What is Mutli-Level Marketing (MLM)

What you need to know about MLM

MLM Explained
MLM: The good, bad and misunderstood. Apcuk | Getty Images

Multi level marketing, or MLM, is a form of direct sales home business in which independent representatives sell goods and services from a company to an end consumer. The multi-level aspect refers to each representatives ability to recruit and train other representatives, and earn a commission on their reps' sales.

Income earned in MLM comes from the commission earned on personal sales, as well as a percentage of the sales earned by other reps recruited by you.

MLM Terms to Know:

The Plan: Most MLM reps refer to their program as "the plan" which outlines their marketing and compensation plans.

Sponsor: The sponsor is the representative who directly recruits another person into the business. For example, MLM member A recruits member B. Member A is the sponsor and is responsible for training member B.

Recruit: A recruit may also be referred to a team member. It's a person brought into the business by a sponsor as a new member.

Downline: Your downline contains the recruits brought in below you. This can include members you've recruited as well as those your recruits have brought into the business.

Upline: The upline consists of the representative sponsors who came in before you. For example, if rep A recruited rep B, who recruited rep C, who recruited you, your upline is C, B, and A. 

Compensation Plan: Similar to the plan, this outlines all the ways reps earn money.

To be legal and not a scam, the focus needs to be on the sales of products and services, not on recruitment of new members. Along with commissions on sales made by you and your team, many companies pay bonuses and increase commission splits based on volume of sales.

Network Marketing: Multi-level marketing is sometimes referred to as network marketing as well.

Is MLM Legal?

There are many myths and misconceptions about MLM, including it's illegal. For an MLM to be legal, it needs three things:

1. A quality product or service

2. Income is earned off sales of products or services

3. The focus is on sales, not recruitment alone. 

A program with no or a low-quality product, or with a focus on getting paid per recruit, could be an illegal pyramid scheme. However, don't let the term pyramid throw you off. It's not the shape of the organization that makes it illegal. What makes it illegal is the lack of a quality product, or that income is earned on recruiting, not commissions from sales. 

Are MLM Businesses Successful?

MLM businesses get a bad rap because they have such a high "failure" rate. However, there is much misinformation regarding these stats. First, the failure rate in business in general is fairly high. Second, it's easier to walk away from a business in which you invested $50 versus one in which you invested $5,000. Finally, because of the way MLMs are presented, many people sign up for the quick buck, instead of paying attention to whether or not they like the product or are willing to follow the marketing plan. These issues are not MLM businesses' fault.

Like any business, success or failure depends on the owner/rep.

The truth is, an MLM business is like any other business. You can succeed with an MLM business if you do what it takes to make money. While most MLM businesses have their own marketing strategies, to be successful, you need to employ the time tested business building activities; find your target market, attract your market, and sell to your market.

What About Saturation?

One strategy some sketchy MLMers use to recruit is by giving the impression that if you don't join now, you'll miss out. They tell you that if you don't get in early, the market will saturate and therefore, there won't be anybody for you to sell to or recruit. But that myth is nonsense. First, how many people do you know and how many buy from or are in an MLM? Odds are very few, which means there are many potential customers and recruits.

Further, every day there are people who turn 18 and enter eligibility to join an MLM company. Finally, new people are born every day, which means in 18 years, they'll be more people to sell to and recruit. The idea that you'll run out of customers or potential recruits is bunk. 

How to Become Successful in MLM

Success in MLM requires several things:

1) Find a company that is a member of the Direct Selling Association, which requires members to uphold a code of ethics. 

2) Choose a product or service you like and can get enthusiastic about sharing with others. A consumable product is often the best bet so you can get regular re-sales to repeat customers.

3) Studying the company's history and compensation plan. Understand how the money is made and recommendations for marketing your business. 

4) Treat your MLM business like a business. Despite what you might hear, MLM isn't a get rich scheme. Like any business it requires you to define your target market, reach out to your market, and make sales.You have a sponsor to help you, but she isn't going to do the work for you.Your success in MLM or any business is based on the quality of work you do.

Updated April 2017 by Leslie Truex