Multi-level marketing

Multi-level marketing (MLM) is a marketing strategy in which the sales force is compensated not only for sales they generate, but also for the sales of the other salespeople that they recruit. This recruited sales force is referred to as the participant's "downline", and can provide multiple levels of compensation.[1] Other terms used for MLM include pyramid selling,[2][3][4][5][6] network marketing,[5][7][8] and referral marketing.[9] Many pyramid schemes attempt to present themselves as legitimate MLM businesses.[10] Portions of the public assert that all MLMs are essentially pyramid schemes even if they are legal.[9][11][12] MLM is illegal in mainland China.[13][14] According to the U.S. Federal Trade Commission (FTC), some MLM companies constitute illegal pyramid schemes which exploit members of the organization.[15][16][17]

MLM is one type of direct selling. Most commonly, the salespeople are expected to sell products directly to consumers by means of relationship referrals and word of mouth marketing. MLM salespeople not only sell the company's products but also encourage others to join the company as a distributor.[1][7][10]

Companies that use MLM models for compensation have been a frequent subject of criticism and lawsuits. Criticism has focused on their similarity to illegal pyramid schemes, price fixing of products, high initial entry costs (for marketing kit and first products), emphasis on recruitment of others over actual sales, encouraging if not requiring members to purchase and use the company's products, exploitation of personal relationships as both sales and recruiting targets, complex and exaggerated compensation schemes, the company and/or leading distributors making major money off training events and materials, and cult-like techniques which some groups use to enhance their members' enthusiasm and devotion.[9][18]

Direct selling, network marketing, and multi-level marketing

Network marketing and multi-level marketing have been described by author Dominique Xardel as being synonymous, and as methods of direct selling.[1] Other terms that are sometimes used to describe multi-level marketing include "word-of-mouth marketing", "interactive distribution", and "relationship marketing". Critics have argued that the use of different terms and "buzzwords" is an effort to distinguish multi-level marketing from illegal Ponzi schemes, chain letters, and consumer fraud scams.[19] Some sources classify multi-level marketing as a form of direct selling rather than being direct selling.[20][21][22]

The Direct Selling Association (DSA), a lobbying group for the multi-level marketing industry, reported that in 1990 twenty-five percent of members used MLM, growing to 77.3 percent in 1999.[23] By 2009, 94.2% of DSA members were using MLM, accounting for 99.6% of sellers, and 97.1% of sales.[24] Companies such as Avon, Electrolux, Tupperware,[25] and Kirby all originally used single level marketing to sell their goods and later introduced multi-level compensation plans.[20] The DSA has approximately 200 members [26] while it is estimated there are over 1,000 firms using multi-level marketing in the United States alone.[27]

History

The origin of multi-level marketing is often disputed; but multi-level marketing style businesses existed in the 1920s,[28] 1930s California Vitamin Company,[29] (later named Nutrilite) or California Perfume Company (renamed as "Avon Products"),[30]

Setup

MLM binary tree structure. The blue individual will receive compensation from the sales of the downline red members.

Independent non-salaried participants, referred to as distributors (or associates, independent business owners, independent agents, etc.), are authorized to distribute the company's products or services. They are awarded their own immediate retail profit from customers plus commission from the company, not downlines, through a multi-level marketing compensation plan, which is based upon the volume of products sold through their own sales efforts as well as that of their downline organization.

Independent distributors develop their organizations by either building an active consumer network, who buy direct from the company, or by recruiting a downline of independent distributors who also build a consumer network base, thereby expanding the overall organization. Additionally, distributors can also earn a profit by retailing products they purchased from the company at wholesale price.

Income levels

Several sources have commented on the income level of specific MLMs or MLMs in general:

  • "While earning potential varies by company and sales ability, DSA says the median annual income for those in direct sales is $2,400."[35]
  • In an October 15, 2010 article, it was stated that documents of a MLM called Fortune reveal that 30 percent of its representatives make no money and that 54 percent of the remaining 70 percent only make $93 a month. The article also states Fortune is under investigation by the Attorneys General of Texas, Kentucky, North Dakota, and North Carolina with Missouri, South Carolina, Illinois, and Florida following up complaints against the company.[36]
  • A February 10, 2011 article stated "It can be very difficult, if not impossible, for most individuals to make a lot of money through the direct sale of products to consumers. And big money is what recruiters often allude to in their pitches."[37]
  • "Roland Whitsell, a former business professor who spent 40 years researching and teaching the pitfalls of multilevel marketing": "You'd be hard-pressed to find anyone making over $1.50 an hour, (t)he primary product is opportunity. The strongest, most powerful motivational force today is false hope."[37]

