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Thursday, September 17, 2009

What is MLM?

MLM or Multi-level Marketing (also called network marketing) is a kind of business strategy designed to create a marketing and sales force by compensating promoters of company products not only for sales they personally generate, but also for the sales of other promoters they introduce to the company, thereby creating a downline of distributors and a hierarchy of multiple levels of compensation.

The products and company are usually marketed directly to consumers and potential business partners by means of relationship referrals and word of mouth marketing.

In a Multi-level Marketing setup, independent, unsalaried salespeople of multi-level marketing, referred to as distributors or associates (ie. independent business owners, dealers, franchise owners, sales consultants, consultants, independent agents, etc.), represent the company that produces the products or provides the services they sell. They are awarded a commission based upon the volume of product sold through their own sales efforts as well as that of their downline organization.

Independent distributors develop their organizations by either building an active customer base, who buy directly from the company, or by recruiting a downline of independent distributors who also build a customer base, thereby expanding the overall organization. Additionally, distributors can also earn a profit by retailing products they purchased from the company at wholesale price.

This arrangement of distributors earning a commission based on the sales of their independent efforts as well as the leveraged sales efforts of their downline is similar to franchise arrangements where royalties are paid from the sales of individual franchise operations to the franchiser as well as to an area or regional manager. Commissions are paid to multi-level marketing distributors according to the company's compensation plan. There can be individuals at multiple levels of the structure receiving royalties from a single person's sales.

MLM is a legitimate business, although sometimes, it is mistook for pyramiding (an illegal business strategy). To differentiate itself from a pyramid scheme, an MLM company has to make sure that commissions are earned only on sales of the company's products or services. Businesses that requires sign-up fees, and businesses that require to buy more products than they are likely to sell does not belong on the MLM category. However, new salespeople may be asked to pay for their own training and marketing materials, or to buy a significant amount of inventory.

MLM has many types of compensation plans - Unilevel, Stairstep Breakaway, Matrix, Binary, and Hybrid.

Unilevel is a type of plan that allows a person to sponsor one line of distributors, called a "frontline." Every distributor the person sponsors is considered to be on that sponsor's frontline and there are no width limitations, meaning there is no limit to the amount of people one can sponsor in the frontline. The common goal of this plan is to recruit a large number of frontline distributors and then encourage them to do the same. This is due to the fact that commissions are normally paid out on a limited depth, which typically means sponsor can earn commissions on sales between 5 to 7 levels deep.

In a Stairstep Breakaway type, it is characterized as having representatives who are responsible for both personal and group sales volumes. Volume is created by recruiting and by retailing product. Various discounts or rebates may be paid to group leaders and a group leader can be any representative with one or more downline recruits. Once predefined personal and/or group volumes are achieved, a representative moves up a commission level. This continues until the representative's sales volume reaches the top commission level and "breaks away" from their upline. From that point on, the new group is no longer considered as part of his/her upline's group and the multi-level compensation aspect ceases. The original upline usually continues to be compensated through override commissions and other incentives.

The Matrix plan is similar to a Uni-level plan, except there is also a limited number of representatives who can be placed on the first level. Recruits beyond the maximum number of first level positions allowed are automatically placed in other downline (lower level) positions. This plan often have a maximum width and depth. When all positions in a representative's downline matrix are filled (maximum width and depth is reached for all participants in the matrix), a new matrix may be started. Like Uni-level plans, representative in a matrix earn unlimited commissions on limited levels of volume with minimal sales quotas.

A Binary plan is a multilevel marketing compensation plan which allows distributors to have only two front-line distributors. If a distributor sponsors more than two distributors, the excess are placed at levels below the sponsoring distributor's frontline. This "spillover" is one of the most attractive features to new distributors since they need only sponsor two distributors to participate in the compensation plan. The primary limitation is that distributors must "balance" their two downline leg constitute no more than a specified percentage of the distributor's total sales.

While the Hybrid plan is a compensation plan that is constructed using elements of more than one type of compensation plan.

While MLM sounds like a promising business opportunity, there are some criticisms surrounding the said business strategy. MLM organizations have been described by some as cults, pyramid schemes, or organizations rife with misleading, deceptive, and unethical behavior, such as the questionable use of evangelical discourse to promote the business, and the exploitation of personal relationships for financial gain.

MLM's are also criticized for being unable to fulfill their promises for the majority of participants due to basic conflicts with Western culture. There are even claims that the success rate for breaking even or even making money are far worse than other types of businesses. The vast majority of MLM's are recruiting MLM's, in which participants must recruit aggressively to profit. Based on avalable data from the companies themselves, the lose rate for recruiting MLM's is approximately 99.9%, in other words, 99.9% of participants lose money after subtracting all expenses, including purchases from the company. In part, this is because encouraging recruits to further recruit people to compete with them leads to market saturation.

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