A concept that dates back to the 1920s with California Vitamin Company
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. The salespeople sell the products directly to consumers by means of relationship referrals and word of mouth marketing and also recruit others to join the company as distributors.
Multi-level marketing originated in the 1920s with California Vitamin Company (later named Nutrilite) and California Perfume Company (renamed as ‘Avon Products’). Companies such as Avon, Electrolux, Tupperware, and Kirby all originally used single level marketing to sell their goods and later introduced multi-level compensation plans.
Independent distributors develop their organisations 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 organisation.
MLM has a tarnished reputation as the vast majority of MLMs are recruiting MLMs, in which participants must recruit aggressively to profit. Approximately 99.9% of participants lose money after subtracting all expenses, including product purchases from the company. This is because encouraging recruits to further ‘recruit people’ to compete with them leads to ‘market saturation’.
MLM is an effective strategy for building a business and sales if 80% of a participant’s time and effort is spent selling the company’s products to consumers, and less than 20% recruiting participants. In addition, the product price, cost and market dynamics must make it possible for participants to just sell the company’s products and make a profitable business.