what is MLM?
Today is Monday April 18, 2016
Multi-level marketing, also known as MLM or Network Marketing, is an alternate channel for a manufacturer to deliver its products to market.
(Other channels include retail storefronts, catalog shopping, and door-to-door sales.) Depending on the particular company, the MLM channel may provide both word-of-mouth advertising and distribution.
Q: Why would a company choose the MLM route to product distribution?
There are several good reasons:
- Low overhead. There are virtually no up-front advertising costs.
Unlike a typical retail company, the MLM company doesn't have to spend massive amounts of money to "pull" customers in. Instead, it pays distributors to "push" the product out into the marketplace.
In addition, the company only has to pay the distributors for *results* -- that is, a percentage of products actually sold.
Ordinarily an MLM company will use the money that *would* have gone into advertising to pay its distributors. (Using Procter & Gamble as an example: I have an unconfirmed report that says P&G's sales in 1992 were $25billion. Their advertising budget was $10billion. So they spent 40% of their sales on ads. MLM companies typically pay 40-80% of their sales volume to their distributors.)
- Low distribution overhead. Typical retail companies generally use:
a series of national, regional, state, and local warehousers to distribute their product to the retail stores. Each of these intermediaries wants to make a living, and marks up the cost of the product. Using P&G again: my unconfirmed report says that a tube of Crest that sells for $2-3 in a store costs P&G roughly 13 cents to manufacture. If it sold for $2, 40% (80c) would go to advertising, leaving $2 - 80c - 13c = $1.07 for distribution costs and P&G's profit.
- Rapid growth. A well-managed MLM company can grow at an amazing:
rate -- as much as 20%, 50%, even 100% per MONTH. (In fact one of the biggest reasons for MLM company failure is inability to keep up with explosive growth.) It would be difficult or impossible to generate this kind of growth in an overcrowded retail market.
- Specialized and motivated "sales force." There are hundreds of thousands of products cramming the shelves of retail stores. It's almost impossible for a new product to make a dent in the market, unless the company spends megabucks on advertising.
Also, many MLM products need more explanation than can be done in a 30-second TV spot. A person-to-person word-of-mouth campaign can solve both of these problems.
That's the company's perspective. For the individual, MLM can offer an opportunity to build a part-time income source that can, with enough effort, grow into a significant income. With hard work (and a little luck) you can earn incredible incomes.
How? MLM is all about "a lot of people doing a little bit." In an MLM you are rewarded for the sales you create -- not only directly, but indirectly as well. You get profit for any retail sales you make, plus you get a bonus on the sales made by people you enrolled into the company, and people they enrolled, and people THEY enrolled, and... By getting a small percentage of many people, your income can grow to a very large number.
But wait. It's not that simple. It takes a lot of time and work to build up a group (called a "downline") in any MLM. What's more, even if you're a real hard-working go-getter, YOU can't do all of it.
You can't enroll the 90,000+ people in this group by yourself. Each person has to find 5 of his own -- and the sad truth is, most people are not that ambitous. It's hard to find the ones that will work.
So it's almost unheard-of for someone to actually build an idealized group like this. Some "legs" in the downline will build faster than others, and some will grow slower. If you don't work hard yourself, you might never start ANY legs that go anywhere.
But that's the concept: a whole lot of people doing a little bit each, and you getting a small reward on each one. If you have the initiative and work ethic to build that group, you can make a very nice income in MLM -- maybe even get rich.
But MLM **IS NOT** a get-rich-quick deal. It DOES take a lot of work, and most people won't put in the work it takes. The large majority of people will never get rich; quite a few hardly make a dime. But the beauty of it is, as long as you pick a good company with a good product or service, the size of your success is up to YOU.
Q: Is MLM a scam? Is it legal? Is it moral, ethical, etc?
The short answer is: maybe.
This is the cause of 99% of the flamefests, arguments, and general disagreements about MLM. Many people contend MLM is immoral or unethical. Many Attorneys General (who ought to know what they're talking about) say a properly-run MLM is perfectly legitimate and ethical. Who's right?
The truth is, MLM is not inherently good or evil any more than capitalism is good or evil. Both can be done ethically, and both can be done unethically. It depends on how a particular company is designed and managed.
Since the MLM industry is very young (about 40 years old), the law is still in flux. There are admittedly many MLM companies that are nothing more than scams, get-rich deals for the owners and their cronies, glorified chain letters, etc. Some of them even manage to skirt around the legal issues and avoid prosecution.
