Multi-level marketing(MLM),also called pyramid selling, network marketing and referral marketing is a marketing strategy for the sale of products or services where the revenue of the MLM company is derived from a non-salaried workforce, selling the company’s products/services, while the earnings of the participants are derived from a pyramid-shaped or binary compensation commission system. A pyramid scheme is a business that recruits members via a promise of payments or services for enrolling others into the scheme, rather than supplying investment or sale of products. As recruiting multiplies, recruiting become quickly impossible and most members are unable to make profit as such pyramid schemes are unsustainable and often illegal though the schemes have existed for at least a century in different guise. Although, each MLM company dictates its own specific financial compensation plan for the payout of any earnings to their respective participants, the common features that is found across all MLMs is that the compensation plans theoretically pay out to participants only from two potential revenue streams. The first is paid out from commissions of sales made by the participants directly to their own retail customers. The second is paid out from commissions based upon the wholesale purchases made by other distributors below the participants who have recruited those other participants into the MLM; in the organizational hierarchy of MLMs, these participants are referred to as one’s down line distributors.
MLM salespeople are therefore expected to sell products directly to end-user retail consumers by means of relationship referrals and word of mouth marketing, but most importantly they are incentivized to recruit others to join the company’s distribution chain as fellow salespeople so that these can become down the distributors. According to a report that studied the business models of 350 MLMs, published on Federal Trade Commission’s website, at 99% of people who join MLM companies lose money. Nonetheless, MLMs function because downline participants are encouraged to hold on to the belief that they can achieve large returns, while the statistical improbability of this is de-emphasized. MLMs have been made illegal or otherwise strictly regulated in some jurisdictions as a mere variation of the traditional pyramid scheme including mainland China. The overwhelming majority of MLM participants (most sources estimated to be 99.25% of all MLM distributors) participate at either an insignificant or nil net profit. Indeed, the largest proportion of participants must operate at a net loss (after expenses are deducted) so that the few individuals in the uppermost level of the MLM pyramid can derive their significant earnings. Said earnings are then emphasized by the MLM Company to encourage their continued participation at a continuing financial loss.
The end result of the MLM business model is, therefore one of a company (the MLM company) selling its products and services through a non-salaried workforce (Partners) working for the MLM company on a commission only basis while the partners simultaneously constitute the overwhelming majority of the vary consumers of the MLM company’s products and services that they, as participants of the MLM,are selling to each other in the hope of one day themselves being at the top of the pyramid. This creates great profit for MLM company’s actual owners and shareholders. Many MLM companies do generate billions of dollars in annual revenue and hundreds of millions of dollars in annual profit. However the profit of the MLM Company are accrued at the detriment to the majority of the Company’s constituent workforce (the MLM participants).Only some of the said profit is then significantly shared with individuals’participants at the top of the MLM distributorship pyramid. The earning of those top few participants is emphasized and championed at Company’s seminars and Conferences, thus creating an illusion of how one can potentially become financially successful if they become a participant in the MLM. This is then advertised by the MLM Company to recruit more distributors to participate in the MLM with a false anticipation of earning margins which are in reality theoretical and statistically improbable. The main sales pitch of MLM Companies to their participants and prospective participants is not the Company’s products or services. The product/services are largely peripheral to the MLM model. Rather the true sales pitch and emphasis is on a confidence given to participants of potential financial independence through participation in the MLM luring with phrases like “life style you deserve” or “independent distributor”. Erik German’s memoir “My Father’s Dream” documents the real life failure of German’s father as he lured into “get-rich-quick “schemes such as Amway. The memoir illustrates the multi-level marketing (MLM) sales principles known as “Selling the dreams”.
Although emphasis is always made on the potential of success and positive life change that “might or could” (not “will or can”)result, it is only in otherwise difficult to find disclosure statements (or at the very least, difficult to read and interpretdisclosure statements), that MLM participants are given fine print disclaimers that they as participants should not rely on the earning results of other participants in the highest levels of MLM participants pyramid as an indication of what they should expect to earn. MLMs very rarely emphasize the extreme likelihood of failure or the extreme likelihood of financial loss from participation in MLM. MLM are also seldom forthcoming about the fact that any significant success of the new individuals at the top of the MLM participant pyramid is in fact dependent on the continual financial loss and failure of all other participants below them in MLM pyramid. MLMs have been made illegal in some jurisdiction as a mere variation of the traditional pyramid scheme including in China. In jurisdiction where MLMs have not been made illegal, many illegal pyramid schemes attempts to present themselves as MLM business. Given that overwhelming majority of MLM participants cannot realistically make a net profit, let alone a significant net profit but instead overwhelmingly operate a net losses, some sources have defined all MLMs as a type of pyramid scheme, even if they have not been made illegal like traditional pyramid scheme through legislative statutes. MLMs are designed to make profit for the owner/ shareholders of the Company and a few individual participants at the top levels of the MLM pyramid of participants.