The Power of Network Marketing

I run across people all the time, many of them involved in this business, who simply do not understand where the real power of network marketing lies.

The power of network marketing is in the potential for exponential growth. People think they can be real successful by running a lot of ads, personally generating a lot of leads, personally sponsoring a lot of people. And there's nothing wrong with any of that. But it is simply not enough. The power of network marketing comes from the fact that you can create a self-duplicating business, a network of distributors that, combined, can reach infinitely more people than you ever could personally. The key to tapping into that power is not necessarily in personally sponsoring a lot of warm bodies. The key to success is in making sure that those you do sponsor are quickly successful, and that they understand how to train others to be just as successful.

Many of the rules of traditional business do not apply in network marketing. It is a different sort of environment. You don't mass market your business, you personal-market it, one on one. You develop strong bonds with your customers and distributors, to an extent which would be completely unpractical in a traditional business.

So how do tap into the power of network marketing, the power of unlimited exponential growth? Here are several good suggestions, gathered from various sources.

Value your customers and distributors at whatever level they wish to be. If they want to be retail customers, appreciate them and serve them as such. If they want to be "preferred customers" (distributors who sign up primarily to get the discount), then value and appreciate them at that level. Personally, I feel that in the long run, "preferred customers" are perhaps the best kind of distributors. It may take a while, but eventually they will start recommending the products, doing a little retailing, then sponsoring, and before long they find themselves as business builders, even though they never had the intention to do the business. I've seen it happen time after time. And the business builders that come up through this route are going to be the most solid distributors you have. They have a strong commitment to the product(s), they have no false expectations. They simply use and recommend the products, which is precisely what network marketing is all about -- a lot of people, each doing their little bit, consistently and with commitment.

And value your business builders at whatever level they wish to be. If you find someone who wants to turn over their whole life to your opportunity, to work the business day and night, evenings and weekends, to contact everyone they know, to run ads, ask for referrals, and really hit the ground running, then you need to drop everything and work with that person to ensure his/her success. If you have a distributor who tells you she'll be at the meeting, and then never shows up, or one who keeps saying he wants to do the business but then never does anything, then you need to value that person as well. Don't push them to go to meetings. Don't pester them to call their friends. Simply let them do their own thing. Let them know you are available if they need anything. If you push them they'll leave. But if you value them and appreciate them at the level they choose, then at least you'll have a satisfied "preferred customer" who will, eventually, bring in more business.

And value the retailer. The distributor who doesn't want to sponsor a lot of people but who just wants to sell products to family and friends. These distributors are an excellent source of referrals and testimonials.

Be friends with your distributors. Develop personal relationships with them. Develop a rapport and a bonding. Do this without any expectations. Take a sincere interest in them as people.

Develop and use a marketing system that can be easily learned and duplicated. Don't try to make the business too complex. Don't promote your business in ways that require specialized skills or expertise. You may be able to recruit a lot of people this way, but those people, by and large, will not possess the specialized skills necessary to duplicate your success. And in this business, the downline copies whatever the upline does. So remember that whatever you do will be repeated by your downline. That goes for the bad as well as the good.

Work for your distributors' success. Work to make them successful, and you will be successful. The more people you help to be successful, the more successful you will be. This almost goes without saying. And work deep within your organization to lock in your downline. Make sure those people down on the lower levels are enjoying success. If you are in a breakaway system, it pays you to work with people who are so far below you that they don't even show up on your printout. Why? Because those people do show up on the printouts of the people who show up on your printout, and if you can work to assure the success of those on your printout they will remain on your printout, month after month, year after year.

Don't be surprised if a friend or acquaintance tries to sell you vitamins, herbs, homeopathic remedies, weight-loss powders, or other health-related products. Millions of Americans have signed up as distributors for multilevel companies that market such products from person to person. Often they have tried the products, concluded that they work, and become suppliers to support their habit.

Multilevel marketing (also called network marketing) is a form of direct sales in which independent distributors sell products, usually in their customers' home or by telephone. In theory, distributors can make money not only from their own sales but also from those of the people they recruit.

