Multi-level marketing (
MLM) also called
pyramid selling,
network marketing,
]and
referral marketing,
[4] is a
marketing strategy for the sale of products or services where the
revenue of the MLM company is derived from a non-salaried
workforce selling the company's products/services, while the earnings of the participants are derived from a pyramid-shaped or
binary compensation
commission system.
Although each MLM company dictates its own specific "compensation plan" for the payout of any earnings to their respective participants, the common feature which is found across all MLMs is that the compensation plans theoretically payout to participants only from the two potential
revenue streams. The first stream of compensation can be paid out from commissions of sales made by the participants directly to their own retail customers. The second stream of compensation can be paid out from commissions based on the sales made by other distributors below the participant who had recruited those other participants into the MLM; in the organizational hierarchy of MLMs, these participants are referred to as one's “downline” distributors.
[5]
MLM salespeople are, therefore, expected to sell products directly to end-user retail consumers by means of relationship referrals and
word of mouth marketing, but most importantly they are incentivized to recruit others to join the company as fellow salespeople so that these can become
their downline distributors.
[3][6][7]According to a report that studied the business models of 350 MLMs, published on the Federal Trade Commission’s website, at least 99% of people who join MLM companies lose money.
[8][9] Nonetheless, MLMs function because downline participants are encouraged to hold onto the belief that they can achieve large returns, while the statistical improbability of this is de-emphasized. MLMs have been made illegal in some jurisdictions as a mere variation of the traditional
pyramid scheme, including in mainland
China.
