Multi-level marketing

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Multi-level marketing ( MLM ) also called pyramid selling , [1] [2] network marketing , [2] [3] and referral marketing , [4] is a controversial marketing strategy for the sale of products and services. revenue of the MLM company is derived from a non-salaried workforce (also called participants , and variously known as “salespeople”, “distributors”, “consultants”, “promoters”, “independent business owners”, etc.) selling the company’s products / serviceswhile the earnings of the participants is derived from a pyramid-shapedcommission system.

Although each MLM company has its own specific “compensation plan” for the respective participants, the common feature of the MLMs is that the compensation plans are theoretically paid out to two potential revenue streams . The first stream of compensation can be paid by the participants directly to their own retail customers. The second stream of compensation may be paid by the participants who have recruited those other participants in the MLM; In the organizational hierarchy of MLMs, these participants are referred to as “downline” distributors. [5]

MLM salespeople are, therefore, expected to sell products directly to end-user retail Consumers by means clustering of relationship referrals and word of mouth marketing, purpose MOST importantly They are incentivized to recruit others to join the company as fellow salespeople n That thesis can Become Their down line distributors. [3] [6] [7]

990 and 999 of every 1000 participants (ie between 99.0% and 99.9% of all participants) in MLMs in fact lose money. [8]

Business model

Revenue streams

In the MLM business model, the commission derived from the MLM pyramid structure (ie from the sales of one’s recruits) is the most profitable revenue stream. This revenue stream, however, is also the least statistically probable source of compensation to a salesperson. Conversely, the revenue stream is the least profitable. This revenue stream, however, is also statistically the most likely source of revenue to salespeople. For the overwhelming majority of participants, however, neither of these two stories will be deducted.

Participant profits and losses

The overwhelming majority of MLM participants (most likely estimated to be over 99.25% of all MLM participants) participate at an insignificant or nil net profit. [9] Indeed, the largest proportion of participants in the MLM pyramid can be derived from the MLM company. to all other participants to encourage their continued participation in the continuing financial loss.

Participant consumerism

Consumers of an MLM company’s products / services can, in theory, simply end-user retail consumers. End-user retail consumers are non-participants of the MLM company, with their relationship to the MLM company being nothing more than a capacity of consumers. In actual practice, however, the overwhelmingly majority of consumers of MLM products / services are participants. They are the very “salespeople” within the MLM who had been recruited by a fellow participant in the field of the MLM pyramid structure.

MLM is one of the largest MLM companies in the world. Only an insignificantly small proportion of revenue and total profit are derived from non-participating retail consumers who are outside the participating MLM pyramid. Many MLM companies will not disclose what percentage of their consumers are their own participants. Other MLMs do not keep said figures because they do not differentiate between consumer and non-participant retail consumerism.

Distribution of profit to participants

It is important to distinguish between the MLM company itself versus the so-called “independent businesses” run by the MLM participants. Many MLM companies can and do generate billions of dollars in annual revenue and millions of dollars in annual profit, however, an MLM company’s overall profitability does not correlate to the profitability of their participants.

The percentage of an MLM company’s total profit is distributed to its participants (the sales force), away from the MLM owners or shareholders, differs from one MLM company to the next. However, the percentage earmarked to be paid to participants is usually a smaller share of overall company profits. The earmarked figure is then distributed in complex compensation plans which, ultimately, are most important to the participants in the upper-most levels of the participating MLM pyramid. The majority of participants (often over 99.5% or more) receive no returns, or negligible returns, which are more often than not a net loss after they have been incurred in the promotion of their “independent businesses”.

Participant movement

While participants’ movement up the pyramid of an MLM can be accomplished in theory, and indeed is one of the distinguishing factors between MLMs and traditional pyramid schemes , such upward movement is so extremely improbable as to make it practically impossible, despite all efforts and investments of time and money by a participant.