Becoming an MLM distributor is simple and requires no real knowledge of health or nutrition. Many people do so initially in order to buy their own products at a discount. For a small sum of money -- usually between $35 and $100 -- these companies sell a distributor kit that includes product literature, sales aids (such as a videotape or audiotape), price lists, order forms, and a detailed instructional manual. Most MLM companies publish a magazine or newsletter containing company news, philosophical essays, product information, success stories, and photographs of top salespeople. The application form is usually a single page that asks only for identifying information. Millions of Americans have signed up, including many physicians attracted by the idea that selling MLM products can offset losses attributable to managed care.

Questionable Financial Opportunity

Distributors can buy products "wholesale," sell them "retail," and recruit other distributors who can do the same. When enough distributors have been enrolled, the recruiter is eligible to collect a percentage of their sales. Companies suggest that this process provides a great money-making opportunity. However, it is unlikely that people who don't join during the first few months of operation or become one of the early distributors in their community can build enough of a sales pyramid to do well. And many who stock up on products to meet sales goals get stuck with unsold products that cost thousands of dollars. This strategy -- referred to as "front-end loading" -- is promoted with claims that it will push the new distributor to higher bonus and/or leadership levels quickly. Some companies permit direct ordering of their products, which avoids this problem. In July 1999, the National Association of Attorneys General announced that complaints about multilevel marketing and pyramid schemes were tenth on their list of consumer complaints.

An Amway Corporation report indicates that the vast majority of its distributors make very little money. Amway's 1998 "Business Review" tabulates figures gathered from April 1994 through March 1995 from distributors who attempted to make a retail sale, presented the Sales and Marketing Plan, received bonus money, or attended a company or distributor meeting in the month surveyed. The average "gross income" for these "active distributors" was $88 per month. The report defines "gross income" as the amount received from retail sales minus cost of products, plus any bonus. It does not take any business expenses into account. If this figure includes purchases for personal use, the potential profit would, of course, be less. The report also notes that "approximately 41% of all distributors of record were found to be active."

Dubious Health Claims

More than a hundred multilevel companies are marketing health-related products. Most claim that their products are effective for preventing or treating disease. A few companies merely suggest that people will feel better, look better, or have more energy if they supplement their diet with extra nutrients. When clear-cut therapeutic claims are made in product literature, the company is an easy target for government enforcement action. Some companies run this risk, hoping that the government won't take action until their customer base is well established. Other companies make no claims in their literature but rely on testimonials, encouraging people to try their products and credit them for any improvement that occurs.

Most multilevel companies tell distributors not to make claims for the products except for those found in company literature. (That way the company can deny responsibility for what distributors do.) However, many companies hold sales meetings at which people are encouraged to tell their story to the others in attendance. Some companies sponsor telephone conference calls during which leading distributors describe their financial success, give sales tips, and describe their personal experiences with the products. Testimonials also may be published in company magazines, audiotapes or videotapes. Testimonial claims can trigger enforcement action, but since it is time-consuming to collect evidence of their use, government agencies seldom bother to do so.

Government enforcement action against multilevel companies has not been vigorous. These companies are usually left alone unless their promotions become so conspicuous and their sales volume so great that an agency feels compelled to intervene. Even then, few interventions have substantial impact once a company is well established.

Dubious Promotions

During the past 15 years, I have collected information on more than 100 multilevel companies marketing health products. Here are some examples of improper marketing activities:

