What Are The Key Attributes and Qualities of an MLM or Network Marketing Company?
MLM is short for Multi-level Marketing. Network marketing is another term for the same idea, though it is less precise. MLM and Network Marketing are part of a broader industry, known as the Direct Selling.
MLM is generally defined as a marketing strategy where a company with a product or service has an independent sales force which is compensated for their personal sales and the sales of a salesforce that they have recruited. From the standpoint of an individual who joins such a company and not only sells products but also recruits others to join the sales force, the recruited salespeople often are called the “downline” or “team”, and different types of compensation can apply to them.
This marketing strategy for MLM or Network Marketing is what distinguishes MLM from other parts of the Direct Selling industry, which would include affiliate marketing (usually with no sales force or only one level of sales force commissions), and of course direct sales of one’s own product or service or of a licensed product or service.
In many cases, particularly where personal contact is helpful or where direct sales increase the chances of gaining profit, many companies find it helpful to use the direct selling approach, and particularly the MLM approach where there is an encouragement to build up a large sales team. However, there are also questions about the true definition of MLM. Companies, regulators, and participants in this industry are concerned about the additional responsibilities that go hand-in-hand with the benefits of being MLM.
The U.S. Federal Trade Commission (FTC) first defined MLM in 1979 in its famous Amway decision. According to the FTC:
“A business model in which a company distributes products through a network of distributors who earn income from their own retail sales of product and from the retail sales made by distributors’ direct and indirect recruits.”
However, the terms used in this definition is already outdated. Today, most businesses deliver their products directly to the customers. Companies seldom use distributors for actual delivery of products as consumers prefer door-to-door delivery of the items they purchase.
Currently, the FTC defines MLM on their website as:
“In multilevel or network marketing, individuals sell products to the public — often by word of mouth and direct sales. Typically, distributors earn commissions, not only for their own sales but also for sales made by the people they recruit.”
The definition given by the FTC seems okay overall, but some of the terms seem a bit too broad. Nevertheless, the FTC also gave a more appropriate definition when they filed a case against a company called BurnLounge. In their decision, they said the MLM program is:
“Any marketing program in which participants pay money to the program promoter in return for which the participants obtain the right to; (a) recruit additional participants, or have additional participants placed by the promoter or any other person into the program participant’s downline, tree, cooperative, income center, or other similar program groupings; (b) sell goods or services; and (c) receive compensation, in whole or in part, based upon the sales of those in the participants’ downline, tree, cooperative, income center or similar program grouping.”
Aside from the fact that some direct selling or MLM companies are free to join and thus don’t require to pay money for the rights, this explanation of MLM points out the key components of an MLM company. It states that the participant should have the ability to recruit others into his/her sales force. It also states that the participant should have the ability to sell products or services to consumers of both the salesperson and the sales person’s downline. The last element of MLM is the payment received from a specific compensation plan involving at least two levels of salesforce.
In simple terms, a company is MLM if it offers incentives to sell, incentives to build a team, and a multi-level compensation model. The most important factor in MLM is the presence of different levels of compensation. Companies that allow their sales force to recruit and earn on top of their personal sales volume, and with at least two levels of salesforce, are considered MLM.
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