What Is Multi-level Marketing (MLM) and How Does It Work?
The multi-level marketing business model has been around for over eighty years, and it is a very well known concept worldwide. The possibilities it offers are constantly getting wider, but it is already clear that it has a future ahead. It is known under different names, the most widely used is MLM, but it is also called network marketing. This article talks about this type of business in greater detail. We will talk abouth the origins of MLM, the basic mechanics of this online business and the advantages and disadvantages of multi-level marketing.
What Is Multi-level Marketing?
As you may have guessed from its name, multi-level marketing is a form of marketing (advertising).
The principal function of marketing is to influence the demand for goods or services. The word multi-level is also self-explanatory – meaning marketing on several levels.
So in a nutshell, MLM is basically the act of selling goods and services on multiple levels.
To understand what multi-level sales mean, one needs to imagine a system where a gradual intake of new members is introduced. This gradual introduction basically creates a network of sellers, which explains why MLM is often also described as network marketing.
Although it may appear so, an MLM scheme must not be mistaken for a pyramid scheme.
The Initial Idea of MLM Is Actually Very Simple
If you are looking to buy something (say a piece of clothing or a bottle of good wine), you don’t just pay the actual production cost. The product price actually consists of several layers – the cost of production, cost of marketing, general energy bills, business rental costs (e.g. store, storage costs), shipping costs, etc. So, naturally, the margin may shrink down considerably.
Let’s say the product cost is roughly $30, by the time these costs are calculated + the cost for marketing gets added, the actual purchase cost ends up being $150. This is how the general sales system works.
Multi-level marketing, on the other hand, works completely differently. The main idea behind it is selling the product directly. This basically means that the transaction between the seller (producer) and the buyer (end customer) is conducted with the aid of an independent MLM distributor. This could save the company a significant amount of money for storage, shipment, marketing, advertising, etc. as these activities are absorbed by the independent MLM distributor.
What does the MLM company do with the money saved during this process? Part of the savings is paid out between the individual distributors through their multilevel system (see picture above).
You could compare direct sales to a train ride where one journey takes you straight to your destination without having to change the train and without delays.
The annual turnover for so called direct sales increases yearly. In 2000 the annual turnover for direct sales was approximately $82 billion, four years later, the figure was nearing $100 billion, and in 2014, it was $182 billion.
A Practical Example
Imagine, there is a new business in town – restaurant, coffee shop, cinema, general shop selling goods or other type of business. You visit this new business, pay for your food or services, and leave. Having enjoyed the atmosphere so much, you tell your friends, complimenting the food, the quality of service, the overall ambiance of the venue, etc. and based on this recommendation, your friends also visit. The owner had just gained new customers at no cost to themselves, as it was a direct recommendation. But what about you? You were the ones bringing the customers in but received nothing in return.
So, what does the owner do with the money saved on advertising? They keep it…
Now, let’s try the same example, but with a little twist. The business you have visited operates within the MLM system. You purchase a product, you test it, and if you like it, you might become a repeat customer – based on the fact that you have enjoyed it.
You introduce the business to your friends, and if your friends like the product(s) too, they will become new customers. The company not only gained another customer(s), but they have also saved huge amounts of money on advertising in the newspaper or on TV. The MLM company can now redistribute part of these funds and pay them out to you (your reward for making the recommendation).
So, there you have it. It’s not that difficult. However, if you want to do network marketing, you have to understand the main principle mentioned above.
To sum up – MLM is actually a form of reward. If you can attract new customers for a particular company, they will share their profits with you.
What is important, however, is that you are presenting a good quality product. A product that is memorable and cannot be looked upon as an overpriced product, or a something that is not functional. If the product is viewed as gimmicky, it would be more of a pyramid scheme.
There Are Two Systems of MLM Rewards
These are either “stairs” – the classic setup that is used by most MLM companies. The distributors create a network and receive a certain percentage of earnings for each person introduced into the system.
You don’t need to bring hundreds of people into the system. Even a few can be an interesting earning opportunity.
The payments are paid on various levels, depending on the success of the individual distributor who is at the top of the imagined pyramid.
The other option is the so-called binary system. The idea behind this system is that even people who entered the process early, and are several levels higher above you in the imaginary pyramid, can add new branches to your network (e.g. they can add new members to your network).
A Long History Going Back to Pre-war Years
When did the MLM actually start? You may be surprised to learn that MLM is around one hundred years old.
Of course, the early beginnings were not always legitimate. The early products were, for example, alcohol during the prohibition. The owners of these schemes, for example, Al Capone, Vincent Drucci, quickly realised that smuggling (alcohol products) was a great way to get rich. They were connected with experienced smuggles, who in turn took on new members to distribute their illicit product, and the business grew at the speed of sound.