• Body Wise International, of Carlsbad, California, markets "fitness" products and weight-management products. In 1995 the FTC charged the company with making unsubstantiated claims that Cardio Wise was "designed to give an extra margin of insurance against heart disease" and that its weight-management products would foster weight loss without dieting. The company signed an FTC consent agreement prohibiting it from making unsubstantiated health-related claims in the future.
• At one time, Mary Kay, well known for its cosmetic products, marketed a $29.50-per-month daily supplement packet alleged "to help bridge the gap between what a healthy diet provides and what a woman needs for optimum health and beauty." Tufts University Diet & Nutrition Letter observed: (1) the supplements contain huge amounts of thiamin, riboflavin, vitamin B6, and vitamin B12, which almost all Americans get from their food; (2) they lack iron, which might benefit some women of childbearing age; and (3) more rationally formulated multivitamin/mineral preparations are available elsewhere for one tenth the cost.
• In 1993, Melaleuca Inc., of Idaho Falls, Idaho, began offering a "wellness assessment" by a company that provided in-home testing. The procedure included a questionnaire, a blood cholesterol test, a blood-pressure reading, and an estimate of the percentage of body fat. The resultant report evaluated personal risk factors and recommends modifications in diet, exercise habits, and lifestyle. The recommendations include taking a "balanced vitamin/mineral supplement every day" and "working closely with a 'Vitality for Life counselor' (a Melaleuca distributor) to implement the suggested changes. Prospects were then encouraged to purchase a "Vitality Pack" of "55 different vitamins, minerals, and other nutrients, all in the proper amounts and proper proportions," which wholesales for $263.40 for an annual supply. Although the health-risk appraisal could provide useful information, the Vitality Pack is a waste of money. People who wish to take a multivitamin/multimineral formula can obtain equivalent nutrients at a drugstore for less than $50 per year. The company also marketed a patented "fat conversion activity bar," an expensive candy bar whose ingredients are claimed to make exercise easier by "inhibiting the body's ability to hold on to fat."
• Matol Botanical International, a Canadian firm, markets Km, a foul-tasting extract of 14 common herbs. Km was originally marketed as Matol, which was claimed to be effective for ailments ranging from arthritis to cancer, as well as for rejuvenation. Canada's Health Protection Branch took action that resulted in an order for the company to advertise only the product name, price, and contents. In 1988 the FDA attempted to block importation of Matol into the United States. However, the company evaded the ban by adding an ingredient and changing the product's name. The product literature acknowledges that Km has never been tested for effectiveness against any disease and states that distributors should not diagnose or recommend its products for any specific disease. However, many distributors do so
• Nature's Sunshine Products, of Spanish Fork, Utah, markets herbs, vitamins, other nutritional supplements, homeopathic remedies, skin and hair-care products, water treatment systems, cooking utensils, and a weight-loss plan. Its more than 400 products include many that are claimed to "nourish" or "support" various body organs. Its salespeople, dubbed "Natural Health Counselors," are taught to use iridology (a bogus diagnostic procedure in which the eyes are examined), applied kinesiology (a bogus muscle-testing procedure), and other dubious methods to convince people that they need the products.
• Nu Skin International, Inc., of Provo, Utah, sells body-care products and dietary supplements. Nu Skin's Interior Design division markets expensive antioxidant, phytochemical, and "active enzyme" products. The enzyme products are said to be important because "the majority of cooked or processed foods we eat lack an ideal level of enzyme activity" needed for digestion. This statement is nonsense because the enzymes needed for digestion are made by the body's digestive organs. In 1993, the company and three of its distributors agreed to pay a total of $1,225,000 to settle FTC charges that they made unsubstantiated claims for Nutriol Hair Fitness Preparation and two skin-care products. In 1997, the company agreed to pay $1.5 million to settle charges that it had made unsubstantiated claims for five more of its products. The products, which contained chromium picolinate and L-carnitine were falsely claimed to reduce fat, increase metabolism, and preserve or build muscle.
• Sunrider Corporation, of Torrance, California, claims that its herbal concoctions can help "regenerate" the body. Although some ingredients can exert pharmacologic effects on the body, there is little evidence they can cure major diseases or that Sunrider distributors are qualified to advise people about how to use them properly. During the mid-1980s the FDA ordered Sunrider to stop making health claims for several of its products. In 1989, the company signed a consent agreement to pay $175,000 to the state of California and to stop representing that its products have any effect on disease or medical conditions. The company toned down its literature but continued to make therapeutic claims in testimonial tapes included in its distributor kits. In 1992 a jury in Phoenix, Arizona, concluded that Sunrider had violated Arizona's racketeering laws and awarded $650,000 to a woman who claimed she had been misled by company representations and had become ill after using some of its products. On January 7, 1997, The Wall Street Journal reported that Sunrider's president Tei-Fu Chen and his wife Oi-Lin Chen were indicted for conspiracy, tax evasion, and smuggling. The article stated that they had (1) underreported their 1987-90 income by more than $125 million, (2) used foreign companies they controlled to overcharge Sunrider for ingredients so the company could understate its profits, (3) wired millions of dollars to pay the inflated charges, but "recycled" the money to purchase U.S. real estate and Chinese antiques, and (4) filed falsely low customs declarations to reduce the import duty on dozens of art works. In September 1997, the Chens and the company pled guilty to tax and customs frauds. Mr. Chen was sentenced to two years in federal prison, to be followed by two years of supervised release including six months of home detention. Mrs. Chen was sentenced to two years probation, including six months of home detention. The financial penalties totaled $99.8 million. The Corporation was fined $500,000 for filing a false tax return for 1989. Mr. Chen agreed to pay the Customs Service $4 million to avoid forfeiting antique items that had been seized. In related actions, the Chens had paid the Internal Revenue Service $93 million in back taxes, interest, and penalties, and paid the Customs Service $2.3 million in additional duties. In 1998, the FDA issued a warning letter citing manufacturing violations and stating that it was illegal for the company to market "spray vitamins" as dietary supplements.

