Multi-level marketing, also known
as MLM or Network Marketing, is an alternate channel for a
manufacturer to deliver its products to market.
channels include retail storefronts, catalog shopping, and
door-to-door sales.) Depending on the particular company,
the MLM channel may provide both word-of-mouth advertising
Q: Why would a company choose the
MLM route to product distribution?
There are several good reasons:
- Low overhead. There are virtually no up-front advertising
Unlike a typical retail company, the MLM company doesn't have
to spend massive amounts of money to "pull" customers
in. Instead, it pays distributors to "push" the
product out into the marketplace.
In addition, the company only has
to pay the distributors for *results* -- that is, a percentage
of products actually sold.
Ordinarily an MLM company will use
the money that *would* have gone into advertising to pay its
distributors. (Using Procter & Gamble as an example: I
have an unconfirmed report that says P&G's sales in 1992
were $25billion. Their advertising budget was $10billion.
So they spent 40% of their sales on ads. MLM companies typically
pay 40-80% of their sales volume to their distributors.)
- Low distribution overhead. Typical
retail companies generally use:
a series of national, regional, state, and local warehousers
to distribute their product to the retail stores. Each of
these intermediaries wants to make a living, and marks up
the cost of the product. Using P&G again: my unconfirmed
report says that a tube of Crest that sells for $2-3 in a
store costs P&G roughly 13 cents to manufacture. If it
sold for $2, 40% (80c) would go to advertising, leaving $2
- 80c - 13c = $1.07 for distribution costs and P&G's profit.
- Rapid growth. A well-managed MLM
company can grow at an amazing:
rate -- as much as 20%, 50%, even 100% per MONTH. (In fact
one of the biggest reasons for MLM company failure is inability
to keep up with explosive growth.) It would be difficult or
impossible to generate this kind of growth in an overcrowded
- Specialized and motivated "sales
force." There are hundreds of thousands of products cramming
the shelves of retail stores. It's almost impossible for a
new product to make a dent in the market, unless the company
spends megabucks on advertising.
Also, many MLM products need more explanation than can be
done in a 30-second TV spot. A person-to-person word-of-mouth
campaign can solve both of these problems.
That's the company's perspective.
For the individual, MLM can offer an opportunity to build
a part-time income source that can, with enough effort, grow
into a significant income. With hard work (and a little luck)
you can earn incredible incomes.
How? MLM is all about "a lot
of people doing a little bit." In an MLM you are rewarded
for the sales you create -- not only directly, but indirectly
as well. You get profit for any retail sales you make, plus
you get a bonus on the sales made by people you enrolled into
the company, and people they enrolled, and people THEY enrolled,
and... By getting a small percentage of many people, your
income can grow to a very large number.
But wait. It's not that simple. It
takes a lot of time and work to build up a group (called a
"downline") in any MLM. What's more, even if you're
a real hard-working go-getter, YOU can't do all of it.
You can't enroll the 90,000+ people
in this group by yourself. Each person has to find 5 of his
own -- and the sad truth is, most people are not that ambitous.
It's hard to find the ones that will work.
So it's almost unheard-of for someone
to actually build an idealized group like this. Some "legs"
in the downline will build faster than others, and some will
grow slower. If you don't work hard yourself, you might never
start ANY legs that go anywhere.
But that's the concept: a whole lot
of people doing a little bit each, and you getting a small
reward on each one. If you have the initiative and work ethic
to build that group, you can make a very nice income in MLM
-- maybe even get rich.
But MLM **IS NOT** a get-rich-quick
deal. It DOES take a lot of work, and most people won't put
in the work it takes. The large majority of people will never
get rich; quite a few hardly make a dime. But the beauty of
it is, as long as you pick a good company with a good product
or service, the size of your success is up to YOU.
Q: Is MLM a scam? Is it legal? Is
it moral, ethical, etc?
The short answer is: maybe.
This is the cause of 99% of the flamefests,
arguments, and general disagreements about MLM. Many people
contend MLM is immoral or unethical. Many Attorneys General
(who ought to know what they're talking about) say a properly-run
MLM is perfectly legitimate and ethical. Who's right?
The truth is, MLM is not inherently
good or evil any more than capitalism is good or evil. Both
can be done ethically, and both can be done unethically. It
depends on how a particular company is designed and managed.
Since the MLM industry is very young
(about 40 years old), the law is still in flux. There are
admittedly many MLM companies that are nothing more than scams,
get-rich deals for the owners and their cronies, glorified
chain letters, etc. Some of them even manage to skirt around
the legal issues and avoid prosecution.