Participant financial loss, company financial gain

The end result of the MLM business model is, therefore, one of a company (the MLM company) selling its products / services through a non-salaried workforce (“partners”) working for the MLM company on a commission-only basis while the MLM is one of the largest MLM companies in the world, which is one of the largest MLM companies in the world. This creates great profit for the MLM company’s actual owners and shareholders. quote needed ]

As noted, many MLM companies generate billions of dollars in annual revenue and millions of dollars in annual profit. However, the profits of the MLM company are derived from the overwhelming majority of the company’s non-salaried workforce (the MLM participants). Only some of the participants are at the top of the list of participating MLM pyramid. The earnings of those top few participants then allows the creation of an illusion of how to become financially successful if it becomes a participant in the MLM. MLM is a MLM company that is willing to participate in the MLM with a false anticipation of earning margins which are in fact highly theoretical and statistically improbable.[10]

Although an MLM company holds out those few individuals, the reality is that the MLM business model depends on the failure of the overwhelming majority of all participants, through the injection of money. from their own pockets, so that it can become the profit of the MLM company, of which the MLM company shares only a small portion of the MLM participant pyramid. Participants, other than the individual, provide their own financial loss for the company’s own profit and the individual participants. [11]

Selling the dream, then the product or service

The main sales pitch of MLM companies to their participants and prospective participants is not the MLM’s company’s products / services. The products / services are largely peripheral to the MLM model. Rather, the true sales pitch and emphasis is a false confidence given to participants of potential financial independence through participation in the MLM. [12] This is referred to as selling the dream. [13]

The term “might” or “could” or “can” or “can” or “can” or “may” or least, difficult to read and interpret disclosure statements) That MLM participants are Given fine print disclaimers That they’re participants shoulds not Rely on the earning results of other participants in the Highest levels of the MLM participant pyramid as an indication of What they shoulds expect to earn.

MLMs very rarely emphasize the extreme likelihood of failure, or the extreme likelihood of financial loss, from participation in MLM. MLMs are also likely to be subject to the fact that any of the MLM participating pyramid is in fact dependent on the MLM pyramid.

Not a pyramid scheme in the traditional sense

MLMs have been made in some jurisdictions and have changed in the traditional pyramid scheme , including in mainland China . [14] [15] In jurisdictions where MLMs have not been made illegal, many illegal pyramid schemes have been attempted by MLM businesses. [7]

Given the fact that the overwhelming majority of MLM participants can not realistically make a net profit, let alone a significant net profit, but instead overwhelmingly operate at net losses, some sources have defined all MLMs as a type of pyramid scheme, even if they have not was made illegal like traditional pyramid schemes through legislative statutes . [4] [16] [17] This is despite the fact that MLM companies (as opposed to the “independent businesses” run by participants) generate multi-million dollar profits for the MLM owners and shareholders.

By the very nature of the MLM model, MLMs are designed to make profits for the owners / shareholders of the company, and a few individual participants at the top levels of the MLM pyramid of participants. According to the US Federal Trade Commission (FTC), some MLM companies already have illegal pyramid schemes even by the narrower existing legislation, exploiting members of the organization. [18] MLMs, or to enact specific anti-MLM legislation to make MLMs illegal in parallel to pyramid schemes, have already been done in some jurisdictions. quote needed ]

While the legal distinction between MLMs and traditional pyramid schemes has been characterized by a legal fiction , that legal distinction between MLM and pyramid businesses Whereas rising pyramid schemes are overwhelmingly statistically improbable (especialy to its highest participant levels) A traditional illegal pyramid scheme is both statistically and theoretically impossible.

Employment law

MLM salespeople are not employees of the MLM company. Participants do not have a salary / wage, nor do participants receive compensation from the MLM company for their business and expenses in their MLM “independent business”. The income of participants, if any income is made at all, is derived from their commissions of sales or their share of the commissions on the sales of their downlines (the MLM compensation structure).

As non-employees, participants are not protected by law . Instead, salespeople are typically presented by the MLM company as “independent contractors” or “independent business owners”. However, participants do not have a business in the traditional legal sense, as the participants do not have any tangible business assets or intangible business goodwill or a business acquisition. These are the property of the MLM company.