Motivation: Powerful but Misguided

The "success" of network marketing lies in the enthusiasm of its participants. Most people who think they have been helped by an unorthodox method enjoy sharing their success stories with their friends. People who give such testimonials are usually motivated by a sincere wish to help their fellow humans. Since people tend to believe what others tell them about personal experiences, testimonials can be powerful persuaders.

Perhaps the trickiest misconception about quackery is that personal experience is the best way to tell whether something works. When someone feels better after having used a product or procedure, it is natural to give credit to whatever was done. However, this is unwise. Most ailments are self-limiting, and even incurable conditions can have sufficient day-to-day variation to enable bogus methods to gain large followings. In addition, taking action often produces temporary relief of symptoms (a placebo effect). For these reasons, scientific experimentation is almost always necessary to establish whether health methods are really effective. Instead of testing their products, multilevel companies urge customers to try them and credit them if they feel better. Some products are popular because they contain caffeine, ephedrine (a stimulant), valerian (a tranquilizer), or other substances that produce mood-altering effects.

Another factor in gaining devotees is the emotional impact of group activities. Imagine, for example, that you have been feeling lonely, bored, depressed or tired. One day a friend tells you that "improving your nutrition" can help you feel better. After selling you some products, the friend inquires regularly to find out how you are doing. You seem to feel somewhat better. From time to time you are invited to interesting lectures where you meet people like yourself. Then you are asked to become a distributor. This keep you busy, raises your income, and provides an easy way to approach old friends and make new ones -- all in an atmosphere of enthusiasm. Some of your customers express gratitude, giving you a feeling of accomplishment. People who increase their income, their social horizons, or their self-esteem can get a psychological boost that not only can improve their mood but also may alleviate emotionally-based symptoms.

Multilevel companies refer to this process as "sharing" and suggest that everyone involved is a "winner." That simply isn't true. The entire process is built on a foundation of deception. The main winners are the company's owners and the small percentage of distributors who become sales leaders. The losers are millions of Americans who waste money and absorb the misinformation.

Do you think multilevel participants are qualified to judge whether prospective customers need supplements -- or medical care? Even though curative claims are forbidden by the written policies of each company, the sales process encourages customers to experiment with self-treatment. It may also promote distrust of legitimate health professionals and their treatment methods.

Some people would argue that the apparent benefits of "believing" in the products outweigh the risks involved. Do you think that people need false beliefs in order to feel healthy or succeed in life? Would you like to believe that something can help you when in fact it is worthless? Should our society support an industry that is trying to mislead us? Can't Americans do something better with the billion or more dollars being wasted each year on multilevel "health" products?

Physician Involvement

During the past few years, many physicians have begun selling health-related multilevel products to patients in their offices. The companies most involved appear to be Amway, Body Wise, Nu Skin (Interior Design), and Rexall. Doctors are typically recruited with promises that the extra income will replace income lost to managed care. In June 1999, the AMA House of Delegates approved ethical guidelines emphasizing that physicians should not coerce patients to purchase health-related products or recruit them to participate in marketing programs in which the physician personally benefits, financially or otherwise, from the efforts of their patients. The guidelines clearly frown on doctors profiting from the sale of health-related nonprescription products such as dietary supplements.

