spread the word about the products.

It’s extremely important to understand that MLM distributors are not hired employees who have fixed salaries paid at the end of each month.

Distributors are getting paid only when they sell products or recruit other distributors (also called representatives or consultants) into the network.

If you like video-based content more, you may wish to watch this video revealing What is an MLM:

 

 

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Let’s Address a Little Bit to the History Here…

What is Multi-level Marketing About? - Carl Rehnborg
Carl Rehnborg (1919-1973)

MLM business model has its root in the United States of America.

In the 1930s, a man named Carl F. Rehnborg was developing nutritional supplements (today known as Nutrilite brand sold by Amway) that were made from natural substances and had a large number of vitamins.

To look at the demand for such a product, the entrepreneur decided to distribute supplements to his friends. They had to try them and leave a review, and if someone likes it, then he/she can buy in the future.

But it didn’t work. Although the product had positive reviews, many felt that if Carl gives them away for free, then they are not of such high quality.

After that, the entrepreneur decided to take money for these goods, but still, he was selling them to his friends only.

This time, the results showed up almost instantly. A huge number of people began to buy nutritional supplements.

Carl’s friends advised them to their friends and those to theirs. And so the world’s first network marketing appeared.

Thus, Carl received huge profits at practically minimal cost, which included the only production of the product itself and packaging).

Towards the end of that same year, he founded his own company for the production of food additives (California Vitamin company, which he renamed it in 1939 to Nutrilite), opened a research department, and launched a network of distributors in regions across the country.

I wanted to add this more modern picture of Carl to show you how he looked like not long before his death in 1973, a year after he sold his company to Amway.

 

What is Multi-level Marketing About? - Carl Rehnborg Modern Times

 

 


What is a Multi-Level Marketing Company and Why Most of the People Fail?

Apparently, these are companies that operate according to the MLM business model.

Usually, MLM companies distribute cash received from distributors as follows:

50% – bonuses

25% – the cost of the product/service

25% – overhead and profit

This means that for every dollar spent by distributors, only 50 cents is returned in the form of bonuses.

Like lottery and races, MLM companies do not print their own money. They only spend part of the money that they receive from distributors. Balance is used to pay for product costs, profits, and overhead.

Will distributors take part in the work of MLM companies, knowing that they will lose 50% of their investments?

Yes, but as long as a multilevel company provides its cash with a certain equivalent.

If an MLM company did not have a product or service, or a product or service of insignificant value, distributors would quickly get tired of losing 50% of their cash.

This is the mistake that permeates the lower ranks of many leaders.

Too many of their distributors join only for the sake of money and forget about the cost of the product, guided by the erroneous idea that money can do everything, and this is justified in comparison with costs.

But, from a mathematical perspective, this is impossible!

Such distributors attract others by telling them that they will receive bonus checks more than the costs they incur.

But this is simply not possible!

Statistics show that only a few distributors can receive bonus checks that exceed their own investments. Most distributors will receive fewer bonus checks or will not receive anything at all.

MLM companies are not able to make one dollar profit by providing a product or service, pay overhead costs, make a profit and in addition pay one and a half dollars in the form of bonuses.

The reality is that many distributors do not receive bonus checks.

However, such an erroneous perception leads distributors to say the following over and over again:

“Don’t worry about the product. Even if you don’t need it or if you think that it is too expensive, it’s important that you only need three distributors in order to “settle accounts”. When you find the fourth distributor, you will immediately make a profit!”

Newly invited distributors enter the program and, in turn, attract several other distributors. Their new distributors do not receive enough bonuses compared to their monthly costs, so they normally quit.

 

What is Multi-Level Marketing About? - Low Success Rate

 

Now the bonus of the first distributor is lower than his monthly expenses, so he also quits. His sponsor’s bonus check, too, in turn, falls below his initial costs, so his sponsor also drops out from the system.

When a distributor uses the power of a marketing plan only to attract another distributor, he is doomed to failure.

No marketing plan can leave anyone out there to gain money by receiving bonus checks that are larger than the initial costs.

When you say that only three people are needed for you to “settle accounts”, in reality, you say:

“Three must lose their investments so that you can compensate your losses”.

When we put it this way, we see why using only a marketing plan to convince potential customers to join the program is doomed to failure.

How long are grassroots distributors going to lose money so their sponsors can get back on their feet?

Not surprisingly, in his free e-book “The Case (for and) Against Multi-Level Marketing, Jon Taylor found that 99.7% of people will lose money in network marketing.  

