MULTI-LEVEL marketing, or MLM, as it has become known, accounts for a growing number of small business startups.
MLMs are not for everybody, and there are many schemes that border on what is actually legal in the direct sales industry.
But there is an important aspect of MLMs that can’t be overlooked: they have created millionaires the world over.
Multi-level marketing firms are organizations that sell products through a sales organization made up of sales managers and their recruits. The process of recruiting and selling, and then recruiting more and selling more, creates a pyramid-type organization that is sales-based and that builds many separate independent businesses based on commissions and bonuses earned throughout the organization.
Even though the MLM model involves a pyramid-like structure, it is important to distinguish between a legitimate MLM and an illegal pyramid scheme.
Many refer to all MLMs as pyramid schemes, which is not accurate.
Illegal pyramid schemes have some red flags that should alert potential members of possible fraud.
The most obvious red flag is that the organization makes money, even if it doesn’t have any retail customers. A retail customer is someone who buys the product who does not participate in the organization in a selling capacity.
There are some MLMs that make more money from a variety of activities geared to sell goods and services to members. These products include goods for resale, which is completely legitimate.
However, the sales of additional goods and services, such as business manuals, books and training materials can actually put a legitimate MLM in the crosshairs of regulators if the revenue earned from such sources approaches that earned from retail sales.
Photo by zzzack
Miss Masters on April 22nd, 2009 at 2:05 pm
I have heard MLM’s called pyramid schemes, but what I don’t understand … how can a company still make money if they dont’ have retail customers. I am confused by this notion — I will have to dig around and see if someone can better explain this to me. I would like to have an example of one of these red flag companies so I can better understand what the writer is saying.
Dean Kosage on April 23rd, 2009 at 7:10 am
You cannot express the distinction enough between a legitimate MLM plan and a pyramid scheme
Larry Rivera on April 23rd, 2009 at 2:42 pm
Because so many people have gotten scammed by ponzi schemes and many more people have gotten lied to by unscrupulous mlmers the industry as a whole has gotten a very bad name.
If more people would realize that mlm businesses models are indeed legal businesses the world would be a happier place.