What is Multi-Level Marketing?
Multi-Level Marketing (MLM) is a business model which consists of Network Marketing and Direct Sales. MLM is commonly known as ‘network marketing’ or ‘referral marketing’. The distribution-based marketing strategy consists of multiple layers/tiers of commission overriding.
In MLM, the incentive or profit-sharing is organized at the multi-level of the sales force. Multi-level marketing is considered as one of the brand marketing strategies to strengthen brand image and boost product sales.
Sales personnel are expected to generate sales lead, sell their products to end consumers based on word of mouth, network referrals and brand awareness, thereby boosting organic sales. They further onboard more people on commission basis to further expand the distribution and marketing chain.
What is the Significance of Multi-Level Marketing?
The purpose of Multi-Level Marketing strategy is to focus on distribution-based marketing which offers various kinds of commissions by distributing products to consumers. MLM companies recruit individuals who persuade others to join the sales force to sell their products.
The more you recruit and sell, the higher you climb in the organization hierarachy, reaching the top of the pyramid. Each recruited person gets an opportunity to create its own team by recruiting more independent distributors.
Famous examples of companies making sales through MLM are Oriflame, Amway, Herbalife, Tupperware etc.
Suppose one salesperson appoints four more people and each one of them appoints two people each, the first salesperson will get paid for onboarding 12 new people.
When one salesperson recruits more sales force, the person receives a percentage of their sales as well because you introduced them into the business. So, the idea is to keep onboarding more people in the distribution chain and climb up towards the pyramid top.
MLM companies have different structures and strategies. Binary, Matrix, X-UP, Pyramid business plans.
MLM business is one of the profitable business plans in this world, and it's booming worldwide, but many of them are not trustworthy, and innocent people can get stuck up in fraud.
What is Network Marketing?
In Network Marketing, consumers can participate as marketing representatives and salespeople. Individuals can promote and sell the products as per the company's instructions. In the Network Marketing, company or the manufacturer markets and sells its products to the consumers through a network of consumers.
The sales team is not the employees of the company but the consumers who buy the products, participate and act as sales representatives. They are also called:
In this type of sales strategy, the incentive is shared with the sales force, and a relationship is managed between the Marketing company or the Manufacturer and sales force via commissions. Each salesperson is motivated to sell more products and with the referral, convert more customers into sales representatives. Depending on the sales they do and people they recruit, they receive incentives apart from the financial benefits such as Bonus, Car fund, House fund, Travel fund and Royalty.
What is Direct Selling?
In Direct Selling, salesforce, which is employed to sell products, markets and sells the products to the consumers. Traditional business or a marketing company may hire a sales force to sell the products by giving daily based incentives with or without the sales.
Door to door selling or selling on television or online sale are a few examples of this marketing strategy. The salesforce is employed at the marketing company or the manufacturer.
Why is Multi-Level Marketing so Lucrative?
MLM (Multi-Level Marketing) is a type of marketing where someone manufactures a product and appoints a pool of people to sell and distribute it. With a pyramid structure, the maker of the product sits at the top of the pyramid and assigns salespeople to sell it for a commission. When a new person joins the sales either by them or by the people appointed by them, they will get an incentive amount and discounts on the products.
Each salesperson has a "downline" or people set by that salesperson. When a downline member executes a sale, a commission process begins. Further, these people expand marketing and distribution by adding more people in the chain.
MLM has been gaining acceptance by business seekers as a lucrative job option in terms of flexi job hours, less initial investment, lower risk and ease of doing business. Many retirees have been hopping on to job opportunities in MLM based on flexible and convenient work commitment.
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What are the Risks Associated with Multi-Level Marketing?
The idea of Multi-Level Marketing has been criticized many times in the world. People have sued the companies for fraud. Some have also gone to jail for duping other people.
In general, this strategy is considered as a bad idea by a lot of lawyers, economists, etc. Because there is no such legal contact made between the sales force and the manufacturer, and this can get risky. It mostly depends on which company you get associated with, their business risk and the worthiness of the person you are dealing with.
MLM is also banned in some countries, while it operates in all 50 US states. The business plan is referred to as ’affiliate marketing’. The marketing strategy is not illegal per say but it's also been criticised in the US court of law.
Some countries like Saudi Arabia and Bangladesh also prohibit MLM on religious grounds. MLM is illegal in China and strictly regulated in a few other countries.
Besides, people seeking employment in businesses based on MLM strategy are often burdened with the requirement of buying and managing inventories. A lot of initial efforts, sales campaign and persuasive selling is needed to get the sales process and business flow running smooth.
Moreover, the earnings are based on sales commission and adding more tiers of the sales force in the sales and marketing chain. Lack of optimal compensation plan and risk of earnings threat often discourage people in associating with MLM based business model.
What Strategies Can be Adopted to Sail Through MLM Risks?
Businesses engaged in the MLM model should have customer satisfaction as the first goal in the Business Ethics charter. Informing customers of the benefits, risks and hidden charges in procuring and using the product need to be dealt with caution.
Besides, security is another important area that need not be overlooked. MLM based businesses should be well-positioned at all levels of sales representatives to offer payment security to the consumers.
Quality standards need to be maintained as per the commitments made. All the product features and specifications should be shared with the consumers in the most transparent fashion, amidst aggressive marketing and sales approach adopted by sales executives in meeting their sales targets and earnings hunger.
After sales customer service and grievance addressal also play an important role in long-term sustenance of the MLM business model.
While it is the most upcoming business opportunity, it should not be considered as ‘Get Rich Quick’ scheme. Dedicated efforts, smartness in tapping consumer interests of varied demographics, intelligent marketing skills are needed to enjoy stable earnings.