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Multi-level marketing (MLM) (also called network marketing (NM)) exhibits a business model which exemplifies direct marketing. Typically, independent business owners (IBOs) become associated with a parent company in a contractor-like relationship. IBOs receive remuneration for shopping within their own business, for selling products and for expanding their network of people ("downline") doing the same. An IBO receives a percentage of the profits generated by the network of all IBOs introduced to the system by him or her, and also of the profits generated by the people introduced by those IBOs, and so on. A points system, where the points represent the volume of products sold through the IBO network, tracks rewards.
Multi-level marketing has a recognised image problem because of difficulties in making a clear distinction between legitimate network marketing and illegal "pyramid schemes" or Ponzi schemes. Nonetheless, many NM/MLM businesses operate legitimately in various parts of the world. See List of network marketing companies for more information.
Critics contend that some companies produce revenue primarily by attracting new participants, as opposed to selling products. Amway (the world's leading company in network marketing, with annual turnover exceeding USD $1 billion) in particular often receives criticism for generating considerable revenue from selling instructional and motivational materials to its participants. The United States Department of Justice indicted the company, but Amway secured an acquittal.
Companies
Some of the companies known to use multi-level marketing:
Compensation Plans
Over the course of decades, companies have devised various MLM compensation plans:
- Breakaway plan. This plan features two types of distributors: managers and non-managers and three types of pay:
- Baseshop overrides are overrides of managers from their subordinate non-managers. This is no different from any sales organisation.
- Generational overrides are overrides of managers from managers who were previously their subordinate. Most plans compensate at least three generations of such managers.
- Executive bonuses. Additional commission to managers who exceed a sales quota. For example, 2% of the total company sales revenue goes to a bonus pool which is shared monthly pro-rata to managers who exceed $10,000 in that month.
- Matrix plan. This plan limits the width of each level in a distributor's group, hereby forcing strong distributors to pile their recruits over people who did not sponsor them.
- Binary plan. This plan limits the width of each level to two legs. Commissions are based on "cycles" where a distributor is paid a fixed amount whenever both legs achieve a certain number of sales units each.
- One, two, four, eight pyramid structure. This plan features a "game board" where each participating distributor would pay in one or more product units, and that the "one" would receive consideration when the "eight" had paid in. After this the structure would split, the "two" advance to the "one" position and an additional "eight" would be required for each of the structures before the "one" would be paid and the structures again split.
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