There are other companies that have legitimate products, and may have been in business for many years, but which are run in such a way that many people get burned -- old ladies investing their retirement funds to buy a garage full of products, and so on.
Most people would agree these companies, or at least the distributors that do the questionable practices, are not very ethical.
On the other hand, there ARE many companies that are run legitimately, legally, and ethically. They produce good products that are valued by customers, and give many people the opportunity to improve their financial situation.
The anti-MLM people will often assert that MLM companies and people sell unrealistic fantasies of income potential, recruiting "cannon fodder" to fatten their upline's bonus checks. This view is understandable, but misses one critical point: in general, the new person has the SAME OPPORTUNITY to build a group as the fatcat upline guy. The upline has worked hard, maybe for years, to build the downline that is now rewarding him so richly.
The new person has invested maybe a couple of hundred bucks and a few hours. It's only fair that everyone starts out in the same place -- AT THE BOTTOM -- and everyone has the SAME chance to build a downline of their own.
The major exception to this is in the theoretical case of "saturation." In this situation the company has grown so much that a large percentage of people who would be interested in enrolling have already enrolled.
(NOTE that this does NOT mean "EVERY person is enrolled"!) The new person has a much harder time finding new recruits than the upline person did N years ago. The new person has several choices:
go with the established company, and live with the saturation; go with another company that has no saturation problems; or give up.
On the other hand, while it may be a bit harder to find new prospects when a company is mature, the new person who joins the mature company has MANY more tools and support mechanisms available to him/her than the "old hands" did back at the start of the company. There are probably also many more products, more professional literature, etc.
While those pioneers may have had wide-open spaces to settle, they also got more arrows in their backs. It works out pretty evenly.
In actual practice, saturation is very seldom a problem. It may be easier or harder to find new prospects for a particular company in a particular location, but there are very few cases that are actually "saturated." The thing to understand is that saturation is not a clear-cut, yes-or-no situation; one company may be CLOSER to saturation than another, but neither might be actually "saturated."
The anti-MLM argument often runs calculations of exponential growth, and demonstrates that the entire population of the planet will be enrolled within a short period. This is an intellectual exercise rather like the example of "one pregnant mosquito could carpet the earth in mosquitoes by the end of the summer." In other words, in actual reality, it doesn't happen that way. The growth rate is normally much slower than people realize (especially once a company gets larger), and slows down as a company approaches saturation. It may get harder to enroll new people in a large and near-saturated company, but NO company in the history of MLM has ever grown fast enough to exhaust its potential marketplace. More people turn 18 every year in the United States than are enrolled in all MLM companies combined. So far, at least, the growth of MLMs hasn't kept up with the growth of population.
So, bottom line: In the opinion of many people, MLM *can* be done legally, morally, and ethically. It can also be done unethically and illegally. Choose your company carefully.
Q: But isn't it wrong to keep bringing in new participants, rather than concentrating on selling a product like "regular" businesses?
Many anti-MLM folks think that the only purpose of ANY MLM is to enroll new people, instead of selling a product. What they don't understand is that ENROLLING NEW PEOPLE *IS* HOW YOU SELL THE PRODUCT IN MLM.
If you focus only on selling, it isn't MLM -- it's plain old sales. Nothing wrong with that; it's just not MLM.
MLM works with a DIFFERENT PROCESS than typical sales. Rather than finding a few people who sell a ton, you find a bunch of people who sell a little. (And, since each sells so little, self-consumption can account for a significant portion of those sales.) Enrolling new people, and building downlines, is how you find the people who each do the small amount of sales. (Note: EACH do a small amount of sales.
NOT just the "suckers on the bottom". In any legitimately-run MLM, ALL people, from top to bottom, contribute to the sales effort.)
Product still gets moved -- that's how bonuses get paid in a legitimate MLM -- it's just done in a different manner than in traditional sales or retail.
MLM works differently than traditional methods, but just because it's different doesn't make it bad. It's just DIFFERENT. Just like franchising was different from traditional retailing, and was considered to be a scam for many years. But when properly implemented, franchising is not a scam; it's a very effective way to do business. Similarly, when properly implemented, MLM is different from traditional retailing AND franchising, but can be a very effective way to do business.
Q: What's the difference between MLM and Network Marketing?