Lawsuits

Companies that use the MLM business model have been a frequent subject of criticism and lawsuits. Legal claims against MLMs have included, among other things:

  • their similarity to traditional illegal pyramid schemes
  • price fixing of products or services,
  • collusion and racketeering in backroom where secret compensation packages are created between the MLM company and a few individual participants to position the participants in the MLM set up for financial loss in their futile quests for “success”
  • high initial entry costs (for marketing kit and first products),
  • emphasis on recruitment of others (especially sales to non-participants)
  • encouraging the company’s products,
  • exploitation of personal relationships
  • complex and exaggerated compensation schemes,
  • false product claims
  • the company or leading distributors making major money off participating-attended conventions, training events, materials, advertising materials, and
  • cult-like techniques which some groups use to enhance their members’ enthusiasm and devotion. [4] [19]

Direct selling versus network marketing

“Network marketing” and “multi-level marketing” (MLM) have been described by author Dominique Xardel as being synonymous, with it being a type of direct selling . [6] Some sources emphasize that multi-level marketing is merely a form of direct selling, rather than being direct selling. [20] [21]

Other terms include “word-of-mouth marketing”, “interactive distribution”, and ” relationship marketing “. Critics have argued that the use of these and other terms is ” buzzwords ” is an effort to distinguish multi-level marketing from illegal Ponzi Schemes , chain letters , and consumer fraud scams. [22]

The Direct Selling Association (DSA), a lobbying group for the MLM industry, reported that in 1990 only 25% of DSA members used the MLM business model. By 1999, this had grown to 77.3%. [23] By 2009, 94.2% of DSA members were using MLM, accounting for 99.6% of sellers, and 97.1% of sales. [24]

Companies such as Avon , Electrolux, Tupperware, [25] and Kirby have been originally single-level marketing companies, using that traditional and uncontroversial direct selling business model (separate from MLM) to sell their goods. However, they later introduced multi-level compensation plans, becoming MLMs. [20]

The DSA has approximately 200 members [26] while it is estimated there are over 1,000 firms using multi-level marketing in the United States alone. [27]

History

The origin of multi-level marketing is often disputed; multi-level marketing style business existed in the 1920s, [28] 1930s California Vitamin Company, [29] (later named Nutrilite ) or California Perfume Company (renamed as ” Avon Products “). [30]

Setup

MLM binary tree structure. The blue individual will receive compensation from the sales of the downline red members.

Independent non-salaried participants, referred to as distributors (variously called “associates”, “independent business owners”, “independent agents”, etc.), are authorized to distribute the company’s products or services. They are awarded their own business by the company, which is based on a multi-level marketing compensation plan, which is based on their own bottom line organization. .

Independent distributors and their organizations, which by the same token, or by recruiting a downline of independent distributors, who also build a consumer network base, thereby expanding the overall organization.

The combined number of recruits from these cycles are the salesperson’s “downline”. This “downline” is the pyramid in MLM’s multiple level structure of compensation. [6]

Assuming the blue individual recruits five, and those five recruits, and so on, the maximum possible cycles of recruits possible in the “downline” of the individual blue is 14 cycles (5 14 = 6.1 billion people), after which point the total human population is exceeded.

Pyramidal structure

MLMs often argue that they are pyramidal in structure, with a CEO at the top, management levels beneath, and successive levels of major employment and employees.

That pyramid organizational structure of a business is then supported by MLMs to show that MLMs are no more than other business structures, and that it is unfair to paint MLMs as a type of pyramid scheme rather than a legitimate business structure.

The pyramid shape in MLMs, however, does not refer to “pyramid organizational structure,” but rather, it refers to the pyramid structure of MLM’s incoming revenue sources, which is itself unpaid participants (ie its unpaid participating non-employees). This is the reason MLMs are grouped with other ordinary pyramid schemes, even where they can not be classified as such by existing law.

In ordinary businesses, however, the pyramid shape does not refer to a pyramid structure of revenue of the business, but refers to the “pyramid organizational structure” of the business’s human resources (ie its paid employees). Revenue and income of ordinary businesses then comes from independent customers (ie not from participants of the business).

