*Multi-level Marketing as a Business Opportunity

Multi-level Marketing as a Business Opportunity

Multi-level marketing is a business model where salespersons like sales consultants, distributors, and even franchise owners and independent owners work in harmony to increase sales of the product. Everyone works on a commission basis (except the producer of the product). This is more like a franchise arrangement where the sales of the product depend on the combined effort of each franchise and regional manager. There are multiple levels of people receiving commission. Usually there are seven or more levels. In an ideal program there are only two levels: you and the new associate you are training. Multilevel marketing is basically a combination of franchise and direct marketing.

This concept started in 1980s when most of the companies started handling the stocking and distribution issues and started compensating all of the layers of individuals involved. This increased the interest of each member in promoting sales due to the chance of earning bonuses. Since then the Multilevel Marketing companies have taken the responsibility of taking orders, shipping goods, and paying revenues. Things became easier with the transition to the Internet. Product promotion, advertising, and sales were made online and hence, the whole process began to be known as online MLM.

There are various MLM compensations plans. According to the uni-level or stairway breakaway plans, there are two types of distributors involved: managers and non-managers. According to the matrix plans, the width of each level in a distributor’s group is regulated. In binary plans, the limit of each level’s width has two legs. Commission was paid when both the legs reached a specific target. In a third type of compensation plan, called the elevator scheme, the distributors pay splits after a certain number of units have been paid.

Overall, commissions are paid in one of two ways. The first regulates commission payments on the basis of actual sales. The commission is paid only if the product is sold. The second one involves paying commission even if the customer just ‘signed-up’. This method acknowledges bringing a new associate online to expand sales. Therefore, it doesn’t require new associates to buy anything. This second method ultimately contributed to MLM getting a bad name. People didn’t have to believe in their product before trying to sell it to others. This resulted in rapid accumulation of sellers without buyers. In short, illegal pyramids started to arise. The intermediate members used to make proxy customer sign-ups to receive commission and they were used to tempt the participant to buy more products than they could sell.

This problem still exists today. As most of these businesses still present themselves as legal, precautions must be taken. It is better to approach businesses that follow the first method of commission, where it’s compulsory to make a sale and not just recruiting a customer to actually receive a commission. If recruiting is done without a sale, ensure products do not need to be purchased and stocked prior to sale. Opportunities that sell and ship product direct from the manufacturer/producer and require no intermediate stockage will never fall into this trap. In essence, the marketer never has a product investment (except for his/her own use) prior to making the sale. Here money isn’t paid for customer sign-up at all. If you do have to purchase inventory up front because you make the product deliveries (not the manufacturer), make sure the manufacturer will not allow restocking until at least 70 percent of existing stockage is sold. This is the law. If they aren’t ensuring it is followed, don’t get mixed up with them. Properly done, MLM marketing is being practiced highly successfully all over the United States and in dozens of other countries.

In 1979, a major brush and soap products company that functioned as an MLM was accused of price fixing. Likewise, they were accused of exaggerating sales claims, while their distributors sold the products at a minimum price. After that, the FTC chastised all multi-level companies whose commission was based on recruiting and not just sales. In 2006, all business opportunity sellers, including MLM organizations, were tasked to provide customers with thorough information, according to the Business Opportunity Rule introduced by the Federal Trade Commission, so as to save customers from deception. Before that many motivating programs were started which hid the truth of actual results. Such programs were known as cult programs. n
Laws have since been made stronger. As a measure of effectiveness, pyramid schemes became banned in most of the developed trade countries. All newly hired salespeople now have to bear the cost of initial training and material. I have emphasized this in other related articles on Home Business opportunities. If you are being offered your self-development and training for free, the opportunity being presented has a high probability of being an illegal pyramid. Any legitimate business opportunity should require some initial investment in training and set-up. Expect it. Welcome it. It means the opportunity is not a scam relegated to collapse as the pyramid gets too tall.

Ideally, look for an opportunity that does not pay commission for signing up a customer or associate for free. Also look for one that doesn’t require you to purchase or stock any products that are not for your personal use. In other words, in an ideal opportunity all product shipments should come directly from the producer. In a home based business, you truly want to be the marketer – not the inventory control and distribution specialist.

Richard Loewenhage

CEOnwww.LivingMyLifestyle.com