The Truth About Multi-Level Marketing

Otherwise known as network marketing, referral marketing, and pyramid selling, multi-level marketing as defined by Investopedia is a strategy used by some direct sales companies to encourage existing distributors to recruit new distributors who are paid a percentage of their recruits' sales. These recruits are the distributor's 'downline'. Simply put, a multi-level marketing model involves a pyramid structure of non-salaried participants who are paid a commission whenever they or a 'downline' of theirs makes a sale. Multi-level marketing (MLM) salespeople/independent retailers sell directly to consumers through relationships and word of mouth.

Although controversial, multilevel marketing is a legitimate business strategy. Those interested in joining a multi-level marketing program must however watch out for the thin line that separates genuine multi-level marketing from pyramid schemes. Genuine multilevel marketing companies sell their products primarily to consumers. Pyramid schemes on the other hand lay emphasis on distributor recruitment than on product sales; they must recruit new members to buy their products. In a pyramid scheme, for example, a person will be asked to pay a $50 'admission fee' with a promise that s/he'll get 20% of every of his or her recruit's admission fees.

The top 10 MLM companies in 2018 by revenue are:

10. Tupperware - Revenue: $2.26 billion

9. Nu Skin - Revenue: $2.28 billion

8. Perfect - Revenue: $2.96 billion

7. Natura - Revenue: $3.09 billion

6. Mary Kay - Revenue: $3.25 billion

5. Infinitus - Revenue: $3.92 billion

4. Vorwerk - Revenue: $4.19 billion

3. Herbalife - Revenue: $4.40 billion

2. Avon - Revenue: $5.7 billion

1. Amway - Revenue: $8.6 billion. Amway is the biggest MLM company in the world.

The setup of MLM constitutes its biggest advantage (to company  owners) and biggest disadvantage (to 'partners'/salespersons/workforce). The largest proportion of salespersons must operate at a net loss so that the few at the top of the MLM pyramid can derive significant earnings. Financial independence is the main sales pitch of MLM companies to their participants and prospective participants with catch phrases like "the lifestyle you deserve". They use those at the top of the pyramid as evidence of how participation in the MLM company could lead to enrichment. They however fail to disclose that the success of the few at the top is dependent on the continued failure of the majority at the bottom. These bottom-level participants inject money from their own pockets into the company (buying of products for further retail, admission fees) which becomes the revenue and profit of the MLM company, a small portion of which is shared to the top level pyramid participants.

According to a report by the Federal Trade Commission (USA) that studied the business models of 350 multi-level marketing companies, at least 99% of people who join these companies lose money.

Other cons of MLM include limited benefits and support, and high rejection rates. MLM salespersons tend to learn a lot by themselves, with little guidance from the company (excluding an official onboarding). Also MLM salespersons work as freelancers, hence not benefiting from traditional perks like paid vacations or health insurance. Most people you share your MLM product offers with will reject your offer, making sales difficult.

Watch out for the following as they are red flags of a non-genuine MLM venture.

1. Deceptive advertising practices, such as making income guarantees or suggesting a prospective participant will make money doing very little work.

2. Pressure to buy and stock inventory.

3. Outrageous and unfounded product claims. Such outlandish hype is seen in health and wellness companies. Their representatives often falsely claim that their products work miracles or cure diseases.

Longrich is an example of an MLM company that has been declared illegal at least one country. In a statement issued on April 12, 2019, the Bank of Namibia (central bank) said Longrich was an illegal financial scheme and that those promoting its operations in the country should cease operations.