The multilevel marketing (MLM) field grows, and its member companies multiply. Solicitations to join seem to be everywhere. Its promoters would like you to believe that it is the wave of the future, a business model that is gaining momentum, growing in acceptance and legitimacy, and will eventually replace most other forms of marketing. Many people are led to believe that success will come to anyone who believes in the system and adheres to its methods.
Unfortunately, the MLM business model is a hoax that is hidden beneath misleading slogans. Calling it a "great business opportunity" makes no more sense than calling the purchase of a lottery ticket a "business venture" and winning the lottery a "viable income opportunity for everyone." MLM industry claims of distributor income potential, its glorified descriptions of the "network'" business model, and its prophecies of dominating product distribution have as much validity in business as UFO sightings do in the realm of science.
The very legality of the MLM system rests tenuously upon a single 1979 court ruling on one company. The guidelines for legal operation set forth in that ruling are routinely ignored by the industry. Lack of governing legislation or oversight by any designated authority also enables the industry to endure despite occasional prosecutions by state attorneys general or the FTC.
MLM's economic scorecard is characterized by massive failure rates and financial losses for millions of people. Its structure in which positions on an endless sales chain are purchased by selling or buying goods is mathematically unsustainable, and its system of allowing unlimited numbers of distributors in any market area is inherently unstable. MLM's espoused core business -- personal retailing -- is contrary to trends in communication technology, cost-effective distribution, and consumer buying preferences. The retailing activity is, in reality, only a pretext for the actual core business, which is enrolling investors in pyramid organizations that promise exponential income growth.
As in all pyramid schemes, the incomes of those distributors at the top and the profits to the sponsoring corporations come from a continuous influx of new investors at the bottom. Viewed superficially in terms of company profits and the wealth of an elite group at the pinnacle of the MLM industry, the model can appear viable to the uninformed, just as all pyramid schemes do before they collapse or are prosecuted by authorities.
The growth of MLM is the result of deceptive marketing that plays upon treasured cultural beliefs, social and personal needs, and some economic trends, rather than its ability to meet any consumer needs. The deceptive marketing is nurtured by a general lack of professional evaluation or investigation by reputable business media. Consequently, there is widespread belief that MLM is a viable business investment or career choice for nearly everyone and that the odds of financial success in the venture are comparable or better than other employment or business ventures.
MLM's true constituency is not the consuming public but hopeful investors. The market for these investors grows significantly in times of economic transition, globalization, and employee displacement. Promises of quick and easy financial deliverance and the linking of wealth to ultimate happiness also play well in this market setting. The marketing thrust of MLM is directed to prospective distributors, rather than product promotions to purchasers. Its true products are not long distance phone services, vitamins, or skin creams, but the investment propositions for distributorships which are deceptively portrayed with images of high income, low time requirements, small capital investments, and early success.
Here are ten lies I have identified during more than 20 years of observing the MLM marketplace:
Lie #1: MLM offers better opportunities than all other conventional business and professional models for making large amounts of money.
Truth: For almost everyone who invests, MLM turns out to be a losing financial proposition. Fewer than 1% of all MLM distributors ever earn a profit and those earning a sustainable living at this business are a much smaller percentage still.
Extraordinary sales and marketing obstacles account for much of this failure, but even if the business were more feasible, sheer mathematics would severely limit the opportunity. The MLM business structure can support only a small number of financial winners. If a 1,000-person downline is needed to earn a sustainable income, those 1,000 will need one million more to duplicate the success. How many people can realistically be enrolled? Much of what appears as growth is in fact only the continuous churning of new enrollees. The money for the rare winners comes from the constant enrollment of armies of losers. With no limits on numbers of distributors in an area and no evaluation of market potential, the system is also inherently unstable.
Lie #2: Network marketing is the most popular and effective new way to bring products to market. Consumers like to buy products on a one-to-one basis in the MLM model.
Truth: Personal retailing -- including nearly all forms of door-to-door selling -- is a thing of the past, not the wave of the future. Retailing directly to friends on a one-to-one basis requires people to drastically change their buying habits. They must restrict their choices, often pay more for goods, buy inconveniently, and engage in potentially awkward business relationships with close friends and relatives. In reality, MLM depends on reselling the opportunity to sign up more distributors.
Lie #3: Eventually all products will be sold by MLM. Retail stores, shopping malls, catalogs and most forms of advertising will soon be rendered obsolete by MLM.
