Multilevel marketing is a strategy in which associates are remunerated not only for the sales that they themselves generate, but also for the sales generated by the people that are part of their organizational structure or network.
Other names by which is known multilevel marketing are marketing network or referral marketing. But it is different from pyramid selling, although according to the Federal Trade Commission US Some multi-level companies constitute illegal pyramid schemes because of their resemblance, which exploit members of their organization.
Multilevel marketing is a type of direct sales. Usually, commercials sell products directly to consumers through word of mouth marketing and recommendations. MLM commercials not only sell the company's products, but encourage other people to join the company as distributors to share their recommendations that turn into sales.
The attraction of multilevel marketing as a way of doing business is that it is designed to generate linear revenue through direct sales and residual income from the construction of a network of associates who learn to do exactly the same.
As a whole team is created, which grows as a network, by word of mouth recommendation (as is the case with the growth of social networks such as Facebook, WhatsApp and others), a great increase in product placement is achieved in the market, which generates a turnover that allows the creation of a compensation system that encourages and stimulates the work of all distributors by sharing the products or services they use. As, in addition to the delivery of the product, there is an implicit training service from which the distributor must perform, more satisfied customers are obtained who obtain the results. This generates more sales, which represents for distributors not only to create income from their physical effort to place product, but the possibility and the potential to create assets that generate passive income when training other distributors to do the same, through the building a solid and ethical business of distributing network products and services.
Multilevel marketing companies have been subject to criticism and demands, due to their similarity to illegal pyramid schemes, product pricing, high initial costs, emphasis on the recruitment of low-level sellers on real sales, pressure for sellers acquire and use the company's products, potential exploitation of personal relationships used for sales and recruitment purposes, complex and sometimes exaggerated compensation schemes and techniques similar to those of the sects that some groups use to enhance their enthusiasm and devotion. members.
Direct sales companies
Many sales companies began to support their distributors with more than their own sales commissions. They began to grant them commissions from people who invited to join the company.
Direct sales are a controversial business model, and critics resemble fraudulent "pyramid schemes" or Ponzi schemes.
ACN is a company registered in Spain, as well as in other 24 countries, and complies with the regulation of the sector in each market. ACN is a veteran member of the association of direct sales companies in Spain, in addition to Seldia, the European Association of direct sales companies. If customers are not acquired, ACN does not offer any compensation. ACN's income disclosure statement also states that "not all independent ACN business owners obtain benefits and success is in no way guaranteed.
In the USA Herbalife since 2014 was investigated for alleged use of pyramid schemes in its recruitment system. The commission of the FTC (Federal Trade Commission) established the closure of this case in July 2016, defining that although Herbalife's business model is not Pyramidal, its compensation model must be restructured so that the remuneration to the distributors come 80% of direct sales to the final consumers, and not mainly of self-consumption. This case is very important since it has repercussions for all companies of Network Marketing or Multilevel Marketing.
Level of benefits
Several sources have commented on the profit margin of specific multilevel companies or of multilevel companies in general:
- The Times: "The government's investigation has revealed that only 10% of Amway's agents in the UK make a profit, and only a rate lower than 1 in 10 manages to sell a product or more."
- Scheibeler, a high-level member of Amway (emerald): "Justice in the United Kingdom discovered in 2008 that out of a population of 33,000 IBOs (independent representatives) 'only about 90 had sufficient income to cover the costs of building their business.' This represents a loss at 99.7 for the people who invest. "
- Newsweek: According to the benefit report released by Mona Vie in 2007 "less than 1% qualifies (meets the requirements) to receive commissions and of those only 10% get more than 100 dollars a week."
- Business students focus on ethics: "In the US, the average multilevel marketing benefits for 90% of its members is equal to or less than $ 5,000 per year, which is far from being enough to live a normal life. (San Lian Life Weekly 1998) "
- USA Today has published several articles:
The FTC advises that multilevel organizations with greater incentives to recruit than sales of products are treated skeptically.
The loss rate of people recruited for MLM is approximately 99.9% after subtracting all expenses including the acquisition of company products. Partly this is because MLM companies encourage recruits to recruit more people to compete with them, leading to market saturation.