There are other companies that have
legitimate products, and may have been in business for many
years, but which are run in such a way that many people get
burned -- old ladies investing their retirement funds to buy
a garage full of products, and so on.
Most people would agree these companies,
or at least the distributors that do the questionable practices,
are not very ethical.
On the other hand, there ARE many
companies that are run legitimately, legally, and ethically.
They produce good products that are valued by customers, and
give many people the opportunity to improve their financial
The anti-MLM people will often assert
that MLM companies and people sell unrealistic fantasies of
income potential, recruiting "cannon fodder" to
fatten their upline's bonus checks. This view is understandable,
but misses one critical point: in general, the new person
has the SAME OPPORTUNITY to build a group as the fatcat upline
guy. The upline has worked hard, maybe for years, to build
the downline that is now rewarding him so richly.
The new person has invested maybe
a couple of hundred bucks and a few hours. It's only fair
that everyone starts out in the same place -- AT THE BOTTOM
-- and everyone has the SAME chance to build a downline of
The major exception to this is in
the theoretical case of "saturation." In this situation
the company has grown so much that a large percentage of people
who would be interested in enrolling have already enrolled.
(NOTE that this does NOT mean "EVERY
person is enrolled"!) The new person has a much harder
time finding new recruits than the upline person did N years
ago. The new person has several choices:
go with the established company, and live with the saturation;
go with another company that has no saturation problems; or
On the other hand, while it may be
a bit harder to find new prospects when a company is mature,
the new person who joins the mature company has MANY more
tools and support mechanisms available to him/her than the
"old hands" did back at the start of the company.
There are probably also many more products, more professional
While those pioneers may have had
wide-open spaces to settle, they also got more arrows in their
backs. It works out pretty evenly.
In actual practice, saturation is
very seldom a problem. It may be easier or harder to find
new prospects for a particular company in a particular location,
but there are very few cases that are actually "saturated."
The thing to understand is that saturation is not a clear-cut,
yes-or-no situation; one company may be CLOSER to saturation
than another, but neither might be actually "saturated."
The anti-MLM argument often runs calculations
of exponential growth, and demonstrates that the entire population
of the planet will be enrolled within a short period. This
is an intellectual exercise rather like the example of "one
pregnant mosquito could carpet the earth in mosquitoes by
the end of the summer." In other words, in actual reality,
it doesn't happen that way. The growth rate is normally much
slower than people realize (especially once a company gets
larger), and slows down as a company approaches saturation.
It may get harder to enroll new people in a large and near-saturated
company, but NO company in the history of MLM has ever grown
fast enough to exhaust its potential marketplace. More people
turn 18 every year in the United States than are enrolled
in all MLM companies combined. So far, at least, the growth
of MLMs hasn't kept up with the growth of population.
So, bottom line: In the opinion of
many people, MLM *can* be done legally, morally, and ethically.
It can also be done unethically and illegally. Choose your
Q: But isn't it wrong to keep bringing
in new participants, rather than concentrating on selling
a product like "regular" businesses?
Many anti-MLM folks think that the
only purpose of ANY MLM is to enroll new people, instead of
selling a product. What they don't understand is that ENROLLING
NEW PEOPLE *IS* HOW YOU SELL THE PRODUCT IN MLM.
If you focus only on selling, it isn't
MLM -- it's plain old sales. Nothing wrong with that; it's
just not MLM.
MLM works with a DIFFERENT PROCESS
than typical sales. Rather than finding a few people who sell
a ton, you find a bunch of people who sell a little. (And,
since each sells so little, self-consumption can account for
a significant portion of those sales.) Enrolling new people,
and building downlines, is how you find the people who each
do the small amount of sales. (Note: EACH do a small amount
NOT just the "suckers on the
bottom". In any legitimately-run MLM, ALL people, from
top to bottom, contribute to the sales effort.)
Product still gets moved -- that's how bonuses get paid in
a legitimate MLM -- it's just done in a different manner than
in traditional sales or retail.
MLM works differently than traditional
methods, but just because it's different doesn't make it bad.
It's just DIFFERENT. Just like franchising was different from
traditional retailing, and was considered to be a scam for
many years. But when properly implemented, franchising is
not a scam; it's a very effective way to do business. Similarly,
when properly implemented, MLM is different from traditional
retailing AND franchising, but can be a very effective way
to do business.
Q: What's the difference between
MLM and Network Marketing?
Most people would say the terms are
synonymous. MLM is an older term, and has taken on negative
connotations in some people's minds. Network Marketing is
preferred by some who are trying to avoid this stigma.
