What is Multilevel Marketing (MLM)?

An MLM company is like a product manufacturer, while the distributors are like retail stores…

Most consumer goods companies don’t sell their own products. Instead, they manufacture them and send them to stores like Walmart and Amazon, who then sell them to the consumers. That’s how MLM companies work, except they send the products to distributors instead of retailers to sell to the public.

Multilevel marketing (MLM) companies generally sell a physical product. Rather than selling their products in retail stores, MLM companies recruit distributors (sometimes referred to as consultants or associates) to sell the products.

The distributors earn income by selling the product. They might sell the products online or in-person, often to friends and family.

In addition to making money by selling the company’s product, a distributor also makes money by recruiting additional distributors to work under them. The people who a distributor recruits are referred to as his or her downline.

Distributors take home a percentage of the revenue from their downline. The more recruits a distributor can add to their downline, the more money they might be able to make.

MLM company recruits often have to make a significant financial investment into the company before they can begin making money. Many companies require them to purchase a starter kit. Some starter kits cost around $50 and include sales manuals and brochures.

Other companies require recruits to buy inventory for hundreds of dollars, and the recruits then turn around and sell the inventory, keeping the profits.

Many people use the terms MLM and pyramid scheme interchangeably. And while some MLM companies (sometimes known as direct sales companies) might be pyramid schemes, that’s not the case for all of them.

A pyramid scheme is when an individual or company recruits participants to sell a product with the promise of significant financial returns in a short period of time. Pyramid schemes place a heavy emphasis on the recruitment of new participants.

From the description, it might sound like pyramid schemes and MLM companies have the same business model. And while they have some similarities, there are some critical distinctions as well.

Pyramid schemes don’t have a legitimate product to sell. They often promote products on their websites but don’t actually make any of their revenue from sales to consumers. They go to great lengths online to make the company look legitimate, but it isn’t.

Pyramid schemes rely entirely on recruiting for their revenue. The promoter, often the business owner, attempts to get new participants to join with the promise of passive income and substantial financial returns. When someone signs up, they have to pay a fee.

Once they join, the new participant is instructed to find new participants to join in their downline. When they recruit a new member, and the recruit pays their start-up fee, the person who recruited them gets a commission.

MLM companies and pyramid schemes are similar in that they encourage distributors to recruit new participants to join. The difference, however, is that an MLM allows distributors the opportunity to make money selling the product. With a pyramid scheme, there is no legitimate product, or the participants can only make money by recruiting new participants.

Some companies that market themselves as MLM companies turn out to be pyramid schemes after all. In October 2019, the Federal Trade Commission (FTC) announced that the company AdvoCare was running an illegal pyramid scheme.

The company marketed products such as energy drinks, shakes, and supplements. They recruited distributors by promising large payouts that would allow them to quit their day jobs.

Recruits had to pay thousands of dollars to join AdvoCare, and then were only able to earn money from the company by recruiting other distributors. The FTC banned AdvoCare from operating as an MLM company and required them to pay $150M in consumer refunds.

Not all companies that the FTC has charged with running a pyramid scheme have had to end their MLM practices. In 2016, the health company Herbalife was found to be running an illegal business model. Like AdvoCare, Herbalife promised large profits to distributors, but then only rewarded them for recruiting new participants rather than selling the product.

Instead of banning Herbalife from operating as an MLM company, the FTC instead required Herbalife to change its compensation system so that distributors were rewarded for selling the product rather than just for recruiting new distributors.

MLM companies have come under a lot of fire over the years for their business models and the treatment of their recruits.

One of the most unfortunate truths about MLM companies is that most people who join make little to no money. Some even end up losing money or going into debt to finance the upfront costs that come with joining an MLM company.

Surveys of MLM distributors have shown that this business model is a losing battle for most people who join. Most distributors earn well under minimum wage when you account for the time they put into the business — Many even earn less than $1 per hour.

The chances are slim that participants will make any significant money from an MLM company. Most distributors have made less than $500, and many never make a sale at all.

Not only do participants often fail to earn any money from joining an MLM, but many go into debt as well. A survey of MLM participants found that nearly one-third of distributors finance their business endeavors through credit cards and personal loans. They think they’ll make enough money selling products to pay off the debt, but that rarely happens.

Some distributors have even reported that MLM recruiters encourage recruits to go into debt to get started or crowdsource the start-up costs on sites like GoFundMe.