Most people would say the terms are synonymous. MLM is an older term, and has taken on negative connotations in some people's minds. Network Marketing is preferred by some who are trying to avoid this stigma.
Some companies, such as Amway, consider "Network Marketing" to be a specific form of MLM: namely, combining a "network" of outside suppliers (AT&T, Coke, Reebok, etc.) with a network of "marketing" folks (the distributors).
Q: How can you succeed in MLM?
Short answer: Work diligently, work consistently, and don't give up.
Long answer: all companies are different, and what works in one company might not work in another. You should learn from your upline -- ask them what works and what you should do to succeed.
Draw on them for help. They've found out from experience what works and what doesn't, and they're interested in your success. The fundamental ideas, though, are the same in any company.
Do what a distributor/associate/whatever is supposed to do in your company -- retail products, sell services, consume products, whatever -- and find others to do the same. Teach them to do what you do.
*Duplication* is the key to success in MLM. You're not supposed to go out and enroll the world, or sell something to everybody on the planet. You're supposed to find a FEW people who want to build a business, and help them do it. More importantly, teach THEM to do what a distributor does, AND go out and find a few people to work with, AND teach those new people. Until you have "taught your people to teach their people to teach," you have not really duplicated yourself.
Keep plugging away. Unless you're incredibly good at this, it will take time to build a group. It takes time to find good people and teach them what they need to know. Sometimes your best people will give up and drop out. Sometimes it can be very discouraging. Sometimes you may be tempted to give up.
(And if your company isn't working very well, maybe you should. But if the company's working well, and others are succeeding, you need to take a look at what YOU'RE doing that isn't working. It may be that you wouldn't do any better in another company, even if the grass looks greener, because you're doing the wrong things.)
It is a sad fact that a very small percentage of people who enroll in any particular MLM will succeed big. This is NOT, however, a fatal flaw of MLM; it's a reflection of real life. 90%+ of small businesses fail within 1-5 years -- and the owners lose a whole lot more than the few hundred dollars an MLM person typically invests. 98%+ of corporate employees will never achieve executive levels. 95% of 65-year-old retirees in the US (according to insurance & Social Security statistics) are dead or broke. The sad fact is, very few people succeed big in ANY endeavor. Most people simply will not do what it takes to succeed. MLM is no different in this regard.
However, many people get into an MLM with the idea that it's some kind of "easy road to riches". It's not. It takes work. It takes time and dedication. But most people don't see that, either because their sponsor misled them with rosy predictions of instant wealth, or because they chose to hear the easy story. People like this enroll and don't do anything, or give it a try but give up after a few months. This is where the vast majority of "MLM failures" comes from.
The biggest problem with MLM is that it's "too easy" to get into it (usually no more than a few hundred dollars), so it's "too easy" to get out. With only a few hundred bucks committed, it's easy for someone to say "Ah, heck, I talked to 4 people and none of them were interested. This doesn't work! Guess I wasted $200."
You should approach your business as if it was a "real" business, one that you had invested your life savings into. If you had sunk $200,000 into your MLM business, would you let 4 "no"s stop you? Hell no!! You'd get back OUT there and KEEP working until you MADE it work, because you had too darn much money in it to give up! Well, guess what? That's what makes MLM work too -- that dedication to keep working until you make it work.
If you work consistently, and effectively, and build your group faster than the faint-hearted people drop out, your group will slowly but steadily build. And if you've taught your people the correct ideas of "work consistently, work effectively, and teach your people how to duplicate your efforts", you should see a consistent rate of growth. It will probably take longer than you'd like (hey, that's the way life works!), but as long as you keep working at it, your income will eventually build to the level you want.
The problem is, most people don't do this. Most people who get into MLM give it a half-hearted try, then give up the first time they get a "no" and complain that "It doesn't work." Only the people who determine to put in the effort, and actually DO what it takes to succeed, will stick it out and end up on top.
Q: How can I identify a good MLM?
Things you should look for include:
- Good products. Are they something that LOTS of people will buy?
Do they fill a real need? Are they competitively priced, and can you make a profit selling them?
- Strong and stable company. You don't want them to go belly-up after you've worked to build a downline. How long have they been in business?
What is their financial situation? (A quick check with Dunn&Bradstreet and the Better Business Bureau [if in the US] might be worth your time.)
What prior experience, both in general business AND in MLM, does the company management have?
- Good company support. Are there good training materials, manuals, etc?