Truth: Fewer than 1% of all retail sales are made through MLM, and much of this is consists of purchases by hopeful new distributors who are actually paying the price of admission to a business they will soon abandon. MLM is not replacing existing forms of marketing. It does not legitimately compete with other marketing approaches at all. Rather, MLM represents a new investment scheme couched in the language of marketing. Its real products are distributorships that are sold through misrepresentation and exaggerated promises of income. People are buying products in order to secure positions on the sales pyramid. The possibility is always held out that you may become rich if not from your own efforts then from some unknown person ("the big fish") who might join your "downline."
MLM's growth does not reflect its value to the economy, customers, or distributors, but the high levels of economic fear, insecurity, wishes for quick and easy wealth. The market dynamics are similar to those of legalized gambling, but the percentage of winners is much smaller.
Lie #4: MLM is a new way of life that offers happiness and fulfillment. It provides a way to attain all the good things in life.
Truth: The most prominent motivational themes of the MLM industry, as shown in industry literature and presented at recruitment meetings, constitute the crassest form of materialism. Fortune 100 companies would blush at the excess of promises of wealth, luxury, and personal fulfillment put forth by MLM solicitors. These appeals actually conflicts with most people's true desire for meaningful and fulfilling work at something in which they have special talent or interest.
Lie #5: MLM is a spiritual movement.
Truth: The use of spiritual concepts like prosperity consciousness and creative visualization to promote MLM enrollment, the use of words like "communion" to describe a sales organization, and claims that MLM fulfills Christian principles or Scriptural prophecies are great distortions of these spiritual practices. Those who focus their hopes and dreams upon wealth as the answer to their prayers lose sight of genuine spirituality as taught by religions. The misuse of these spiritual principles should be a signal that the investment opportunity is deceptive. When a product is wrapped in the flag or in religion, buyer beware! The "community" and "support" offered by MLM organizations to new recruits is based entirely upon their purchases. If the purchases and enrollment decline, so does the "communion.'"
Lie #6: Success in MLM is easy. Friends and relatives are the natural prospects. Those who love and support you will become your life-time customers.
Truth: The commercialization of family and friendship and the use of"'warm leads" advocated in MLM marketing programs are a destructive element in the community and very unhealthy for individuals involved. People do not appreciate being pressured by friends and relatives to buy products. Trying to capitalizing upon personal relationships to build a business can destroy one's social foundation.
Lie #7: You can do MLM in your spare time. As a business, it offers the greatest flexibility and personal freedom of time. A few hours a week can earn a significant supplemental income and may grow to a very large income, making other work unnecessary.
Truth: Making money in MLM requires extraordinary time commitment as well as considerable personal skill and persistence. Beyond the sheer hard work and talent required, the business model inherently consumes more areas of one's life and greater segments of time than most occupations. In MLM, everyone is a prospect. Every waking moment is a potential time for marketing. There are no off-limit places, people, or times for selling. Consequently, there is no free space or free time once a person enrolls in MLM system. While claiming to offer independence, the system comes to dominate people's entire life and requires rigid conformity to the program. This is why so many people who become deeply involved end up needing and relying upon MLM desperately. They alienate or abandon other sustaining relationships.
Lie #8. MLM is a positive, supportive new business that affirms the human spirit and personal freedom.
Truth: MLM is largely fear-driven. Solicitations inevitably include dire predictions about the impending collapse of other forms of distribution, the disintegration or insensitivity of corporate America, and the lack of opportunity in other occupations. Many occupations are routinely demeaned for not offering"unlimited income." Working for others is cast as enslavement for "losers." MLM is presented as the last best hope for many people. This approach, in addition to being deceptive, frequently discourages people who otherwise would pursue their own unique visions of success and happiness. A sound business opportunity does not have to base its worth on negative predictions and warnings.
Lie #9. MLM is the best option for owning your own business and attaining real economic independence.
Truth: MLM is not true self-employment. "Owning" an MLM distributorship is an illusion. Some MLM companies forbid distributors to carry other companies' products. Most MLM contracts make termination of the distributorship easy and immediate for the company. Short of termination, downlines can be taken away arbitrarily. Participation requires rigid adherence to a "duplication" model, not independence and individuality. MLM distributors are not entrepreneurs but joiners in a complex hierarchical system over which they have little control.
Lie #10: MLM is not a pyramid scheme because products are sold.
Truth: The sale of products does not protect against anti-pyramid-scheme laws or unfair trade practices set forth in federal and state law. MLM is a legal form of business only under rigid conditions set forth by the FTC and state attorneys general. Many MLMs are violate these guidelines and operate only because they have not been prosecuted. Recent court rulings are using a 70% rule to determine an MLM's legality: At least 70% of all goods sold by the MLM company must be purchased by nondistributors. This standard would place most MLM companies outside the law. The largest MLM acknowledges that only 18% of its sales are made to nondistributors.

