Multilevel marketing (MLM) is a sales method that uses a pyramid-shaped commission system to offer products and services to non-salaried employees. MLM is frequently referred to as network marketing or referral marketing.
Multilevel marketing companies encourage existing distributors to recruit new distributors, referred to as the “downline” of existing distributors. A pyramid scam is commonly confused with multilevel marketing, but the latter is illegal.
The multilevel marketing (MLM) technique uses a pyramid-shaped commission structure to incentivize existing distributors to recruit new distributors.
Multilevel marketing distributors are self-employed and do not receive a salary. Distributors are paid commissions on the sales that they and their downline teams make.
Companies can establish a huge customer base with cheap sales costs by using multilevel marketing.
How Multilevel Marketing Works
In multilevel marketing, there are numerous tiers of salespeople. Distributors, who are self-employed and do not get a salary, make up the sales force.
A distributor might earn money from two sources. One is the commission earned from selling things directly to clients. The other is by enlisting the help of new distributors.
When a new (downline) participant is recruited, the distributor is not compensated. However, he is also responsible for the sales of his downline distributors. The distributor is paid a percentage of the sales generated by his downline team.
Many distributors with vast downline teams don’t even sell their own products. They can earn enough money from the sales of their downline teams. Existing distributors are successfully motivated to grow or increase their downline teams thanks to the commission system. It enables the organization to hire more salespeople, giving it access to a broader customer base.
Pros and Cons of Multilevel Marketing
Both corporations and distributors benefit from the multilevel marketing technique. Multilevel marketing allows a corporation to reach a huge client base across a broad geographic area.
Because the distributors are self-employed, the company does not have to pay set wages and instead pays commissions only when sales are made, allowing it to save money on sales expenses.
Multilevel marketing allows distributors to supplement their income while maintaining sufficient freedom. To best accommodate their schedules, they can work full-time or part-time.
Lower-tier distributors, on the other hand, may find themselves at a disadvantage. Because upper-tier distributors share the commission on their sales, they frequently work more yet earn much less than those in the bottom tiers.
The great level of flexibility and autonomy has a disadvantage. The corporation only provides little support to distributors. Their sales attempts may be inefficient due to a lack of sales training or support from experts.
A multilevel marketing company also has little control over its sales staff. Its reputation could be harmed if some of its distributors act recklessly or fail to keep their promises to customers.
Pyramid schemes are another issue with multilevel marketing. Pyramid schemes are deceptive and can result in significant financial losses for participants.
Multilevel Marketing vs. Pyramid Scheme
A pyramid scam resembles multilevel marketing in appearance. It also expands the business by forming a pyramid system by recruiting numerous tiers of members. Pyramid schemes, on the other hand, are illegal, although multilevel marketing is allowed.
The main distinction is that a multilevel marketing company’s primary purpose is to offer actual products or services to its consumers. A pyramid scheme, on the other hand, does not offer any real items or investments.
Participants believe the company is in possession of a great product or investment opportunity. They only get “promised compensation” if they recruit downline members.
More people are drawn into the fraudulent activity as more downline players are recruited.
Distributors in multilevel marketing, particularly those in the lower tiers, typically earn little amounts of money. A pyramid scam victim often loses all of the money they invested or paid as “membership fees.”
Before joining, it is critical to determine whether the business strategy is real multilevel marketing or a fake pyramid scam. If a company prioritises recruitment over product sales, it’s most certainly a pyramid scheme.