Multi Level Marketing

Network Marketing is often confused with Multi Level Marketing (MLM) which is a denomination for a hierachial business structure applying bonuses and commision on the earnings of downstream affiliates, hence affiliates located below themselves in the pyramid-like business tree structure.

MLM Compensation Structure where the individual affiliate (blue dot) will receive commision from the sales of downstream affiliates (red dots).

Pyramid Schemes

However in some scams, the incentive in finding new affiliates for one's own downline structure became the main thing instead of the sale of products. Thus in most states getting commisions from recruitment of new members or affiliates is prohibited as "pyramiding". 

In other cases affiliates were motivated to buy more than they could sell or mainly purchased for own use.

The affiliates' obligatory purchase of the products in such pyramid schemes became the main source of business income and therefore this kind of structure has been made illegal in most countries including in the USA. 

Avoiding MLM Scams

In order to oppose this downside some companies have introduced rules that obligate the affiliate to sell a certain amount before replenishing the stock. The 70% rule requires the affiliate to sell 70 % of the previously adquired inventory before reordering from the company. 

Some lawyers insist that 70% of all sales ought to be made to people outside of the company. Never the less many MLM companies allow for internal sale to account for a substantial part of the total sale.

Signs of an illegal pyramid scheme can be lack of training of the affiliates and merely focusing on recruiting these.

Facts about recruiting MLM's

In fact based on data from recruiting Multi Level Marketing companies, the loss rate is approximately 99.9 %, meaning that 99.9 % of all recruits or affiliates loose money when their expenses have been subtracted. Expenses might include payments for the products which the affiliate is then unable to sell partly due to market saturation caused by the exaggerated encouragement to recruit new affiliates.

According to Carl Walter "MLM organizations have been described by some as cults (Butterfield, 1985), pyramid schemes (Fitzpatrick & Reynolds, 1997), or organizations rife with misleading, deceptive, and unethical behavior (Carter, 1999), including the questionable use of evangelical discourse to promote the business (Hopfl & Maddrell, 1996),and the exploitation of personal relationships for financial gain (Fitzpatrick & Reynolds, 1997)." 

Good Multi Level Marketing Companies