Some companies, such as Amway, consider
"Network Marketing" to be a specific form of MLM:
namely, combining a "network" of outside suppliers
(AT&T, Coke, Reebok, etc.) with a network of "marketing"
folks (the distributors).
Q: How can you succeed in MLM?
Short answer: Work diligently, work
consistently, and don't give up.
Long answer: all companies are different,
and what works in one company might not work in another. You
should learn from your upline -- ask them what works and what
you should do to succeed.
Draw on them for help. They've found
out from experience what works and what doesn't, and they're
interested in your success. The fundamental ideas, though,
are the same in any company.
Do what a distributor/associate/whatever
is supposed to do in your company -- retail products, sell
services, consume products, whatever -- and find others to
do the same. Teach them to do what you do.
*Duplication* is the key to success
in MLM. You're not supposed to go out and enroll the world,
or sell something to everybody on the planet. You're supposed
to find a FEW people who want to build a business, and help
them do it. More importantly, teach THEM to do what a distributor
does, AND go out and find a few people to work with, AND teach
those new people. Until you have "taught your people
to teach their people to teach," you have not really
Keep plugging away. Unless you're
incredibly good at this, it will take time to build a group.
It takes time to find good people and teach them what they
need to know. Sometimes your best people will give up and
drop out. Sometimes it can be very discouraging. Sometimes
you may be tempted to give up.
(And if your company isn't working
very well, maybe you should. But if the company's working
well, and others are succeeding, you need to take a look at
what YOU'RE doing that isn't working. It may be that you wouldn't
do any better in another company, even if the grass looks
greener, because you're doing the wrong things.)
It is a sad fact that a very small
percentage of people who enroll in any particular MLM will
succeed big. This is NOT, however, a fatal flaw of MLM; it's
a reflection of real life. 90%+ of small businesses fail within
1-5 years -- and the owners lose a whole lot more than the
few hundred dollars an MLM person typically invests. 98%+
of corporate employees will never achieve executive levels.
95% of 65-year-old retirees in the US (according to insurance
& Social Security statistics) are dead or broke. The sad
fact is, very few people succeed big in ANY endeavor. Most
people simply will not do what it takes to succeed. MLM is
no different in this regard.
However, many people get into an MLM
with the idea that it's some kind of "easy road to riches".
It's not. It takes work. It takes time and dedication. But
most people don't see that, either because their sponsor misled
them with rosy predictions of instant wealth, or because they
chose to hear the easy story. People like this enroll and
don't do anything, or give it a try but give up after a few
months. This is where the vast majority of "MLM failures"
The biggest problem with MLM is that
it's "too easy" to get into it (usually no more
than a few hundred dollars), so it's "too easy"
to get out. With only a few hundred bucks committed, it's
easy for someone to say "Ah, heck, I talked to 4 people
and none of them were interested. This doesn't work! Guess
I wasted $200."
You should approach your business
as if it was a "real" business, one that you had
invested your life savings into. If you had sunk $200,000
into your MLM business, would you let 4 "no"s stop
you? Hell no!! You'd get back OUT there and KEEP working until
you MADE it work, because you had too darn much money in it
to give up! Well, guess what? That's what makes MLM work too
-- that dedication to keep working until you make it work.
If you work consistently, and effectively,
and build your group faster than the faint-hearted people
drop out, your group will slowly but steadily build. And if
you've taught your people the correct ideas of "work
consistently, work effectively, and teach your people how
to duplicate your efforts", you should see a consistent
rate of growth. It will probably take longer than you'd like
(hey, that's the way life works!), but as long as you keep
working at it, your income will eventually build to the level
The problem is, most people don't
do this. Most people who get into MLM give it a half-hearted
try, then give up the first time they get a "no"
and complain that "It doesn't work." Only the people
who determine to put in the effort, and actually DO what it
takes to succeed, will stick it out and end up on top.
Q: How can I identify a good MLM?
Things you should look for include:
- Good products. Are they something that LOTS of people will
Do they fill a real need? Are they competitively priced, and
can you make a profit selling them?
- Strong and stable company. You don't
want them to go belly-up after you've worked to build a downline.
How long have they been in business?
What is their financial situation?
(A quick check with Dunn&Bradstreet and the Better Business
Bureau [if in the US] might be worth your time.)
What prior experience, both in general
business AND in MLM, does the company management have?
- Good company support. Are there
good training materials, manuals, etc?
- Strong upline support. Ask your
prospective sponsor what kind of help he can provide you.
