Multi Level Marketing or MLM

Multi-level marketing (MLM) is a business model that combines direct marketing with franchising.

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.

Multi-level marketing has an image problem due to the fact that it is often difficult to distinguish legitimate 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 must resell or use at least 70% of their inventory. This is to prevent members "inventory loading" in order to qualify for additional bonuses. The Federal Trade Commission offers advice for potential MLM members to help them identify those which are likely to be pyramid schemes.

The FTC issued a decision, In re. Amway Corp. in 1979, which indicated that multi-level marketing was not per se illegal. 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.

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