Another criticism is that multilevel marketing has lost its usefulness as a legitimate business practice. The argument put forward is that when America was a set of relatively small isolated towns and rural areas not easily accessible by small companies, multilevel marketing was an effective way to publicize and sell products or services but the appearance of commerce through the Internet and the possibility of informing and selling directly to consumers has made this model obsolete. So today, almost all modern MLM businesses ostensibly sell goods and services with an excessive price (if there is a real product or service) as a thin layer of legitimacy while its members are led to recruit even more people within the multilevel, effectively converting these programs into pyramid schemes.
Because of the encouragement to recruit competitors, some believe that, in the best of cases, modern MLM businesses are no more than legalized pyramid schemes.
A pyramid scheme could be defined as a scam model in a business scheme in which participants recommend and attract (refer) more people with the objective that the new participants produce benefits for the original participants. It is required that the number of new participants be greater than the existing ones in order to continue obtaining benefits; for that reason it is given the name of pyramid.
The pyramid sale is illegal in Spain according to the law 7 of 1996, the law 3 of 1991 and the article 248 of the Organic Law 10/1995 of the penal code. According to Law 3 of 1991: "It is considered disloyal because it is misleading, in any circumstance, to create, direct or promote a pyramid sale plan in which the consumer or user makes a consideration in exchange for the opportunity to receive compensation derived basically from the entry of other consumers or users into the plan, and not the sale or supply of goods or services. "
In Spain there are many multilevel companies that are actually hidden selling pyramid schemes and that operate with total impunity for years. In most of them they indoctrinate the people who participate to answer that the multilevel is not pyramidal and to focus on differentiating it from the pyramid scheme of investment or Ponzi instead of the pyramidal sale, thus diverting attention.
Most fraudulent organizations want to confuse potential new victims, so they often say that they are not pyramidal because in the organization they have products (often miraculous) and that in pyramidal organizations there is no product which is not true since the crime that is known as pyramidal sale involves the sale of products and is commonly accused.
If the independent direct sellers of the company receive remuneration for the mere fact of sponsoring other people to join the company as sellers, it is this clear signal that the company carries out pyramid selling activities. This form of compensation may not be evident and may be described as a training fee, etc.
The majority of the fraudulent multilevel marketing companies have created their contractual conditions and their business model adapted to the national pyramid sale laws, so that their business model is totally similar to a pyramid sale saving small details that make it "legal". "
Approximately 99% of people who enter a fraudulent multilevel do not even recover the initial investment.
This is how some multilevel companies save the possible illegalities of their business model:
- Illegality: obligation to purchase products without a repurchase agreement.
- Illegality: It is prohibited to organize the commercialization of products and services when the economic benefit of the organization and the sellers is not obtained exclusively from the sale or service distributed to the final consumers but from the incorporation of new sellers.
- Illegality: It is prohibited to propose obtaining accessions or inscriptions in the hope of obtaining an economic benefit related to the geometric progression of the number of people recruited or registered.
- Illegality: It is considered disloyal by deceptive, in any circumstance, to create, direct or promote a pyramid sale plan in which the consumer or user makes a consideration in exchange for the opportunity to receive compensation derived fundamentally from the entry of other consumers or users in the plan, and not the sale or supply of goods or services.
- Illegality: make promises of benefits that do not correspond to reality.
There are pyramid business systems hidden behind some multilevel systems, which ponder the affiliation to the system by neglecting the product to be marketed, thus achieving the false belief that once the system is perfectly learned, or after a long process of attempts failed, the system compensates the investment made.
Legislation and legitimacy
Some countries have provided legislation on this trade mechanism. In Spain, the Law of Retail Trade 7/1996 applies, where Article 22 and 23 define and demarcate the limits of multilevel sales. It is also important to mention laws 3 of 1991, especially article 24 and its most recent modification in law 29 of 2009.
1. Multilevel sale constitutes a special form of commerce in which a manufacturer or a wholesale merchant sells its goods or services through a network of independent dealers and / or distributors, but coordinated within the same commercial network and whose benefits. The economic benefits are obtained through a single margin on the retail price, which is distributed by perceiving variable percentages of the total turnover generated by all the vendors integrated into the commercial network, and proportionally to the volume of business that each component has created. For the purposes of the provisions of this article, merchants and independent distributors shall in all cases be considered businessmen for the purposes set forth in the consolidated text of the General Law for the Defense of Consumers and Users and other complementary laws.