 

What is Multi-Level Marketing About? - Only the Top is Happy

 

 

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Core Operational Principles of an MLM Company

The principles of network marketing are laid out in the marketing plan. With the help of the marketing plan, the MLM company determines how many people should be at each level, how much to sell and how much compensation the seller will receive for his sales and sales of his structure (often referred to as “downline”).

A reward could be in the form of money, gifts, discounts on your next purchase. There are even more extravagant compensation options like luxurious vacations, cruises, or cars (usually available only to the top earners).

Often, to become a representative of a network company, you need to buy a Starter Pack – this is a mandatory set of products. After that, the networker gets to the first step. The more the agent and his team sell, the higher the level they are placed within the Marketing plan structure.

One of the requirements for distributors is to buy every month the minimum amount of goods for personal use. No matter how much the distributor downline sells, he must personally buy goods, otherwise, he won’t get a reward.


What is a Multi-Level Marketing Business?

Typically, network companies do not hire their representatives as staff but conclude cooperation agreements or agency agreements with them.

In this situation, a networker can work as a self-employed person or an individual entrepreneur, which is why MLM is called a network business.

 

What is Multi-Level Marketing About? - The Business Model


What Type of Training MLM Companies Provide?

Network companies have some sort of training system. They conduct seminars, publish methodological materials, and sometimes, managers take newcomers to work with them on a field.

What they teach you since the early stage is to build a so-called “warm” list that includes your closest friends and members of your family, relatives, colleagues, etc. These are your main potential prospects whom you will approach to ask if they are open to having a look at your offer (products/business opportunity).

 

What is Multi-Level Marketing About? - Build Your "Warm" List

 

Now, I understand why my friends didn’t hurry to join me when I was excited to tell them about my MLM business opportunity. Sometimes, it might sound like a sect, and people just don’t like to be sold to.

When you are done with your “warm” list, you are told to extend it by including all the other people you know or had the chance to meet in your life.

It might be the lady at your grocery store, the man who was sitting next to you during your last flight, or just regular people on the streets, why not?

After all, anybody is good because as your upline is telling you that “this is something anyone can do, and you don’t need to be a salesman”. 

And this is because the products are so good that they “sell themselves”. That’s why they are not selling them in retail or drugstores. 

The truth is that the products won’t sell without your efforts, what they are not telling you upfront is how much time and work you must put in in order to make MLM business model work for you. 

With the informational technology evolving, many MLM companies started to offer their distributors a replicated version of their official website. This website contains your individual link and once someone purchases through your link, all the sales will be assigned to you. 

 

 

What is Multi-Level Marketing About? - Bridge Funnel

 

While this is a great thing essentially, few MLM companies provide training on how to use and promote your website in order to generate more sales and leads.

You are left to intuitively share it through social media, send via email, and eventually other channels available to you. 

Imagine, how much work does it require to do this manually every day? 

Also, there are some automated systems and software nowadays and of course, in order to be able to use them, you’ll need to take out of your pocket additional amount of money, added to your start-up costs and monthly investments.

 

What is Multi-Level Marketing About? - The Training

 

Then, there are MLM companies’ annual events and conferences. In order to be able to attend them, you are going to need to spend even more money to pay the entry fees and other associated costs like transportation, accommodation, etc.

In other words, you pay them for your ability to be part of their team.

Did you know that things could be quite the opposite? In affiliate marketing, companies are inviting you to attend their annual conferences and pay all the costs for you! 

 

 


Are MLM Companies Legal?

MLM is a sales system, and it can be used for legal business, but it can also be used for fraud.

 

What is Multi-Level Marketing About? - Legal and Less Legal

 

Selling cosmetics, food additives, or insurance through network marketing is absolutely legal if the cosmetics are not defective, dietary supplements are not harmful, and the conditions of insurance do not violate the law.

With the help of MLM, goods are sold, but often financial pyramids (also referred to as pyramid schemes) also use this system.


How to Distinguish MLM from the Pyramid Scheme?

With the help of network marketing, you can easily attract new people, and this is what financial pyramids need. The main difference is in their goals.

The goal of network marketing is to sell a product, the goal of a pyramid is to attract a new member. In the pyramid schemes, there is no product/service or it does not play a major role.

The main thing in financial pyramids is the financial contributions of participants.

Here, agents make money if new people are enrolled. When there are no more newcomers, the pyramid collapses. Those who entered last lose money.