Ask what sort of success he or she has had, or, if he's too
new for that to be a fair question, ask about his upline.
If they're not succeeding, they can't
teach you how to succeed, and you don't want to have to invent
a system from scratch.
Things you should avoid at all costs
- Inventory loading. If your sponsor
tries to pressure you into buying thousands of dollars of
inventory (or ANY inventory, in my opinion), you should check
to make sure your wallet is still in your pocket and run for
- High pressure in general.
- Get-rich-quick claims, promises
of wealth without effort, etc.
Those are some broad guidelines. The
biggest determining factor, though, is YOU. YOU are the one
who's going to work or not work. YOU are the one who needs
to stay motivated, and keep plugging along when things get
If YOU'RE not excited about the company, the products, and/or
the opportunity, you probably won't stick it out long enough
to succeed. But if you're pumped up about the company (and
not just the initial "I'm gonna get rich" excitement),
you're much more likely to keep at it until you succeed.
Q: What are the popular compensation
plans? (Breakaway, matrix, etc.)
Product retailing is a major source
of income in most plans, especially for someone who has not
yet built a large downline. But downline bonuses are where
the big long-term money comes from. There are several basic
designs that are used in most MLM bonus plans.
The most common, having been around
the longest, is called a "breakaway" or "stairstep
breakaway" plan. In this sort of plan, there are sometimes
differing wholesale prices, or "discount" rates,
available to someone depending on their position in the plan.
As you progress to the higher positions, you will get a larger
The distinguishing characteristic
of this plan is the "breakaway", a position where
you "break away" from your upline. After this point,
the product volume generated by you and your downline no longer
counts toward your upline's "group volume." Now
that you have "broken away," you start tracking
your OWN group volume.
There is usually some provision for
getting paid bonuses on the volume of "breakaway"
groups. You might get paid 5% on first-level breakaways (groups
directly under you), 4% on second-level groups (breakaway
groups under your first-level groups), and so on. There is
normally a minimum "group volume" requirement for
you to qualify for these "breakaway" or "generation"
bonuses. The number of generations you are paid on and the
percentages you get are dependent on the company and the position
you have reached.
Breakaways are often considered the
best plans for serious hard-core workers. They are harder
than other plans, but also have the greatest potential rewards.
Most MLM fortunes have been made in breakaway plans.
You can get paid hundreds of levels
deep in a breakaway, unlike the other (matrix and unilevel)
plans. But you have to work to earn it.
That does NOT mean that breakaways
are necessarily the best plans for your average Joe -- because
your average Joe **IS NOT** a "serious hard-core worker!!"
Many part-timer MLMers find breakaways to be too difficult
Originally, companies made use of
this "breakaway" design because it simplified their
record-keeping and inventory problems. Without computers,
it would have been impossible to track hundreds of thousands
of distributors, so the companies DIDN'T track all of them.
The "breakaway" levels were
the only ones who worked directly with the company, and acted
as distribution points to their downlines. Often they were
responsible for paying their downlines as well.
Most companies have relieved the distributors
of this overhead, but the breakaway structure is still a popular
The "matrix" is a newer
structure that came about since the advent of cheap and plentiful
computers. A matrix plan has a fixed "shape" that
determines the size of a downline you can be paid on. For
example, if your company uses a 5x7 matrix, you can have no
more than 5 people on your "frontline", and can
be paid no more than 7 levels (people, not breakaway generations)
deep. If you already have 5 people on your frontline, any
future people you enroll will have to be "placed"
somewhere below those 5 frontline people. This is called "spillover."
At first glance you might think this
means you can only have 5*7 or 35 people in your downline,
but that's not true: each of the 5 people in your frontline
can have 5 people on *their* frontline, and so on.
So a 5x7 matrix can actually hold as many as 5+5^2+5^3+5^4...
or almost 100,000 people. In theory, anyway. In reality it
is very rare for a 5x7 matrix to be more than 2-3% full. The
restricted width quickly forces the growth in active legs
down and out of your matrix.
"Spillover" is either a
curse or a blessing, depending on how you look at it. Matrix
proponents say it's a great way to force people to help their
downlines, since they'll have to place people below their
downline distributors. Spillover also tends to keep people
active, because they don't want to lose out on the "free"
downline spilling over from their upline. Matrix detractors
argue that spillover is a form of "MLM welfare"
that rewards weak and non-performing distributors; if they're
working, they already have people below them, so you're more
likely to place people in the "holes" under non-workers.