Finally, MLM companies can be problematic because of how closely they resemble pyramid schemes. Though the Federal Trade Commission (FTC) clarifies that the two aren’t entirely the same, it also acknowledges the similarities.

MLM companies still place a strong emphasis on recruitment, financially rewarding distributors who can recruit new participants to join their downline.

As a result, participants might sign up in the hopes of making money selling the product, only to find out that the real money comes from recruitment. This setup can lead to an unsustainable business model for both the distributor and the company, as well as the possibility of ending up in legally murky territory.

MLM companies sell a wide variety of products. Some of the most popular MLM companies, such as Avon and Mary Kay, sell makeup and skincare products. And while the MLM trend has increased significantly in recent years, the business model is hardly new to the makeup industry.

Avon has been in business since 1939 and is one of the largest beauty brands in the United States. Mary Kay has been around since 1963.

It’s not just beauty products that MLM companies sell. The health industry is another that has its fair share of MLM companies. Businesses such as Herbalife, Isagenix, and Team Beachbody market themselves as weight loss companies that sell shakes and workout programs, among other things.

MLM companies also exist for home goods. In fact, Tupperware was one of the original MLM companies — The company dates back to the 1950s. Tupperware marketed itself as a way for women to make a bit of money, given that many of them didn’t work outside the home at the time. The company still has sales representatives today.

Some MLM companies also sell clothing. For example, the MLM company LuLaRoe sells patterned leggings and other clothing products. The company boasted its best year in 2017, with $2.3B in sales.

MLM companies have made their way into plenty of other industries as well, including essential oils, candles, jewelry, cleaning supplies, and luggage.

There’s no shortage of MLM companies in the market today. Here are some of the top MLM companies based on revenue. This information is from a list published by expixel, an MLM software company:

• Amway: With a 2018 revenue of $8.8B, Amway continues to be the highest-earning MLM company. The company was founded in 1959 and sells health, beauty, and home products.
• Avon: Avon is one of the oldest MLM companies around today. They sell makeup and beauty products, and the company’s 2018 revenue was $5.5B.
• Herbalife: Even though the company was penalized by the FTC, it has bounced back to be one of the largest MLM companies. In 2018, the company made $4.9B.
• Infinitus: This China-based MLM company sells herbal healthcare products. In 2018, the company’s revenue was $4.1B.
• Natura Cosmeticos: This Brazil-based cosmetics company made $3.37B in 2018.
• Vorwerk: Like Avon, Vorwerk has been around for more than 100 years. The company is based in Germany, sells household products, and made $3.08B in 2018.
• Mary Kay: Bringing in $3B in 2018, Mary Kay is a company that sells makeup and beauty products.
• Nu Skin: Another personal care company, Nu Skin, made $3.37B in 2018.
• Forever Living: Forever Living is an MLM company that sells aloe vera based products, with 2018 revenue of $2.5B
• Melaleuca: This wellness company had the 10th highest revenue of all MLM companies in 2018, bringing in a total of $2.1B.

Source: epixel MLM Software

Proceed with extreme caution. There are some MLM companies out there that operate as legitimate businesses, and distributors can earn money working for them. If you have a background in sales, you might find some success. But there are some things to keep in mind before signing up.

First, do your research about the company you’re considering joining. Be sure they haven’t run into any legal trouble, and read some online reviews from past and current distributors.

Research the product as well — Is the company selling a product you’d feel comfortable putting your name behind? Some MLM companies sell quality products, but that’s not a given.

It’s also important to keep in mind the risk that comes with joining an MLM business. If the MLM company you’re joining requires you to pay for a starter kit or inventory, be sure that it’s money you can afford to lose, as there’s no guarantee you’ll get your investment back.

Avoid going into debt to finance your new business venture, and go into it with the knowledge that you might spend time and money without a return on your investment.

Make sure you understand what other costs you’re signing up for as well. Some MLM companies only require that you buy the starter kit and nothing else. Others might require you to regularly purchase new inventory or pay to travel to business conferences and events. These costs can add up quickly.

If the company requires that you buy inventory up front, ask about their refund policy. Some MLM companies have come under fire from distributors and the public because they didn’t allow distributors to return their products for a refund, even when the products were damaged. This policy can cause distributors to lose a lot of money.

Finally, be sure to read the fine print and fully understand the company’s business model. If the company prioritizes the recruitment of new distributors over selling the product and ensuring customer satisfaction, then you might want to rethink your decision to join.