If you are invited to network marketing, and the company does not sell anything, run away as fast as you can – this is a pyramid scheme.

In MLM instead, the seller receives a percentage of the turnover of the structure/organization. He earns while people need the company’s products.

Some pyramid schemes, so that they can be taken as an honest business, also sell goods or services but even in these case, there are four signs of financial pyramids you can look for:

Low Production Costs of Goods While the End Price is Too High 

Often a financial pyramid sells cheap overpriced goods. If you’ll go through my Valentus MLM review, you’ll read there that as a result of one court investigation, it turned out that Valentus was buying the coffee from its supplier for only $6 USD for a bottle, while it’s selling it for $60 bucks. 

It may also be that the product itself is inexpensive, but only a company representative can buy it, and in order to become a representative, you need to pay a high start-up cost.

Deferred Sales

Financial pyramids may offer to buy goods now, and get them later. Moreover, for the same purchases of newcomers, the agent receives a reward immediately.

Unclear Purpose of the Goods

When a product is just a cover for the pyramid scheme, its purpose and content can be incomprehensible.

But you will be told the future lies with this product or that the market for these products is growing rapidly, so you necessarily need to jump in (invest) and invite friends.

Separate Payment Systems for Selling Goods, and Attracting Customers

Some MLM companies reward their representatives for selling the products, and for recruiting other people into the system.

In such companies, a reward you can get for the sale of goods is a small percentage of the sale, but a larger income is promised for attracting new participants (thousands of dollars bonuses).

In this case, you need to pay an entry fee for a place in the network and the right to build your network.


Final Thoughts

Multi-Level Marketing had made some people millionaires but most people failed to make a sustainable income.

There are legal MLM companies but there are also pyramid schemes that use this business model to mask their scammy nature.

Sometimes it might be difficult to spot a pyramid scheme because of the entangled marketing plan they use and I can’t recommend this business model.

It works only for a limited amount of people and we can see proof of this in MLM companies’ income disclosure statements.

I hope the information I have given you in this article will help you stay away from pyramid schemes.

If building your own business is what you are looking for, I recommend looking into blogging and affiliate marketing.

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I hope you have enjoyed reading this article, and now, you are well-versed What is Multi-Level Marketing About.

Have you been into MLM or affiliate marketing before? What’s your experience? I’d love to hear from you!

Please feel free to leave your questions or thoughts in the comments section down below, and I will get back to you asap.

Take care, and I will talk to you within my next post very soon!

Best Wishes,

Natalie

6 thoughts on “What is Multi-Level Marketing About? – Your Ultimate MLM Guide”

  1. Thank you, Natalie,

    I must agree with you on what is multi-level marketing about, and as I see it when a company forces you to buy their product to promote their program they are only after your money.

    Just imagine how many sales they receive from every person who joins their program, so actually, you are the consumer not an associate of MLM companies.

    Jeff

    Reply
  2. Hey Natalia,

    I have tried a few Multi-Level Marketing programs and they turned out to be scams.

    Remember MOBE? I was an investor in one of their programs, and I lost a lot of money.

    Your review definitely does tell the whole story, and you are right in saying pyramid schemes should be avoided. They have been around for years before the internet was even thought of.

    Thanks for being honest and I’m pretty sure lots of people will learn a lot more about MLM from you.

    Excellent article and keep up the great work.

    All the best,

    Tom

    Reply
    • Hi, Tom, thank you for dropping by and sharing your experience.

      Indeed, guys from MOBE will pay heavy cash now for what they have done to so many people. I am sorry to hear that you’ve been through such a terrible experience.

      I got burnt too back in 2012 with TelexFree… and once again with binary options “company”. Disgusting feeling. Thank God, I am not that naive person anymore.

      Wish you all the best, and stay away from scammers!

      Reply
  3. This is a really extensive article – I particularly enjoyed the section about the origins of the MLM system, in the nutritional supplement industry all that time ago.

    Reply
  4. Hi Natalie, thank you for the article, loads of info, and well put together.

    I liked your picture with the sad faces at the bottom and smiley ones on top. They say a picture says a 1000 words.

    I had to smile at this. Many years ago I also got trapped in one of these, we even started buying the products ourselves just to move up the ranks, then we ended going to the conference and then my eye’s opened.

    I was shocked, it was almost like a cult. Everyone was bowing down to the leaders hanging onto every word they said. I ran and never looked back.

    Affiliate Marketing is way better.

    Regards, Barry

    Reply

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