A Basic Guide To Multi-Level Marketing (MLM)
Multi-level marketing (MLM) is also referred to as network marketing. The MLM is essentially a type of business model that combines direct marketing with franchising. The term business model (watch Brilliant Compensation) describes a vast range of informal and formal models that are used by companies to represent various aspects of business, such as operational processes, organizational structures, and financial forecasts.
The MLM business functions by enrolling unsalaried salespeople to sell products and meanwhile earn additional sales commissions based on the sales of people enrolled into their downline, an organization of people that includes direct recruits, recruits’ recruits and so on. This arrangement is similar to franchises where royalties are paid from the sales of individual franchise operations to the franchisor as well as to an area or region manager.
There can be multiple levels of people receiving royalties from one person’s sales. New MLM members may be required to pay for their own training and marketing materials, or to buy a significant amount of inventory to start their career.
The compensation plans vary from one MLM business to the other, but there are basic plans in place. The Unilevel or Stairstep Breakaway plans are the oldest and most popular in the MLM business. These plans features two types of distributors either managers or non-managers.
The pay method of these plans may include overrides which are overrides from their down line. This method is similar to other types of sales organizations.
Most plans compensate at least three generations of such managers and some up to infinity. Executive bonuses are commissions for managers who exceed a posted sales quota. (For example, 2% of the total company sales revenue may go to a bonus pool that is shared monthly to managers who exceed $10,000 in that month).
Commissions are based on the aspect of cycles, where a distributor is paid a fixed amount whenever both legs achieve a certain number of sales units each. Commissions are paid incrementally when the sales volume in each leg matches.
In recent years, the MLM business has developed an image problem due to its resemblance to the illegal pyramid or other similar schemes. MLM businesses operate in the
In the legitimate MLM companies, commissions are earned only on sales of the company’s products and/or services. No money may be earned from recruiting alone through sign-up fees, though money earned from the sales of members recruited is one attraction of MLM arrangements.
A commonly adopted test of legality is that MLMs follow the so-called 70% rule which prevents members “inventory loading” in order to qualify for additional bonuses. The 70% rule requires participants to sell 70% of previously purchased inventory before procuring new orders. There are however variations in interpretations of this rule. Some attorneys insist that 70% of purchased inventory should be sold to people who are not participants in the business, while many MLM companies allow for self-consumption to be a significant part of the sales of a participant. The Federal Trade Commission offers advice for potential MLM members to help them identify those activities that could be scams.
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Lee Stuckey
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