- Strong upline support. Ask your prospective sponsor what kind of help he can provide you. Ask what sort of success he or she has had, or, if he's too new for that to be a fair question, ask about his upline.
If they're not succeeding, they can't teach you how to succeed, and you don't want to have to invent a system from scratch.
Things you should avoid at all costs include:
- Inventory loading. If your sponsor tries to pressure you into buying thousands of dollars of inventory (or ANY inventory, in my opinion), you should check to make sure your wallet is still in your pocket and run for the door.
- High pressure in general.
- Get-rich-quick claims, promises of wealth without effort, etc.
Those are some broad guidelines. The biggest determining factor, though, is YOU. YOU are the one who's going to work or not work. YOU are the one who needs to stay motivated, and keep plugging along when things get tough.
If YOU'RE not excited about the company, the products, and/or the opportunity, you probably won't stick it out long enough to succeed. But if you're pumped up about the company (and not just the initial "I'm gonna get rich" excitement), you're much more likely to keep at it until you succeed.
Q: What are the popular compensation plans? (Breakaway, matrix, etc.)
Product retailing is a major source of income in most plans, especially for someone who has not yet built a large downline. But downline bonuses are where the big long-term money comes from. There are several basic designs that are used in most MLM bonus plans.
The most common, having been around the longest, is called a "breakaway" or "stairstep breakaway" plan. In this sort of plan, there are sometimes differing wholesale prices, or "discount" rates, available to someone depending on their position in the plan. As you progress to the higher positions, you will get a larger discount.
The distinguishing characteristic of this plan is the "breakaway", a position where you "break away" from your upline. After this point, the product volume generated by you and your downline no longer counts toward your upline's "group volume." Now that you have "broken away," you start tracking your OWN group volume.
There is usually some provision for getting paid bonuses on the volume of "breakaway" groups. You might get paid 5% on first-level breakaways (groups directly under you), 4% on second-level groups (breakaway groups under your first-level groups), and so on. There is normally a minimum "group volume" requirement for you to qualify for these "breakaway" or "generation" bonuses. The number of generations you are paid on and the percentages you get are dependent on the company and the position you have reached.
Breakaways are often considered the best plans for serious hard-core workers. They are harder than other plans, but also have the greatest potential rewards. Most MLM fortunes have been made in breakaway plans.
You can get paid hundreds of levels deep in a breakaway, unlike the other (matrix and unilevel) plans. But you have to work to earn it.
That does NOT mean that breakaways are necessarily the best plans for your average Joe -- because your average Joe **IS NOT** a "serious hard-core worker!!" Many part-timer MLMers find breakaways to be too difficult for them.
Originally, companies made use of this "breakaway" design because it simplified their record-keeping and inventory problems. Without computers, it would have been impossible to track hundreds of thousands of distributors, so the companies DIDN'T track all of them.
The "breakaway" levels were the only ones who worked directly with the company, and acted as distribution points to their downlines. Often they were responsible for paying their downlines as well.
Most companies have relieved the distributors of this overhead, but the breakaway structure is still a popular design.
The "matrix" is a newer structure that came about since the advent of cheap and plentiful computers. A matrix plan has a fixed "shape" that determines the size of a downline you can be paid on. For example, if your company uses a 5x7 matrix, you can have no more than 5 people on your "frontline", and can be paid no more than 7 levels (people, not breakaway generations) deep. If you already have 5 people on your frontline, any future people you enroll will have to be "placed" somewhere below those 5 frontline people. This is called "spillover."
At first glance you might think this means you can only have 5*7 or 35 people in your downline, but that's not true: each of the 5 people in your frontline can have 5 people on *their* frontline, and so on.
So a 5x7 matrix can actually hold as many as 5+5^2+5^3+5^4... or almost 100,000 people. In theory, anyway. In reality it is very rare for a 5x7 matrix to be more than 2-3% full. The restricted width quickly forces the growth in active legs down and out of your matrix.
"Spillover" is either a curse or a blessing, depending on how you look at it. Matrix proponents say it's a great way to force people to help their downlines, since they'll have to place people below their downline distributors. Spillover also tends to keep people active, because they don't want to lose out on the "free" downline spilling over from their upline. Matrix detractors argue that spillover is a form of "MLM welfare" that rewards weak and non-performing distributors; if they're working, they already have people below them, so you're more likely to place people in the "holes" under non-workers.
