Knowledge Bite – Multi-Level Marketing (MLM; pyramid selling): What is it exactly?

When I was recently asked what multi-level marketing (MLM, also known as ‘pyramid’ selling) was, I immediately thought I knew but, when it came to articulating it, I realised that my broad concept of it wasn’t enough to properly respond. After doing some research, I explain this controversial but legitimate marketing model …

Knowledge Bite - Multi-Level Marketing (MLM; pyramid selling): What is it exactly?

Knowledge Bite – Multi-Level Marketing (MLM; pyramid selling): What is it exactly?

When I was recently asked what multi-level marketing (MLM, also known as ‘pyramid’ selling) was, I immediately thought I knew but, when it came to articulating it, I realised that my broad concept of it wasn’t enough to properly respond. After doing some research, I explain this controversial but legitimate marketing model here, in brief and in layman’s terms.

Of all the papers I read on the subject, this definition by Investopedia was the most succinct:

“Multi-level marketing is a strategy that some direct sales companies use to encourage their existing distributors to recruit new distributors by paying the existing distributors a percentage of their recruits’ sales; the recruits are known as a distributor’s ‘downline’.”

So, in practical terms, how does it work?

Say a contact of mine who currently sells a big name supplement product introduced me and invited me to become a distributor (ie, recruited me) and, following my recruitment, I became a distributor too. I then go on to earn my own commission from the company via my personal sales pipeline direct from my own customers, with a tiny portion of that commission going to the contact who introduced me/recruited me. And so it goes up (and down) the line. Should I continue the pattern of recruitment, the earning capacity in this scenario would mean that I earn my own commission income stream via personal direct sales (with a little going to my recruiter); and I earn a second income stream via the percentage commission my downline distributors earn me. It is important to note that the individual (ie, me, in this scenario) does not have to continue the pattern of recruiting downline distributors – it is very much a choice.

As an aside, this model benefits both the individual and the company:

  • From the individual’s perspective, the theory is that it would pay to recruit as many downline distributors as possible to bring in extra money for you (without you actually having to ‘work’ for it yourself). Unless you have hundreds of downline distributors, I’m thinking it’s most certainly not a get-rich-quick plan (but as they say, every little helps);
  • From the company’s perspective, they’re the ones earning the big bucks – which you can appreciate; the more people they have selling their product, the more money they make … which is the whole point, isn’t it.

MLM isn’t for every business. A couple of really big brands have found themselves in hot water over their implementation of the model, so be sure to get it right. If you, as a company, are looking into adopting this marketing model … do your homework; understand the legal implications and be sure to follow them precisely – there are very strict laws that come with this model; and since this practice isn’t legal in some countries, be sure to check you’re good to go in your home country before you start.

Please note, this knowledge bite isn’t meant to offer insight or advice into whether or not it would be a strategy to adopt in your business, it is a simple understanding of the basic principles of the model itself.

Pages of interest

  • If you are interested in reading a little more of what Investopedia had to say about multi-level marketing and the Herbalife court case, click here for their article
  • Quick link to Wikipedia‘s page on multi-level marketing