2. It is prohibited to organize the commercialization of goods and services when:
a) The social benefit of the organization and of the vendors is not obtained exclusively from the sale or service distributed to the final consumers but from the incorporation of new vendors, or
b) It is not adequately guaranteed that the distributors have the appropriate labor contract or comply with the requirements that are legally required for the development of a commercial activity.
c) There is an obligation to make a minimum purchase of the products distributed by the new sellers, without a repurchase agreement under the same conditions.
d) In no case may the manufacturer or wholesaler of the network condition the access to it by paying a fee or entry fee that is not equivalent to the promotional, informative or training products and material delivered at a price similar to that of other existing counterparts in the market and that may not exceed the amount that is determined by regulation.
In the cases in which there is a repurchase agreement, the products will have to be admitted for refund provided their status does not clearly prevent their subsequent commercialization.
3. Prohibition of sales in pyramid.
a) The sale made by the procedure called "in chain or pyramidal" and any other analogous, consisting of offering products or services to the public at a price lower than its market value or free of charge, on the condition that it is achieved, is prohibited. the adhesion of other people.
b) It is forbidden to propose obtaining accessions or inscriptions in the hope of obtaining an economic benefit related to the geometric progression of the number of people recruited or registered.
c) The contractual conditions contrary to the provisions of this article will be null and void
4. Pyramid sales practices.
It is considered disloyal because it is deceptive, in any circumstance, to create, direct or promote a pyramid sale plan in which the consumer or user makes a consideration in exchange for the opportunity to receive compensation derived basically from the entry of other consumers or users in the plan, and not the sale or supply of goods or services.
Over the decades, companies have designed different compensation plans for direct sales. There is personal gain from the sale of products and, additionally, gains from the configuration of a network according to the following compensation plans:
- Stepped plan. It is also called breakaway. Distributors earn a commission on their personal sales (discount on sales volume) and the sales of their groups that are below them, until they equal them in the step (hence their name).
- Stair-step breakaway: It is the same as the breakaway but in this there are no width or depth limits.
- Matrix Plan. This plan limits the number of sponsors that each person can have at their first level, that is, their direct fronts. Depending on the company, there may be different amount of levels and different amount of fronts, and depending on the level the commissions vary. For example, in a 3×4 matrix, you can have a maximum of 3 people direct to you and, if a fourth person comes to your team, you must place it under one of your three people. However, the commissions, as mentioned above, vary depending on the level: for example, of the sales made by the people of your level 1, you earn 10%, of those of level 2,9%, of level 3,8% and in that way up to the level that the company has, which in the example were 4.
- Binary Plan This plan limits the width of each level to two fronts. The main advantage is that there are no steps or levels. Associates earn the same from all their distributors regardless of the level at which they are. The binary plan has three types:
- Pata loose, where the representative is paid commissions for the side that made less sales.
- Binary compensation 50/50, where the company pays the associates for both fronts, with the condition that the sales are balanced equally. For example, if 2 products were sold on one front and 3 on the other, the representative is paid a commission for 4 products (2 for each of its fronts), the missing commission is paid when the other front performs a commission. sale, that is, it is compensated.
- The other type of binary is the compensation 1/3 – 2/3, which works similarly to 50/50, only it is a little more flexible, that is, in the previous example the representative would be paid the full commission, because if one side sells 2 products, the other side can sell up to 6 and, even so, continue to be compensated. The key to the binary plan is to stay balanced or compensated. This compensation plan has been one of the last ones to be created, so it has certain advantages over others, such as the case of not having levels, and a frontality of only two new representatives.
- Matriz Revuelta. All the members of the team advance to the top of the compensation plan by the rotating system of the matrix.
- Elevator or pyramid structure. Its legality is questioned and consists of a "game board" in which each distributor pays one or more units of products to participate or receive a bonus. This scheme is considered a fraud, because it provides profits to the founder of the business, but leaves the last bankrupt.