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What is MLM? MLM stands for “Multi Level Marketing”

Multi-level marketing (MLM), sometimes called Network Marketing (NM) is a business model which utilizes a combination of Direct Marketing and Franchising. Typically, individuals become associated with a parent company in an independent contractor relationship. Sellers are compensated based on their sales of a product or service, as well as the sales of those they bring into the business.

Multi-level marketing has a recognized image problem because of difficulties in making a clear distinction between legitimate network marketing and illegal pyramid schemes or Ponzi schemes..

Nonetheless, many NM/MLM businesses operate legitimately in all fifty U.S. states and more than 100 foreign countries. Because of this image problem many new NM/MLM businesses do not use the words “multi-level marketing” or “network marketing” and instead use terms like “affiliate marketing,” “home-based business franchising,” etc.

In a legitimate MLM company, commissions are only earned on the sale of products or services to the end consumer who, in many cases, is also a distributor. No money may be earned on a “sign up fee” or for recruiting alone. Critics contend that some companies produce revenue primarily by attracting new participants, as opposed to selling products. Analysis of the compensation plan is often required to determine whether participants are paid based on actual sales of products to customers versus new recruit bonuses and sales of business support materials.

A major shift in MLM occurred during the 1980s when companies began allowing their members to focus solely on marketing rather than handling the tasks of stocking/distributing products as well as taking care of commission payments to their sales organizations. Today, most MLM companies act as fulfillment companies by taking orders, shipping products, calculating and paying commissions, etc.

Often, victims of fraudulent or illegal MLM schemes are required to purchase expensive inventories of products. These schemes are often quick to collapse, when the merchandise cannot be resold, leaving all but those at the top of the pyramid with sometimes staggering financial losses.

Traditional MLM
The traditional MLM (as described above) works with your personal contacts giving personal recommendations. If some of the contacts like to the idea and wants to earn some money too, they will become an associate from you. They will then recommend the service or the product to their personal “warm” contacts and also find some associates who like to do the same. It is a duplicating process, following very basic steps. If each person gets 10 customers and sponsor three affiliates (and each will get 10 customers and find three affiliates and so on…..) a large organization grows very quickly. Example of well known companies are: Tupperware and Herbalife.

Internet MLM
The Internet MLM works similar but in general with “cold” contacts. Contacts are found on the internet or through a variety of means (website, forums, newsgroups etc). The Internet MLM can easily cross borders in contrast with the traditional MLM being build through local contacts. The key is to get as many contacts as possible.

Network marketing companies
This is a list of examples of well-know companies which utilize traditional Network Marketing or Multi-Level Marketing:
• Amway is the most famous and notorious company for network marketing.
• Avon Products, the corporation behind the “Avon ladies”.
• Fortune Hi-Tech Marketing claims to be the first true network marketing company
• Herbalife
• Kleeneze, the Oldest Network Marketing company in Europe, trading since 1923.
• Mary Kay is the company with the best-recognized name
• Pre-paid legal services
• Primerica
• Shaklee
• Tupperware Corporation, famous for the Tupperware parties.
• Weed music distribution service

Compensation Plans
Unilevel Plan. The oldest and most popular plan features two types of distributors: managers and non-managers and three types of pay:
• Base shop overrides. Overrides Managers from their subordinate non-managers, collectively called a base shop. This is no different from any sales organization.
• Generational overrides. Overrides of managers from the base shop of managers who were previously their subordinate. Most plans compensate at least three generations of such managers.
• Executive bonuses. Additional commission to managers who exceed a sales quota. For example, 2% of the total company sales revenue goes to a bonus pool which is shared monthly pro-rata to managers who exceed $10,000 in that month.

Matrix Plan. This plan limits the width of each level in a distributor’s group, hereby forcing strong distributors to pile (“spillover”) their recruits over people who did not sponsor them.

Binary Plan. This plan limits the width of each level to two legs. Commissions are based on “cycles” where a distributor is paid a fixed amount whenever both legs achieve a certain number of sales units each. Commissions are paid incrementally when the sales volume in each leg matches.

Matrix Scheme or Elevator scheme. This plan features a game board or a list where each distributor would pay in one or more product units to participate. When a certain number of units have been paid in, the structure splits and the earlier participant receives consideration.