Income levels

Several sources have commented on the level of specific MLMs or MLMs in general:

  • The Times : “The Government investigation claims to have revealed that just 10% of Amway’s agents in Britain make any profit, with less than one in ten selling a single item of the group’s products.” [31]
  • Eric Scheibeler, a high-level “Emerald” Amway member: “UK Justice Norris found in 2008 that out of an IBO [Independent Business Owners] population of 33,000, ‘only about 90 made enough incomes to cover the costs of actively building their business. ‘ That’s 99.7 percent loss rate for investors. ” [32]
  • Newsweek : based on Mona Life ‘s own 2007 income disclosure statement “less than 1 percent qualified for commissions and of those, only 10 percent made more than $ 100 a week.” [33]
  • Business Students Focus on Ethics: “In the US, the average annual income from MLM for 90% MLM members is no longer than US $ 5,000, which is far enough to be a sufficient means of making life (San Lian Life Weekly 1998)” [ 34]
  • USA Today has had several articles:
  • “While earning potential varies by company and sales ability, DSA says the median annual income is $ 2,400.” [35]
  • In an October 15, 2010 article, it was stated that a MLM called Fortune Hi-Tech Marketing revealed that 30 percent of its representatives make no money and that 54 percent of the remaining 70 percent only make $ 93 a month, before costs. Fortune was under investigation by the General Attorneys of Texas, Kentucky, North Dakota, and North Carolina with Missouri, South Carolina, Illinois, and Florida following up against the company. [36]
  • A February 10, 2011 article stated “It can be very difficult, if not impossible, to be more likely to make a lot of money in the marketplace. [37]
  • “Roland Whitsell, to train business professor who spent 40 years researching and teaching the pitfalls of multilevel marketing”: “You’d be hard-pressed to find anyone making up $ 1.50 an hour, (t) he primary product is opportunity. , most powerful motivational force today is false hope. ” [37]

Legality and legitimacy

United States

MLM businesses operate in all 50 US states. Businesses may use such as “affiliate marketing” or “home-based business franchising”. Many pyramid schemes attempt to present themselves as legitimate MLM businesses. [7] Some sources say that MLMs are essentially pyramid schemes, even if they are legal. [4] [16] [17]

The US Federal Trade Commission (FTC) states:.. “Steer clear of multilevel marketing plan That pay commissions for recruiting new distributors They’re Actually illegal pyramid schemes Why is pyramiding ? Because Plans dangerous That pay commissions for recruiting new distributors Inevitably collapse When no new distributors can be recruited and most of the time, most people-excepted those at the top of the pyramid-end up empty-handed. ” [38]

In a 2004 Staff Advisory Letter to the Direct Selling Association, the FTC states:

Much has been made of the personal, or internal, consumption issue in recent years. In fact, the amount of any multi-level compensation does not determine whether or not the FTC will consider the plan a pyramid scheme. The critical question for the FTC is whether or not the participants are in a position to participate in a transaction. [39]

The Federal Trade Commission warns that it is not the case that you are more likely to be involved than others in the future. on the plan who’s going to use the products. ” [40]

Criticism

The Federal Trade Commission issued a decision, In re Amway Corp. , In 1979 in qui it Indicated That multi-level marketing Was not illegal per se in the United States. However, Amway was found guilty of price fixing (by effectively requiring “independent” distributors to sell at the same fixed price) and making exaggerated income claims. [41] [42]

The FTC advises that skeptically multi-level marketing organizations are more likely to be viewed. The FTC also argues that the practice of getting commissions is more important than “pyramiding”. [43]

In April 2006, the FTC proposed a Business Opportunity Rule to be open to all business opportunities-including MLMs-to provide enough information to enable prospective buyers to make a decision about acquiring and joining a business venture. average likelihood of monetary profitability (and the extent of monetary profitability, if any) of acquiring / joining the business venture. In March 2008, however, the FTC removed “Network Marketing” (ie MLM) companies from the proposed Business Opportunity Rule, thus leaving MLM participants without the ability to make an informed choice of MLMs based on the likelihood of success. and profitability:

