Understanding multi-level marketing

Multi-level marketing (also known as Network Marketing or MLM) is a subtype of direct sales. As with traditional direct selling, multi-level marketing focuses on a person-to-person approach whereby the product moves straight from the distributor to the end-user, bypassing a retail outlet.

MLM marketing strategies compensate the distributor for their own sales as well as the sales of other distributors that they have recruited. In direct sales (also known as single-level marketing), distributors do not recruit new prospects, and are compensated purely on their own sales volume.

Approached with commitment to the strategy and unwavering self-belief, a venture into the world of multi-level marketing can be very fruitful and fulfilling.

The history of multi-level marketing

In 1945, the California Vitamin Company introduced the first recognized multi-level marketing plan. Shortly afterwards, the name was change to Nutrilite (later to be acquired by Amway). Nutrilite distributors who had acquired a minimum of 25 regular customers were allowed to recruit or sign up new members to the plan, receiving a 3% commission from the sales of these new distributors. This provided the distributor with a residual income.

In the 66 years that followed, the MLM industry exploded, with hundreds of new companies being added to the fold annually. Some of these took a rapid dive, while others (Amway in particular) thrived, regardless of the state of the economy throughout the decades.

Unlike direct sales (its practical and mild-mannered father), multi-level marketing has always had a bit of a bad-boy reputation. Having attracted criticism, outcry, contempt and more than its fair share of lawsuits, MLM has always been the subject of controversy, and is still regarded by some as nothing more than a thinly-veiled pyramid scheme.

Despite its turbulent upbringing, however, it can’t be disputed that some MLM companies have shown longevity, strength and extremely solid financial backbone, which has generated a renewed (if cautious) display of respect from myriad individuals and financial experts alike.

MLM Companies of distinction

In the world of multi-level marketing, there are successes, and then there are big-time players.

Ever heard of these guys?

Avon
This American cosmetics giant has been around for ever. The #1 MLM company in the world, it attracted revenue of $10.9 billion (2010 figures)

Amway
The Mick Jagger of MLM, Amway, with its enormous range of health, personal and household items, is still giving a great performance. In 2nd place at $9.2 billion.

Herbalife
A comparatively new kid on the block, Herbalife’s reputation for excellent nutritional and sports supplements pushed its 2010 revenue to $2.7 billion.

Mary Kay
Privately held and with a focus on both single- and multi-level marketing, Mary Kay Inc continues to blossom with revenue of $2.5 billion.

Tupperware
Although the focus of Tupperware is still predominantly on the direct sale, it now has several MLM aspects to it. $2.3 million.

Is MLM for me? – Reasons to get involved in multi-level marketing

According to advocates of MLM, there are many benefits to MLM.  These include:

  • Helping others – Not only do distributors help others by providing them with a high-quality, beneficial product or service, they get the opportunity to help them achieve their goals.
  • Meeting people – Without doubt, being involved in MLM is going to get you out into the crowds. If you’re a people person, you’ll take to it like a fish takes to water. And if you’re a wallflower, before long you’ll be the life of the party
  • Being your own boss – Who wouldn’t love an occupation that allows you to get out of bed at 9, go to gym whenever the urge takes you, and do business over coffee – all for a relatively low start-up cost.
  • Getting rid of headaches – No staff hassles, no overpriced premises, no delays due to incompetence of colleagues, no deadlines. Bliss? We think so.
  • Creating wealth – Financial freedom is what we all strive for. If you’re willing to work hard and smart, then multi-level marketing may be just what you’re looking for.
  • Achieving your dreams – Whether it’s personal fulfillment or developing people skills or visiting a specific corner of the globe, MLM gives you the opportunity to reach for the stars.

Before enrolling in any MLM programme, make sure that it is a legitimate opportunity and a solid business plan. Check that the company sells top-quality products, provides training, encouragement and recognition, and places an emphasis on product sales rather than gimmicks.