Legality and legitimacy

United States

MLM businesses operate in all 50 U.S. states. Businesses may use terms such as "affiliate marketing" or "home-based business franchising". Many pyramid schemes attempt to present themselves as legitimate MLM businesses.[10] Portions of the public assert that all MLMs are essentially pyramid schemes even if they are legal.[9][11][12]

The U.S. Federal Trade Commission (FTC) states: "Steer clear of multilevel marketing plans that pay commissions for recruiting new distributors. They're actually illegal pyramid schemes. Why is pyramiding dangerous? Because plans that pay commissions for recruiting new distributors inevitably collapse when no new distributors can be recruited. And when a plan collapses, most people—except perhaps those at the very top of the pyramid—end up empty-handed."[38]

In a 2004 Staff Advisory letter to the Direct Selling Association, the FTC states:

Much has been made of the personal, or internal, consumption issue in recent years. In fact, the amount of internal consumption in any multi-level compensation business does not determine whether or not the FTC will consider the plan a pyramid scheme. The critical question for the FTC is whether the revenues that primarily support the commissions paid to all participants are generated from purchases of goods and services that are not simply incidental to the purchase of the right to participate in a money-making venture.[39]

The Federal Trade Commission warns "Not all multilevel marketing plans are legitimate. Some are pyramid schemes. It's best not to get involved in plans where the money you make is based primarily on the number of distributors you recruit and your sales to them, rather than on your sales to people outside the plan who intend to use the products."[40]

Criticism

The Federal Trade Commission issued a decision, In re Amway Corp., in 1979 in which it indicated that multi-level marketing was not illegal per se in the United States. However, Amway was found guilty of price fixing (by effectively requiring "independent" distributors to sell at the same fixed price) and making exaggerated income claims.[41][42]

The FTC advises that multi-level marketing organizations with greater incentives for recruitment than product sales are to be viewed skeptically. The FTC also warns that the practice of getting commissions from recruiting new members is outlawed in most states as "pyramiding".[43] In April 2006, it proposed a Business Opportunity Rule intended to require all sellers of business opportunities—including MLMs—to provide enough information to enable prospective buyers to make an informed decision about their probability of earning money. In March 2008, the FTC removed Network Marketing (MLM) companies from the proposed Business Opportunity Rule:

The revised proposal, however, would not reach multi-level marketing companies or certain companies that may have been swept inadvertently into scope of the April 2006 proposal.[44]

Walter J. Carl stated in a 2004 Western Journal of Communication article that "MLM organizations have been described by some as cults (Butterfield, 1985), pyramid schemes (Fitzpatrick & Reynolds, 1997),[45] or organizations rife with misleading, deceptive, and unethical behavior (Carter, 1999), such as the questionable use of evangelical discourse to promote the business (Hopfl & Maddrell, 1996), and the exploitation of personal relationships for financial gain (Fitzpatrick & Reynolds, 1997)".[45][46] In China, volunteers working to rescue people from the schemes have been physically attacked.[47]

MLMs are also criticized for being unable to fulfill their promises for the majority of participants due to basic conflicts with Western cultural norms.[48] There are even claims that the success rate for breaking even or even making money are far worse than other types of businesses:[49][50][51] "The vast majority of MLMs are recruiting MLMs, in which participants must recruit aggressively to profit. Based on available data from the companies themselves, the loss rate for recruiting MLMs is approximately 99.9%; i.e., 99.9% of participants lose money after subtracting all expenses, including purchases from the company."[49] In part, this is because encouraging recruits to further "recruit people to compete with [them]"[9] leads to "market saturation."[18] It has also been claimed "(b)y its very nature, MLM is completely devoid of any scientific foundations."[52]

