Although multi-level-marketing or MLM often carries a negative connotation, it cannnot be ignored as a significant and legitimate form of marketing in the US and global economy.
What is Multi-Level-Marketing or MLM?
Multilevel marketing is a form of direct marketing where the wholesale and distribution of a product are done by participants in the same marketing plan. The participants in the plan in turn earn their money by recruiting additional participants and supplying the same products to those participants (Canada Competition Bureau, 2003, par. 4). Because firms pay very little to market the product until after a participating distributor has already sold the product, this form of marketing requires relatively little overhead investment for marketing costs, and has proven to be a very effective method of rapid market penetration.
Multilevel marketing originated in the United States in the early 1940s with the introduction of a nutritional supplement company called Nutrilite. The practice of commissions and referral matrices quickly helped Nutrilite products to become successful in the national marketplace, reaching monthly sales revenues of more than US$500,000. Despite such successful sales, problems within their manufacturing and marketing infrastructure significantly hindered the company’s performance (Acidics, 2003, par. 3-6). In 1959 two of Nutrilite’s top distributors, Rich DeVos and Jay Van, established their own multilevel company, the American Way Association, later namedAmway. Often referred to as “direct sales” (Amway, 2003, par. 7), Amway’s model has since been imitated by thousands of companies worldwide, with varying results. Today, approximately 34 million people are engaged in Amway-type direct selling worldwide. The industry has grown into an estimated US$82 billion (Amway, 2003, par. 7).
Multilevel Marketing Perspective
MLM payout and recruitment structures have often been associated with pyramid schemes. A pyramid scheme is an investment scam, “in which the money from later investors is used to pay earlier investors” (Investorwords.com, 2003, p. 1). These scams inevitably collapse due to the exponential increase of investors necessary for each stage of growth.
Although an age-old scheme, this concept was brought to the attention of the American public in the summer of 1920 with the introduction of the “Ponzi Scheme” (Knutson, 1996). Charles Ponzi, an Italian immigrant, recognized that countries whose monetary value was damaged because of World War I had issued postal coupons that could be redeemed in the United States for a much higher value. Charles Ponzi promised a 50% return on investments in only 45 days and investments flooded in. Stamp exchange regulations quickly changed in late summer of 1920, and many investors demanded an instant return on their investments. Charles Ponzi used the money of other investors, without interest, to pay the dividends on earlier investors. On July 24, 1920, Ponzi’s scheme collapsed, he was arrested, his partners were ruined and investors were swindled (Knutson, 1996, par. 59). For this and a number of other reasons, the public perspective of MLM companies has generally been negative (Direct Selling Association, 1997, p. )
It is true that many MLM companies offer commissions and rewards for successful recruiting of additional distributors. This does not, however, indicate that an MLM is necessarily a pyramid scheme. Legitimate MLM companies will provide commission on sales and provide distributors with the opportunity to sell products and receive retail profits.