Matrix plans also punish top performers,
since they have to place new recruits farther and farther
down in their matrix. After a while they get so little benefit
from those new recruits that they lose much of their incentive
to keep producing.
Many newer companies are using matrix
plans. I have seen 5x7, 3x9, 2x12, 3x3, lots of different
shapes. Study the plan carefully to understand how it will
work. Don't assume that a matrix will fill evenly; most often
you will have an active "leg" that will grow out
of the bottom of your matrix long before other legs have filled
in the rest of the matrix. But the simplicity of the matrix
plans makes them very attractive to many people.
(I confess that I'm not a big fan
of matrix plans. But a lot of people really like them, and
are happy with the results they get with matrices. You decide
what's right for you.)
Recently the "unilevel"
plans have become very popular. These plans are similar to
a matrix with no width restriction. So, for example, you might
get paid 6 or 8 levels down, like in a matrix, but you can
have as many people on your frontline as you want. This has
the great advantage of being very simple to explain and to
understand, and it doesn't have the growth restrictions that
limit matrix plans. It loses the matrix "spillover"
effect, since no one is forced to place new recruits below
their frontline. (Personally I consider this to be an advantage
-- too many people join matrix plans hoping that someone else
will do their work for them.)
Some people believe unilevel plans
are too limited, because of their limited depth. In reality,
it's quite possible to build a very substantial income in
a unilevel -- more than 99.9% of MLMers have ever seen. Many
people are earning very serious money in unilevels, as in
every other kind of plan.
Due to the inherent depth limitation
of unilevels (and matrix plans), some companies add on an
additional bonus called the "infinity" bonus. (Note
that the infinity bonus is totally separate from the underlying
unilevel or matrix or whatever, and in fact you could even
add an infinity bonus to a breakaway plan if you wanted to.)
An "infinity" bonus is so named because it can (in
theory) pay down an "infinite" number of levels.
In reality, it doesn't quite work
that way. Infinity bonuses pay down to the next person in
your downline who *also* qualifies for the infinity bonus.
Let's say someone at the A position earns a 1% infinity, a
B earns a 2% infinity, and a C earns a 3% infinity.
If you reach the C level, you get paid an additional 3% on
your downline. BUT if anyone in your downline qualifies for
any infinities, they "intercept" the infinity bonus
for that leg and you don't get it. So if you are a C and you
have a C on your frontline, you will get NO infinity bonus
on that leg; your frontline C gets it instead.
If you have a B on your frontline, you'll get 1% on that leg,
and the B gets the other 2%. Only on legs with no As, Bs,
or Cs do you get the full 3%.
It has to work that way, or the company
could be liable for an "infinite" amount of bonuses!
If everyone could qualify for the full 3% bonus with no cutoff,
then a leg with 34 C's would mean the company would owe 102%
in infinity bonuses. By limiting your "infinity"
bonus down to the next infinity-qualified person, the company
in this example only has to budget for a fixed maximum of
3% for infinity bonuses.
So in reality you can get paid down
to the "bottom" of your downline -- but only in
legs with no leaders, which tend to be shallow legs. In deep
legs, you will virtually always have leaders in your downline.
Which is good!! But it means you won't get the full infinity
bonus on any deep leg. So be wary of claims that a plan will
pay "hundreds of levels deep" because of its infinity
Recently several companies have used
variants of the "binary" plan.
They look a bit like a 2x? matrix plan. The major selling
point of these binary plans is that they pay to *infinite*
depth. They do this by 1) requiring you to balance the volume
on your two "legs," and 2) setting a maximum income
level, often $2000/week or so, on each "income center"
(position in the binary plan).
The maximum-per-center income has
the effective result of limiting the depth that binaries pay
out. While there is nothing that puts a hard limit on how
deep you can go, you can only include enough downline to "max
out" your center. So binaries don't REALLY pay out to
"infinite" depth any more than "infinity"
But since a maxed-out center pays
more than most MLMers have ever earned, and you can have *multiple*
centers, this isn't a real concern for most people.
Since different legs very seldom grow
at the same rate, balancing the legs can be a real challenge.
You can also "buy multiple income centers" in many
of these plans, which basically means you can re-join your
downline to earn additional income from additional income
centers. Which means your downline will be your upline!
Finally, some new companies are combining
aspects of different kinds of structures. This may result
in a plan with the advantages of both and the disadvantages
of neither -- or vice versa!
Make sure you understand at least
the basics of the plan for any MLM you consider joining. After
all, this is where your money comes from. Make sure you like
what you're getting before you make the plunge.
Good Luck !!