Because of the encouraging of recruits to further recruit their competitors, some people have even gone so far as to say at best modern MLMs are nothing more than legalized pyramid schemes[9][11][12] with one stating "Multi-level marketing companies have become an accepted and legally sanctioned form of pyramid scheme in the United States"[11] while another states "Multi-Level Marketing, a form of Pyramid Scheme, is not necessarily fraudulent."[12]

In October 2010 it was reported that multilevel marketing companies were being investigated by a number of state attorneys general amid allegations that salespeople were primarily paid for recruiting and that more recent recruits cannot earn anything near what early entrants do.[53]

Industry critic Robert L. FitzPatrick has called multi-level marketing "the Main Street bubble" that will eventually burst.[54]

China

Multi-level marketing (simplified Chinese: 传销; traditional Chinese: 傳銷; pinyin: chuán xiāo) was first introduced to China by American, Taiwanese, and Japanese companies following the Chinese economic reform of 1978. This rise in multi-level marketing's popularity coincided with economic uncertainty and a new shift towards individual consumerism. Multi-level marketing was banned on the mainland by the government in 1998, citing social, economic, and taxation issues.[55] Further regulation “Prohibition of Chuanxiao”(where MLM is a type of Chuanxiao, Chinese name of the regulation is 《禁止传销条例》 ), was enacted in 2005, clause 3 of Chapter 2 of the regulation states having downlines is illegal (original text from the regulation '组织者或者经营者通过发展人员，要求被发展人员发展其他人员加入，形成上下线关系，并以下线的销售业绩为依据计算和给付上线报酬，牟取非法利益的。').[14] O’Regan wrote 'With this regulation China makes clear that while Direct Sales is permitted in the mainland, Multi-Level Marketing is not'.[13]

MLM companies have been trying to find ways around China’s prohibitions, or have been developing other methods, such as direct sales, to take their products to China through retail operations. The Direct Sales Regulations limit direct selling to cosmetics, health food, sanitary products, bodybuilding equipment and kitchen utensils. And the Regulations require Chinese or foreign companies (“FIEs”) who intend to engage into direct sale business in mainland China to apply for and obtain direct selling license from the Ministry of Commerce (“MOFCOM”).[56] In 2016, there are 73 companies, including domestic and foreign companies, have obtained the direct selling license.[57] Some multi-level marketing sellers have circumvented this ban by establishing addresses and bank accounts in Hong Kong, where the practice is legal, while selling and recruiting on the mainland.[13][58]

It was not until August 23, 2005 that the State Council promulgated rules that dealt specifically with direct sale operation- Administration of Direct Sales (entered into effect on 1 December 2005) and the Regulations for the Prohibition of chuanxiao (entered into effect on 1 November 2005). When direct selling is allowed, it will only be permitted under the most stringent requirements, in order to ensure the operations are not pyramid schemes, MLM, or fly-by-night operations.

