What is Multilevel Marketing (MLM)?

 

Multilevel Marketing is a strategy that some direct selling companies use to encourage existing distributors to recruit new distributors who are paid a percentage of their recruits' sales. Recruits are the "offspring" of the distributor, and distributors also make money by selling products directly to customers.

Key Points to Remember

 

• Multilevel marketing is a strategy that some direct-selling companies use as a tool to encourage existing distributors to recruit new distributors.
• In MLM schemes, there are hundreds or thousands of members worldwide. Still, only some earn significant income from their efforts, indicating a possible pyramid scheme.
• Although many MLM practices are legal, the FTC has investigated multilevel marketing companies for decades and found many of them engaged in legitimate questionable practices, such as setting up pyramid schemes.

Understanding Multilevel Marketing

Multilevel marketing is a legitimate business strategy, although it is controversial. One of the most significant problems is pyramid schemes that use money from new hires to pay the people at the top rather than those doing the work. These schemes are about taking advantage of people by pretending to be doing legitimate multilevel or network marketing. You can spot pyramid schemes by the fact that they focus more on recruiting than on selling products.

The Legitimacy of Multilevel Marketing

An MLM company's legitimacy depends on whether it sells its products and services primarily to consumers or to its members, who should recruit new members to buy their products and services. In the first case, the company is a legitimate multilevel marketing company. If it's the second, it could be an illegal pyramid scheme.

The Federal Trade Commission has been investigating MLM companies for several decades and has found that many have practices that are difficult to determine as legitimate. According to the World Federation of Direct Selling Associates, there were at least 116 million independent representatives among its members worldwide in 2017. Relatively few of them derive significant income from their efforts. For some observers, this reflects the characteristics of a pyramid scheme.

Pyramid schemes are often distinguished by the fact that they focus more on recruitment than on selling products.

Example of a Multilevel Marketing Company

Herbalife Nutrition Ltd. is a high-profile, multilevel marketing company that manufactures and distributes weight loss and nutritional products, with more than 500,000 distributors. Although the FTC has investigated Herbalife, activist investor William Ackman shone the company's national spotlight when he short-sold $1 billion worth of company stock in 2012. Ackman accused the company of operating a pyramid scheme and supported his claims by betting that the company's stock price would fall under the weight of the scam.

In 2018, Ackman backed out of his bet. As of October 27, 2019, the company's stock price was $40 per share. Multiple lawsuits have been filed against Herbalife, accusing it of misrepresenting its sales practices. In particular, it agreed with the FTC in 2016, under which it had to restructure its activities. Herbalife argues that most of its revenue comes from product sales, not recruiting and that it offers its members many protections, like a money-back guarantee, so they don't get stuck with products they couldn't sell.

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