Various MLM compensation plans

Multi-level marketing compensation plans are complex at the best of times. Each company has its own specific business model and payment scheme, and each comes with their own pros and cons and their own separate bonus systems. For the most part, these models are based on one of these four major structures:

FORCED MATRIX PLAN

This plan allows you to have a maximum amount of frontlines (this is known as width). Then once you have these in place, new recruits will be placed under one of these Frontlines, who in turn can have the same number of frontlines. This continues until you reach the specified number of layers (known as depth).

This plan is good in that you can help your downline build their own downline, which helps many people earn small commissions (with you getting the biggest percentage) – this has a positive effect on retention rates, which is so often a challenge that MLM companies are faced with.

However, this plan can make distributors complacent, as you’re doing most of the work for them. Also, you can lose the opportunity to earn good money within the deeper levels if some of your legs aren’t active.

UNI-LEVEL MATRIX PLAN

In this system, you are allowed to sponsor as many people as you like on your frontline. Usually, you are limited in terms of depth: you may not get paid out beyond a certain level. So if one of your legs builds their own organisation 40 levels deep, for instance, you will lose out on that earning potential. If you are good at personally sponsoring frontlines, you may be better off broadening your organisation at the top.

In most cases, width offers profitability and depth offers security.

BINARY PLAN

With this increasingly common compensation plan, you are restricted to only two frontlines or “business centres” (so you may build only two legs). Everyone else who you add to your organization gets slotted in below one of those two frontlines, and so it continues. Depending on which MLM company you join, you usually get paid on the weaker of the two legs. Payment is generally volume-driven rather than level-driven, and often paid out on a weekly basis.

This is an easy to understand and a very supportive structure, because everyone benefits. You help your frontlines build their businesses, and they in turn help build their frontlines’ businesses. Members often get lazy using this plan, though, so continual motivation is required.

STAIRSTEP BREAKAWAY PLAN

This is the oldest and still the most popular multi-level marketing compensation plans. Using this system (which has been accredited to and still used by Amway), allows the business owner or distributor to enroll an unlimited number of frontlines. Remuneration is based on volume, the commission percentage stepping up as business volume increases.

Once a distributor has reached a certain level of success and met specific performance criteria and sales volume, he breaks away from his sponsorship line. His original sponsor receives a predetermined percentage override on the breakaway organisation’s sales.

This system has a good track record, is widely accepted and is driven by distributors’ sales and performance. On the other hand, it is a complex system that is hard for new recruits to understand, and has often been criticised for paying members a far lower percentage of total sales than other plans do, which means that you have to work smarter and harder to earn the big bucks using the stairstep breakaway plan.

Know what you’re getting yourself into

When it comes to multi-level marketing, what you put in is what you get out. The major factor in your new MLM venture is not the product, or the people or the payment plan: it’s YOU. Your attitude, your level of commitment and your self-belief will determine whether or not you’ll succeed in this challenging but dynamic field.

Having said that, all MLM companies have their pros and cons, so do your detective work beforehand.

Before signing on the dotted line:

  1. Read the small print
  2. Ask your potential sponsor detailed questions – if he’s unsure or looks unnerved, walk out the door
  3. Establish if there are bonuses offered for specific achievements
  4. Check that the MLM company’s overall payout is neither too low nor overly generous (and likely to collapse) Most plans pay roughly 30% of suggested retail volume
  5. Make sure that the plan has a lock-in feature: you are locked in once you have reached a certain level and will not be demoted should there for whatever reason be a drop in performance
  6. Does the compensation plan offer good perks for excellent performance, beyond commissions and bonuses? These can include cars, health insurance or stock options.

And most importantly:
Is it the company’s primary objective to sell products to end-users or is it focused on the constant recruitment of new prospects? If it’s the latter, turn your back and walk away. The core focus of legitimate and successful MLM companies is the product… not the compensation plan itself.