See also

References

  1. 1 2 3 Xardel, Dominique (1993). The Direct Selling Revolution. Understanding the Growth of the Amway Corporation. Blackwell Publishing. pp. 1–4. ISBN 978-0-631-19229-9.
  2. ↑ Edwards, Paul (1997). Franchising & licensing: two powerful ways to grow your business in any economy. Tarcher. p. 356. ISBN 0-87477-898-0.
  3. ↑ Clegg, Brian (2000). The invisible customer: strategies for successive customer service down the wire. Kogan Page. p. 112. ISBN 0-7494-3144-X.
  4. ↑ Higgs, Philip; Smith, Jane (2007). Rethinking Our World. Juta Academic. p. 30. ISBN 0-7021-7255-3.
  5. 1 2 Kitching, Trevor (2001). Purchasing scams and how to avoid them. Gower Publishing Company. p. 4. ISBN 0-566-08281-0.
  6. ↑ Mendelsohn, Martin (2004). The guide to franchising. Cengage Learning Business Press. p. 36. ISBN 1-84480-162-4.
  7. 1 2 Vander Nat, Peter J.; Keep, William W. (2002). "Marketing Fraud: An Approach for Differentiating Multilevel Marketing from Pyramid Schemes". Journal of Public Policy & Marketing 21 (1): 139–15. doi:10.1509/jppm.21.1.139.17603.
  8. ↑ Mendelsohn, Martin (2004). The guide to franchising. Cengage Learning Business Press. p. 36. ISBN 1-84480-162-4.
  9. 1 2 3 4 5 6 Carroll, Robert Todd (2003). The Skeptic's Dictionary: A Collection of Strange Beliefs, Amusing Deceptions, and Dangerous Delusions. John Wiley & Sons. pp. 235–36. ISBN 0-471-27242-6. Retrieved June 29, 2009.
  10. 1 2 3 Debra A. Valentine (May 13, 1998). "Pyramid Schemes". FTC. Retrieved June 24, 2009.
  11. 1 2 3 4 Coenen, Tracy (2009). Expert Fraud Investigation: A Step-by-Step Guide. Wiley. p. 168. ISBN 0-470-38796-3.
  12. 1 2 3 4 Salinger (Editor), Lawrence M. (2005). Encyclopedia of White-Collar & Corporate Crime 2. Sage Publishing. p. 880. ISBN 0-7619-3004-3.
  13. 1 2 3 O’Regan, Stephen (July 16, 2015). "Multi-Level Marketing: China Isn’t Buying It". China Briefing. Dezan Shira & Associates. Retrieved November 26, 2015.
  14. 1 2 MLM law of China 'Prohibition of Chuanxiao' http://www.gov.cn/zwgk/2005-09/03/content_28808.htm
  15. ↑ "The Bottom Line About Multilevel Marketing Plans and Pyramid Schemes" (PDF). FTC. Not all multilevel marketing plans are legitimate. Some are pyramid schemes.
  16. ↑ "Multilevel Marketing". FTC.
  17. ↑ "Multilevel Marketing". FTC, Bureau of Consumer Protection.
  18. 1 2 "What's Wrong With Multi-Level Marketing?". Vandruff.com. Retrieved June 29, 2009.
  19. ↑ Charles W. King; James W. Robinson (2000). The New Professionals. Prima Publishing. p. 80. ISBN 0-7615-1966-1.
  20. 1 2 Edwards, Paul; Edwards, Sarah; Economy, Peter (2009). Home-Based Business for Dummies (3rd ed.). Wiley. pp. 38–39. ISBN 978-0-470-53805-0.
  21. ↑ "'Person to person' sales plans... "dream" opportunity or business nightmare? [Amway Ad]". Life 68 (7): 51. February 27, 1970.
  22. ↑ Brown Caryne (Dec 1992). "Door-to-door Selling Grows Up". Black Enterprise 23 (5): 76.
  23. ↑ Michael L. Sheffield (Feb–Mar 1999). "Comp Plan Conversion:Direct Sales to MLM Compensation Plans". Direct Sales Journal. (citing Neil Offen, president of the Direct Selling Association)
  24. ↑ "US Direct Selling in 2009" (PDF). Direct Selling Association. 2010.
  25. ↑ Zoe Brennan (January 18, 2007). "How Tupperware has conquered the world". Daily Mail. Retrieved May 19, 2009.
  26. ↑ "Direct Selling Organization Membership". Direct Selling Association. Retrieved April 29, 2011.
  27. ↑ Zig Ziglar; John P Hayes, PhD (2001). Network Marketing for Dummies. Hungry Minds. ISBN 0-7645-5292-9.
  28. ↑ Pareja, Sergio (2008). "Sales Gone Wild: Will the FTC's Business Opportunity Rule Put an End to Pyramid Marketing Schemes?". McGeorge Law Review 39 (83).
  29. ↑ Attri, Rekha (2011). "A Study of Consumer Perceptions of the Products Sold Through Multilevel Marketing". Management Research Journal (Prabandhan & Taqniki) 39 (83): 97–103.
  30. ↑ "MLM History". network-experience.net. January 24, 2014. Retrieved January 24, 2014.