Matrix plans also punish top performers, since they have to place new recruits farther and farther down in their matrix. After a while they get so little benefit from those new recruits that they lose much of their incentive to keep producing.
Many newer companies are using matrix plans. I have seen 5x7, 3x9, 2x12, 3x3, lots of different shapes. Study the plan carefully to understand how it will work. Don't assume that a matrix will fill evenly; most often you will have an active "leg" that will grow out of the bottom of your matrix long before other legs have filled in the rest of the matrix. But the simplicity of the matrix plans makes them very attractive to many people.
(I confess that I'm not a big fan of matrix plans. But a lot of people really like them, and are happy with the results they get with matrices. You decide what's right for you.)
Recently the "unilevel" plans have become very popular. These plans are similar to a matrix with no width restriction. So, for example, you might get paid 6 or 8 levels down, like in a matrix, but you can have as many people on your frontline as you want. This has the great advantage of being very simple to explain and to understand, and it doesn't have the growth restrictions that limit matrix plans. It loses the matrix "spillover" effect, since no one is forced to place new recruits below their frontline. (Personally I consider this to be an advantage -- too many people join matrix plans hoping that someone else will do their work for them.)
Some people believe unilevel plans are too limited, because of their limited depth. In reality, it's quite possible to build a very substantial income in a unilevel -- more than 99.9% of MLMers have ever seen. Many people are earning very serious money in unilevels, as in every other kind of plan.
Due to the inherent depth limitation of unilevels (and matrix plans), some companies add on an additional bonus called the "infinity" bonus. (Note that the infinity bonus is totally separate from the underlying unilevel or matrix or whatever, and in fact you could even add an infinity bonus to a breakaway plan if you wanted to.) An "infinity" bonus is so named because it can (in theory) pay down an "infinite" number of levels.
In reality, it doesn't quite work that way. Infinity bonuses pay down to the next person in your downline who *also* qualifies for the infinity bonus. Let's say someone at the A position earns a 1% infinity, a B earns a 2% infinity, and a C earns a 3% infinity.
If you reach the C level, you get paid an additional 3% on your downline. BUT if anyone in your downline qualifies for any infinities, they "intercept" the infinity bonus for that leg and you don't get it. So if you are a C and you have a C on your frontline, you will get NO infinity bonus on that leg; your frontline C gets it instead.
If you have a B on your frontline, you'll get 1% on that leg, and the B gets the other 2%. Only on legs with no As, Bs, or Cs do you get the full 3%.
It has to work that way, or the company could be liable for an "infinite" amount of bonuses! If everyone could qualify for the full 3% bonus with no cutoff, then a leg with 34 C's would mean the company would owe 102% in infinity bonuses. By limiting your "infinity" bonus down to the next infinity-qualified person, the company in this example only has to budget for a fixed maximum of 3% for infinity bonuses.
So in reality you can get paid down to the "bottom" of your downline -- but only in legs with no leaders, which tend to be shallow legs. In deep legs, you will virtually always have leaders in your downline.
Which is good!! But it means you won't get the full infinity bonus on any deep leg. So be wary of claims that a plan will pay "hundreds of levels deep" because of its infinity bonus.
Recently several companies have used variants of the "binary" plan.
They look a bit like a 2x? matrix plan. The major selling point of these binary plans is that they pay to *infinite* depth. They do this by 1) requiring you to balance the volume on your two "legs," and 2) setting a maximum income level, often $2000/week or so, on each "income center" (position in the binary plan).
The maximum-per-center income has the effective result of limiting the depth that binaries pay out. While there is nothing that puts a hard limit on how deep you can go, you can only include enough downline to "max out" your center. So binaries don't REALLY pay out to "infinite" depth any more than "infinity" bonuses do.
But since a maxed-out center pays more than most MLMers have ever earned, and you can have *multiple* centers, this isn't a real concern for most people.
Since different legs very seldom grow at the same rate, balancing the legs can be a real challenge. You can also "buy multiple income centers" in many of these plans, which basically means you can re-join your downline to earn additional income from additional income centers. Which means your downline will be your upline!
Finally, some new companies are combining aspects of different kinds of structures. This may result in a plan with the advantages of both and the disadvantages of neither -- or vice versa!
Make sure you understand at least the basics of the plan for any MLM you consider joining. After all, this is where your money comes from. Make sure you like what you're getting before you make the plunge.
Good Luck !!
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