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A Beginner's Guide To Multi-Level Marketing (MLM)

Feb 29, 2008
Another name for Multi-level marketing (MLM) is network marketing. Typically, a company that organizes itself around a multi-level marketing model combines direct marketing techniques with franchising. In a franchise, commissions are paid from the sales of individual franchise operations to the franchisor and also to an area or regional manager. Similarly with MLM, there can be several levels of people receiving royalties from one person's sales.

People join an MLM company as unsalaried affiliates and earn commissions on the products they sell. But they also receive commission on the sales of affiliates who they enrol into their "downline" as well as on the sales of the affiliates of their affiliates, and so on. To put it another way, the profit on one person's sales is divided between several different people in different levels of the organization.

New MLM affiliates are often required to pay for their own training and marketing materials, or to buy a significant amount of inventory to start their career.

MLM business compensation plans come in various shapes and sizes. The oldest models are the Unilevel or Stairstep Breakaway plans. This is the structure that was made famous by Amway. It allows affiliates to recruit as many people as they wish into their first level and offers a limited number of payout levels. Once a distributor achieves a certain level of business development he becomes a manager and "breaks away" from his original manager. The distributer is now a manager and can receive managerial overrides while the higher level manager receives a percentage override from the sales of the entire breakaway organization.

This model is similar to any other type of sales organization. Most plans compensate at least three generations of such managers. Executive bonuses are rewards for managers who exceed sales targets. Typically, a small percentage of total company sales revenue is placed in a bonus pool which is divided up between all the managers who exceed that month's sales target.

Two other popular compensation models are the Matrix plan and the Binary plan. Each limits the number of people who can be placed in any level. This causes an active distributor's recruits to "spillover" so that affiliates will often have people in their downline who were not directly sponsored by them. A binary matrix limits the width of each level to two legs. Commissions are then paid out on a system of "cycles," in which a distributor is earns commission whenever both legs of his downline hit certain sales targets.

One criticism of MLM style businesses that is often heard is that they resemble illegal pyramid schemes. In a pyramid scam people are recruited to an organization and pay out for that privilege alone, there is no product. In contrast, MLM businesses recruit salespeople to sell a product and offer additional sales commission on the sales of other affiliates recruited into a salesperson's "downline". That is why a lot of illegal pyramid schemes try to pass themselves off as legitimate MLM businesses. A legitimate MLM company pays commissions only on sales of products and services. No money may be earned from recruiting alone through sign-up fees.

Some MLM affiliates may be tempted to qualify for bonuses by "inventory loading" - they seek to hit sales targets by purchasing goods for their own use. To prevent this, many MLM distributor agreements now include a 70% rule in which all participants are required to sell 70% of previously purchased inventory before procuring new orders. Unfortunately, this rule is not uniformly interpreted by attorneys. Some 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 as a significant part of the sales quota of affiliates.

Today, the Internet offers the MLM industry a whole new frontier. Sales of MLM products and recruitment to MLM companies have exploded. The use of replicating websites, online order processing, online advertising, opt-in email campaigns and a host of other techniques makes it much easier for MLM affiliates to distribute information and collect sales twenty-four hours a day seven days a week to customers all over the world. The choice of MLM businesses is now huge and for people who want to join an MLM organization and run an Internet business from the comfort of their own home, distinguishing legitimate organizations from pyramid scams has become more important than ever.
About the Author
David Hurley writes articles on a variety of subjects. For more information about Internet success strategies, sign up to his free Internet marketing tips newsletter at: Grasp-The-Nettle.com.
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