Multi-Level Marketing explained

Multi-Level Marketing, or MLM, is often confused with financial pyramids. The latter is a definite scam you should steer clear of. However, the question of the essence of the former is more complex and requires a careful examination. Knowing how MLM functions is useful for you not to get deceived in real life.

In this article, we will explore the precise difference between MLM and financial pyramids, some examples of MLMs, their key features, red flags, and other cool info. Are you ready to settle score with pyramidheads?

Of financial pyramids, actual & perceived values, and the Romans

No human is omnipotent: you can’t excel at knitting, building, sculpturing, researching, defending all the same time. But you can specialize in one activity, get monetary rewarded, and then exchange a portion of money for some goods or services, provided by other humans, specializing in something else — that’s the foundation of capitalism.

Goods and services have real and perceived values in various proportions. For instance, a house has an actual value, corresponding to the labor hours of constructors, materials & resources used, plus manufacturing overheads. However, a house in a city center of Paris has a greater value than an ordinary house in suburbs, due to its location, history, and maybe even fame. This is the case, when actual and perceived values go hand-in-hand and shape the final price.

However, sometimes, there is only perceived value. That’s when a marketer in question sells (fake) promises without adding an actual value to the consumer. No need to think that perceived value is necessarily something bad. Every art is based on perceived value — the more people like Van Gogh, the more popular his works becomes. Of course, aesthetically, there is something more to his canvases — they can serve as a decoration at least, which is a real value to some degree. And this is what makes art different to financial pyramids.

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Financial pyramids, a.k.a. Ponzi schemes, are legally prohibited in many countries, and for a good reason. According to the Federal Trade Commission, paying out for recruiting new members is doomed, because eventually there will be nobody to recruit. This is exactly what Financial pyramids do. To some extent, this resembles the downfall of the Roman Empire, bounded to expand forever due to its dependency on the economy of slaves. The Romans themselves were not an infinite resource, so overseeing the slaves, protecting the ever-growing territories, and getting new resources was an impossible mission to accomplish.

What about multi-level marketing

Multi-level marketing gets dangerously close to financial pyramids but does not cross the vague borderline, at least attempts not to do so. MLM is considered legal in the USA, but banned in mainland China, the UAE, and Bangladesh. No need to think that online MLM is safe, TikTok, as a Chinese social network, bans all the pyramid scheme and MLM-related content.

MLM incorporates the elements of traditional selling to generate revenue, but it also capitalizes on the idea of using multiple sale tiers and active recruiting of new members. Those on top tiers enjoy premiums generated from sales by lower-tier members. It is also usually obligatory to pay a certain entrance fee before joining the staff and selling. Basically, it all boils down to the sales-recruitment ratio. The following red flags can be helpful to see if you are being hoaxed:

• Mind-blowing claims about enormous earnings
• Active promotion of recruiting new members as the main way to earn money
• Artificial time pressure, so that the wanna-be-recruit does not have time to do research
• Exploitation of fear of missing out, claiming the opportunity will be gone in an hour
• Distributors buying a product to earn some sort of company reward without being able to sell it down the drain

MLM, typically cares for its downline distributors and provides some manuals, mentorship, and guides. Low tiers purchase the goods from higher tiers, giving a portion of profit up the line. Basically, it’s a casual retailing that requires no specific business knowledge to set up. The employers in this case don’t actually hire the employees, meaning no social protection. And the employees are somewhat individual entrepreneurs, controlling how much they are willing to work — which is a sort of win-win. Of course, it’s not that simple. Low tiers are usually compensated, based on the level of sales, instead of keeping the chunk of profit for themselves.

Sometimes the goods are sold with a big discount to downline distributors. No worries, the game is rigged from the start, since these distributors have obligations to sell the product at a retail price or higher. All the profit will goes up to the owners anyway, who will compensate those at the bottom.

Real-world examples of MLM

To get a better understanding of the essence of multi-layer marketing, let’s take a look at some of the largest MLM companies, based on the revenue generated annually. Then, we’ll take a closer look at the business operations of the leader of the pack

• Infinitus — revenue: $3.95 billion
• Vorwerk: $4.60 billion
• Herbalife Nutrition Ltd: $5.80 billion
• Natura & Co: $7.20 billion
• Amway: $8.90 billion

Amway is an absolute champion of MVM, originating from the USA and specializing in nutra and cleaning products. Their vitamins and cleaning solvents are actually good and were purely organic long before the green stuff, including greenwashing, became popular.

Amway has a ranking system, which requires an Individual Business Owner (IBO) of Amway to sell more and more products, just like the other IBO do. Long story short, scoring high there without attracting new distributors and purchasing Business Support Materials is borderline impossible. Needless to say, these materials can cost you an arm and leg.

Amway is like grayhat affiliate marketing. It does not violate the law but… it’s neither ethical at times. Consider this:

• Promises of quick riches
• High entry costs and hidden expenses
• Market oversaturation with IBOs
• Limited earnings of the majority of IBOs
• Legal controversies and scrutinies

Still, Amway is not a financial pyramid, not right now at least. Financial pyramids are grounded in constant inflow of capital from the investments made by new participants (pretty much identical to how money lending works). Amway and other MLMs on the other hand actually sell something and are good at that. Their goods might be somewhat overpriced, but that’s a different, perfectly legal story.

Pros & cons of MLM

Let’s give a brief list with all advantages and disadvantages of having or being in MLM and wrap up the article. Let’s start with the positives:

• The audience of quality — the distributors try to pick carefully their prospects, for their level of income is at stake.
• Wide targeting — thanks to the advent of the internet, it is possible to go beyond home country networks and target foreign platforms.
• Automated promotion — modern technologies like AI, bots, social networks, and timely newsletters ease the marketing efforts.
• Easy to set up — no prior knowledge of how to open a business is needed.
• Flexible working hours — you’re your own boss, sort of…
• Professional training — far from being cheap, but various courses are useful for starting your entrepreneurship career.

Don’t forget about the drawbacks:

• Working your fingers to the bone — with the amount of grinding you have to make, it is easier and more beneficial to set up your own full-scale business
• Hidden commissions and nuances — MLM establishes are no fools and will squeeze every dime possible out of their fellow distributors, professional courses included
• Sunk cost fallacy — there is a good reason why initial investments are required upfront, they force the investor to continue and fight back for the investments
• Competition and saturation — MLM encourage enrolling new distributors, who also wants to sell and recruit, which will inevitably lead to market saturation and stiff competition.

Conclusion

All things combined, read the terms and conditions carefully. A real MLM relies mostly on sales and partially on recruiting new members. However, not all MLM are real, some of them are straight up scams and financial pyramids. To some degree, referral programs can also be considered a sort of MLM, where the referring ones get some bonuses for bringing in the referrals.

This leads to the conclusion that MLM in itself is not something bad. But you have to be careful when siding with somebody — the managers might not always be fair and may hide something bad from you. So, examine the reviews, read the feedback, and use your judgement — nothing is free in this life, with great accomplishments requiring you to put in a great deal of effort.