The revised proposal, however, would not be of interest to many companies that may have been swept inadvertently into the scope of the April 2006 proposal. [44]

Walter J. Carl Stated in a 2004 Western Journal of Communication Article That “MLM organisms-have-been Described by Some as cults (Butterfield, 1985), [45] pyramid schemes (Fitzpatrick & Reynolds, 1997), [46] or organisms rife with misleading, deceptive, and unethical behavior (Carter, 1999), [47] Such as the questionable use of evangelical discourse to Promote the business (Höpfl & Maddrell, 1996), [48] and the exploitation of personal relationships for financial gain (Fitzpatrick & Reynolds, 1997) “. [46] [49] In China, volunteers working to rescue people from the schemes have been physically attacked. [50]

MLMs are also criticized for being unable to fulfill their promises for the majority of participants due to basic conflicts with Western cultural norms. [51] There are Even claims que le success rate for breaking Even or Even making money are far worse than other kinds of businesses: [52] “The vast majorité of MLMs are recruiting MLMs, in qui participants must recruit aggressively to profit Based. MLMs is 99.9%, ie, 99.9% of participants, including purchases from the company. ” [52] In part, this is because encouraging recruits to further “recruit people to compete with [them]” [4]leads to “market saturation.” [19] It has been claimed “(b) its very nature, MLM is completely devoid of any scientific foundations.” [53]

Because of the Encouraging of recruits to further Top recruit Their concurrents, some people-have Even gone so far as to say at best modern MLMs are nothing more than legalized pyramid schemes [4] [16] [17] with one Stating “Multi-level marketing have become an accepted and legally sanctioned form of pyramid scheme in the United States ” [16] while another states” Multi-Level Marketing, a form of Pyramid Scheme, is not necessarily fraudulent. ” [17]

In October 2010, it was reported that companies that have been investigated have been investigated by a number of general allegations that salespeople were primarily paid for recruiting and recruiting new recruits. [54]

Industry critic Robert L. FitzPatrick has called multi-level marketing “the Main Street bubble” that will eventually burst. [55]

china

Multi-level marketing ( simplified Chinese : 传销 ; traditional Chinese : 傳銷 ; pinyin : Chuan Xiao ) Was first Introduced to China by American, Taiwanese, and Japanese companies Following The Chinese economic reform of 1978. This rise in multi-level marketing’s popularity coincided with economic uncertainty and a new shift towards individual consumerism. Multi-level marketing was banned on the mainland by the government in 1998, citing social, economic, and taxation issues. [56]Further regulation “Prohibition of Chuanxiao” (Where MLM is a kind of Chuanxiao, Chinese name of the regulation is “禁止传销条例”), Was Enacted in 2005, clause 3 of Chapter 2 of the regulation states HAVING downlines is illegal (original text from the regulation ‘组织者或者经营者通过发展人员,要求被发展人员发展其他人员加入,形成上下线关系,并以下线的销售业绩为依据计算和给付上线报酬,牟取非法利益的.’). [15] O’Regan wrote ‘With this regulation China makes clear that while Direct Sales is permitted in the mainland, Multi-Level Marketing is not’. [14]

MLM companies have been trying to find ways around China’s prohibitions, such as China’s direct sales, to China through retail operations. The direct sales regulations limit health food, sanitary products, bodybuilding equipment and kitchen utensils. And the Regulations require Chinese companies to apply for direct selling license from the Ministry of Commerce (“MOFCOM”). [57] In 2016, there are 73 companies, including domestic and foreign companies, that have obtained the direct selling license.Hong Kong , where the practice is legal, while selling and recruiting on the mainland. [14] [59]

It was not until August 23, 2005 that the State Council promulgated the rules of the United States of America and the United States of America. 2005). When direct selling is allowed, it will not be allowed under the most stringent requirements, MLM, or fly-by-night operations.

See also

  • List of multi-level marketing companies

References

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