Multi-Level Marketing – Definition

Cite this article as:"Multi-Level Marketing – Definition," in The Business Professor, updated July 29, 2019, last accessed July 3, 2020, https://thebusinessprofessor.com/lesson/multi-level-marketing-definition/.

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Multi-Level Marketing Definition

Multi-level marketing is an approach that direct sales firms follow for influencing their present distributors to add new distributors who receive a certain percentage of sales from their recruits. The recruits tend to be the downline for distributors who also earn money by directly selling their products to customers. Amway, an established organization that deals in beauty, health, home care products, etc. follows multi-level marketing strategy.

Key takeaways

  • Multi-level marketing refers to a strategy where companies dealing in direct sales motivate its current distributors to recruit new distributors.
  • Out of billions of members globally, a small chunk is able to convert their efforts into nice incomes.
  • The Federal Trade Commission conducts investigations against multi-level marketing firms to see if their practices are legitimate or not. Till date, it has seen many firms with doubtful legitimate policies.

A Little More on What is Multi-level marketing better

In spite of being legal business strategy, multi-level marketing comes with its own set of controversies. One of the biggest issues with this strategy is pyramid schemes in which the money earned by new recruits is offered to their team leads or the individuals at the top levels. This can be disheartening for the new recruits because they are doing all the hard work in selling the product, and still not getting their credits. Such schemes take undue benefit from people while they portray a legitimate picture for multi-level marketing. If you focus on pyramid scheme, you’ll see that their main emphasis is on recruiting new people and building teams, rather than selling products.

The Legitimacy of Multi-level Marketing

It can be hard to assess if multi-level marketing strategy is legal or not. It’s unclear if the company makes direct sales to its customers, or its members further involve more recruits to their team for purchasing the product. Companies who prefer selling directly to its customers come under legitimate bracket, but the ones who consider the latter, can fall under the illegal pyramid scheme.

The Federal Trade Commission (FTC) has been carrying out investigations against multi-level marketing firms for many years. During this time span, it has found a lot of companies following strategies or practices that are hard to be considered as legitimate. As per the World Federation of Direct Selling Associates’ statistics of 2017, more than 116,737,059 million individuals operate independently among its members throughout the world. However, there are just a few who receive fruitful results for their efforts. For some, this is considered to be one of the major features of a pyramid scheme.

Any scheme that focuses more on recruiting members than on selling products will be considered to be a pyramid scheme.

Example of a Multi-level Marketing Organization

Herbalife Nutrition Ltd., having over 500,000 distributors, is an esteemed multi-level marketing firm. It specializes in distributing weight-loss and health-based products. With FTC investigating Herbalife, its activist investor named William Ackman brought the company in limelight by shorting stock worth $1 billion in 2012. He charged the company for following a pyramid scheme, and challenged that the stock price of the company will instantly fall due to the scam.

Last year in 2018, Ackman surrendered his bet, and gradually on Aug 28, 2018, the stock price of Herbalife was $58 per share.

Many people have accused Herbalife of its illegal practices of misinterpreting its sales, and have filed many lawsuits against its operations. In 2016, during a settlement with the FTC, the company decided to reorganize their business structure. In its defence, the company says that the majority of its revenues are a result of product sales instead of recruitment. Several protection plans such as money-back guarantee, are offered to its members so as to reimburse for the products they could not manage to sell.

References for “Multi-Level Marketing

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