But if we want to mention legitimate MLM schemes that are in line with the law, we can talk about a company called California Vitamins. This company came up with a concept of Multi-Level Marketing in 1934. They started as a direct sales company signing up salespeople who would use the product for their personal use and sell to it to their family and friends. This opportunity was open to anyone who wanted it – and when the distributors introduced new people to the scheme, they received great rewards.
Today, this is a standard business practice adopted by several known companies. These companies, Avon, Herbalife, and many more, profit from this principle.
Many companies were operating within the USA using the MLM principle during the sixties and seventies, and it is thanks to someone like Glen Turner that the MLM business model really spread.
Today, the MLM business models do not only operate within the USA but worldwide. I am sure many of you have heard about brands like MARY KAY, Amway, Avon, Oriflame, and many others – companies that operate worldwide with huge profits (billions of dollars worth of profit).
Are You a Newbie to MLM Marketing? Don’t Worry, There’s No Risk Involved
Are you concerned that you might fail? You should definitely try MLM first hand. The initial investment doesn’t have to be high, and at least you will try whether you have what it takes to make it further. It could be a small earning, but considering the amount of time you will have put in, it may be an interesting earning.
On the other hand, multi-level marketing could turn out to be the biggest source of your income. It really depends on your skills, determination and your hunger to make it.
To achieve success, several other factors are at play too:
- It is entirely up to you how much time, you wish to dedicate to this project. Naturally, the more time you spend on the project, the bigger the chance of success.
- Being flexible with your time (the option to build your business along with your current job or school commitments).
- The initial investment is relatively low, so anyone can start.
- The possibility of building a passive income for the future. You will have to be persistent, we all dream about financial independence, but of course, the journey to get there is usually quite long.
- Learn how to navigate the investment world. The beginnings may be difficult, but once you master how to assess products well, you will become more independent in your current position.
- The other advantage is that some MLM companies offer training which is suitable not only for complete beginners but also for talented novices.
- An attractive bonus and rewards system. There are also rewards for the best-performing distributors. This helps many people to learn to be patient at the beginning of joining the system.
- You don’t need to have any specific education to become a distributor.
If you decide to give MLM a go, you can access some products at a wholesale price. This provides you with a larger margin and it is entirely up to you how you choose to present the product and what ways you use to promote it.
Do Not Be Fooled by Thinking It Will Be an Automatic and Easy Earner
To ensure that this article is as objective as possible, it is only fair to highlight the disadvantages of MLM.
You have to be very careful when undertaking such activities because not everything that looks like an MLM system does actually fall in the same category in the market. Very often it could actually be a pyramid game (pyramid scheme), where you are asked to commit to a certain amount of products per month, pay high entry fees and at the end of the exercise you end up with no more than a leaflet and a few products that nobody is interested in purchasing.
If and when you come across such a scheme, I would say – steer clear of it. After all, a legitimate and fair MLM system will not promise the impossible and it will not act in a shady/illegal manner.
All distributors/customers must be able to clearly understand the reward system of an MLM company (the compensation plan). If the reward system doesn’t make sense, it stands to reason that there might be something wrong with the project itself, and you should think carefully whether or not it’s worth investing in that particular project.
Some People Will Not Succeed in Doing Multi-level Marketing
Put simply, not everyone is cut out for it. If you are expecting miraculous earnings straight from the start, you will most likely be disappointed.
According to several sources, nine out of ten people who try to make it are not successful. And they either learn from the experience, or they abandon the idea of doing MLM business altogether.
A long time has passed since 1942 when an American company Nutrilite entered the market. However, the principle of multi-level marketing remained the same for generations.
The general suspicion and distrust can, at times, be fuelled by an unfamiliar environment. Sadly, there were many unethical sellers in the USA, which gave MLM a bad reputation. However, as I have already mentioned at the beginning of this article, these projects were not MLM based.
Network marketing is a business, it is not employment. What that means, is that you will need to make the initial investment – investing finances, time and diligence. No one will guarantee that your investment will bring returns, but that is just the nature of doing business – any business.
If you want to succeed, you need to follow these four main points:
- Education, education, education!
- Advice, help, motivate!
If you think that you don’t have these attributes, or you are looking for a sure thing, quick money, or salary, then multi-level marketing is not for you!
If you have not found what you were looking for in this article, please try to read the discussion forum as there may be other interesting information regarding this subject.
Do you already have MLM experience? Have you, or are you currently working as a distributor for a MLM company? If the answer is yes, please share your thoughts in the discussion forum. I welcome every opinion, and you could potentially motivate or inspire other readers of this website.
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My name is George and I currently work from home as a freelancer for a PR agency selling advertising. I also freelance as an online marketer for an e-shop, and I am actively involved in creating this website. I am always looking for interesting opportunities on how to make money online. I share my findings with my readers on this website. I consider this to be my hobby. I hope, that you can find some legitimate work from home, or perhaps you might be able to earn a little extra money.