  31. ↑ Brown, David (November 27, 2007). "Marketing group merely 'selling a dream'". The Times. Retrieved July 13, 2009.
  32. ↑ Berkowitz, Bill (January 28, 2009). "Republican Benefactor Launches Comeback". Inter press service. Retrieved July 11, 2009. (in reference to BERR vs Amway (Case No:2651, 2652 and 2653 of 2007) in point of objectionability"c")
  33. ↑ Tony Dokoupil (August 2, 2008). "A Drink's Purple Reign". Newsweek. Retrieved July 17, 2009.
  34. ↑ Ryan (Editor), Leo; Wojciech, Gasparski (Editor); Georges, Enderle (Editor) (2000). Business Students Focus on Ethics (Praxiology): The international Annual of Practical Philosophy and Methodology Volume 8. New Jersey: Transaction Publishers. p. 75. ISBN 0-7658-0037-3.
  35. ↑ Peterecca, Laura (September 14, 2009). "What kind of business do you want to start?". USA Today. pp. 4B. Retrieved September 14, 2009.
  36. ↑ O'Donnell, Jayne (October 15, 2010). "Fortune Hi-Tech: American dream or pyramid scheme?". USA Today. pp. 6B. Retrieved October 1, 2011.
  37. 1 2 O'Donnell, Jayne (February 10, 2011). "Multilevel marketing or 'pyramid?' Sales people find it hard to earn much". USA Today. Retrieved April 5, 2011.
  38. ↑ "FTC Consumer Alert; Lotions and Potions: The Bottom Line About Multilevel Marketing Plans". FTC. January 2000. Retrieved March 26, 2001.
  39. ↑ Kohm, James A. (January 14, 2004). "RE: Staff Advisory Opinion - Pyramid Scheme Analysis" (reprint). Federal Trade Commission.
  40. ↑ Facts for Consumers; The Bottom Line About Multilevel Marketing Plans and Pyramid Schemes Federal Trade Commission
  41. ↑ Richard Eisenberg (June 1, 1987). "The Mess Called Multi-Level Marketing With celebrities etting the bait, hundreds of pyramid-style sales companies are raking in millions, often taking in the gullible". CNN.
  42. ↑ In re Amway Corp., 93 F.T.C. (1979).
  43. ↑ "Multilevel Marketing Plans". FTC Consumer Alert. November 1996. Retrieved May 7, 2008.
  44. ↑ "FTC Press Release".
  45. 1 2 "FalseProfitsHomePage". Falseprofits.com. Retrieved March 5, 2010.
  46. ↑ Carl, Walter J. (2004). "The Interactional Business of Doing Business: Managing Legitimacy and Co-constructing Entrepreneurial Identities in E-Commerce Multilevel Marketing Discourse". Western Journal of Communication 68.
  47. ↑ Hu Yongqi. "Going against the slippery slope of a pyramid scheme". China Daily.
  48. ↑ Bloch, Brian (1996). "Multilevel marketing: what's the catch?". Journal of Consumer Marketing 13 (4): 18–26.
  49. 1 2 Taylor, Jon M. (2002). "Comparing Recruiting MLMs with No-product Pyramid Schemes, and with Gambling". Consumers Awareness Institute. Retrieved March 10, 2014.
  50. ↑ FitzPatrick, Robert L. (August 4, 2002). "The 10 Big Lies of Multi-Level Marketing". Consumers Awareness Institute. Retrieved June 25, 2009.
  51. ↑ Cruz, Joan Paola; Camilo, Olaya (2008). "A System Dynamics Model for Studying the Structure of Network Marketing Organizations [Peer reviewed paper that refers uses Taylor as references]" (PDF).
  52. ↑ Sandbek PhD, Terry. "Brain Typing: The Pseudoscience of Cold Reading". American Board of Sport Psychology.
  53. ↑ "Multilevel marketing or 'pyramid?' Sales people find it hard to earn much". USA Today. February 10, 2011. Retrieved March 3, 2011.
  54. ↑ Greenberg, Herb (January 9, 2013). "Multi-Level Marketing Critic: Beware 'Main Street Bubble'". CNBC. Retrieved February 11, 2014.
  55. ↑ Jeffery, Lyn (March 21, 2001). "Placing Practices: Transnational Network Marketing in Mainland China". In Chen, Nancy N. China Urban: Ethnographies of Contemporary Culture. Duke University Press. pp. 23–42. ISBN 9780822326403.
  56. ↑ Xu, Lehman, Lee &. "Chinese Law | China: Direct Sale". www.lehmanlaw.com. Retrieved 2016-04-21.
  57. ↑ "直销企业信息披露网站". zxjg.saic.gov.cn. Retrieved 2016-04-21.
  58. ↑ "Hong Kong multi-level marketing plan needs closer look (editorial)". South China Morning Post. October 31, 2013. Retrieved November 26, 2015.

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