How MLMs Work

Multi-Level Marketing (MLM), also known as network marketing, is a distribution method whereby products are sold to consumers via a network of individual distributors. Distributors are also known as independent business owners, associates, or consultants.

Compensation

Compensation varies from company to company, but most companies reward distributors for similar actions:

  • Signing up new distributors - This is the most desirable action from the companies perspective since it expands the possible avenues of future sales. Signup fees are usually quite low to avoid issues with the FTC.
  • Selling product - With the low signup fee, product sales provide the bulk of the commission pool. Distributors are able to buy at wholesale prices so many users will just sign up as distributors for personal use. However, distributors that make “retail” sales will be rewarded handsomely.
  • Group sales bonuses - This is where MLM companies distinguish themselves from affiliate programs. By offering rewards to a distributor for sales made at many levels of their “downline” a distributor may make commissions for sales they weren't involved in at all. If done correctly this can establish an impressive residual income with little to no continued effort.

Product

Most MLM companies are built around consumable products that are purchased at regular intervals. The most common example evident today is the health drink. Billion-dollar companies exist which were started with nothing more than an antioxidant-rich drink intended for daily consumption (similar to a multivitamin). The consumable nature of the product ensures a consistent stream of revenue and health products are particularly attractive given the increasing longevity and waistlines of many consumers.

Training

To increase the effectiveness of distributors in selling product and signing up new distributors, most MLM companies offer training. Printed materials, videos, CDs & DVDs are often included as part of the signup fee (another move to avoid government regulations). Also, conference calls and conventions are often used to provide hands-on training to new distributors.