Multi-level marketing (MLM, now sometimes called network marketing) is a business modeldirect marketing with franchising. that combines

Multi-level marketing businesses function by recruiting salespeople (also called Distributors, Independent Business Owners, IBOs, Franchise Owners, Sales Consultants, Beauty Consultants, Consultants, etc.) to sell a product and offer additional sales commissions based on the sales of people recruited into their downline, an organization of people that includes direct recruits, recruits' recruits, etc. This arrangement is similar to franchise arrangements where royalties are paid from the sales of individual franchise operations to the franchisor as well as to an area or region manager, but in some MLM programs, there can be seven or more levels of people receiving royalties from one person's sales.

Legitimacy

Multi-level marketing has an image problem due to the fact that it is often difficult to distinguish MLMs from illegal pyramid or Ponzi schemes. MLM businesses operate in the United States in all 50 states and in more than 100 other countries, and new businesses may use terms like "affiliate marketing" or "home-based business franchising". However, many pyramid schemes try to present themselves as legitimate MLM businesses.

In the most legitimate MLM companies, commissions are earned only on sales of the company's products or services. No money may be earned from recruiting alone ("sign-up fees"), though money earned from the sales of members recruited is one attraction of MLM arrangements. If participants are paid primarily from money received from new recruits, or if they are required to buy more product than they are likely to sell, then the company is a pyramid or Ponzi scheme, which is illegal in most countries.

New salespeople may be required to pay for their own training and marketing materials, or to buy a significant amount of inventory. A commonly adopted test of legality is that MLMs follow the so-called 70% rule which prevents members "inventory loading" in order to qualify for additional bonuses. The 70% rule requires participants to sell 70% of previously purchased inventory before procuring new orders. There are however variations in interpretations of this rule. Some attorneys insist that 70% of purchased inventory should be sold to people who are not participants in the business, while many MLM companies allow for self-consumption to be a significant part of the sales of a participant. The Federal Trade Commission offers advice for potential MLM members to help them identify those which are likely to be pyramid schemes.

Compensation plans

Companies have devised a variety of MLM compensation plans over the decades.

• Unilevel or Stairstep Breakaway plans are the oldest and most popular. They feature two types of distributors -- managers and non-managers -- and three types of pay:
  • Baseshop overrides are overrides of managers from their subordinate non-managers, collectively called a baseshop. This is the same as any other sales organization.
  • Generational overrides are overrides of managers from the baseshop of managers who were previously their subordinate. Most plans compensate at least three generations of such managers.
  • Executive bonuses are commissions for managers who exceed a sales quota. For example, 2% of the total company sales revenue may go to a bonus pool that is shared monthly pro rata to managers who exceed $10,000 in that month.
• Matrix plans limit the width of each level in a distributor's group, forcing strong distributors to pile ("spillover") their recruits over people who did not sponsor them.
• Binary plans limit the width of each level to two legs. Commissions are based on "cycles," where a distributor is paid a fixed amount whenever both legs achieve a certain number of sales units each. Commissions are paid incrementally when the sales volume in each leg matches.
• Elevator or Matrix schemes feature a board or a list on which each distributor pays in one or more product units to participate. When a certain number of units have been paid in, the structure splits and the earlier participant receives consideration. The Matrix scheme article discusses the legality of this plan.

Criticism of MLM

The FTC issued a decision, In re. Amway Corp. in 1979, which indicated that multi-level marketing was not illegal per se. However, Amway was found guilty of price fixing (by requiring "independent" distributors to sell at the low price) and making exaggerated income claims.

The Federal Trade Commission advises that multi-level marketing organizations with greater incentives for recruitment than product sales are to be viewed skeptically. In April 2006, it proposed a Business Opportunity Rule intended to require all sellers of business opportunities—including MLMs—to provide enough information to enable prospective buyers to make an informed decision about their probability of earning money. FTC trade regulation rules usually take 1-1/2 to 3 years before a final rule is established.

Criticisms have been raised against MLM programs for being cult-like in nature. Many MLM programs feature intense motivational programs, which can be hard to distinguish from cult propaganda. Criticism of Amway as a cult have been regarded as largely baseless, though some of the "Independent Business Organizations" within Amway have been accused of operating as cults.

Another criticism is that MLM programs are set up to make most distributors fail, as there is a continued incentive to continue to recruit distributors even as the products have reached market saturation, thus causing the average earnings per distributor to continue to fall.