Multilevel marketing plans, also known as "network" or "matrix" marketing, are a way of selling goods or services through distributors.
Typically, if you sign up as a distributor, you will receive commissions —for both your sales of the plan's goods or services and those sales of the other people you recruit to join.
Multilevel marketing plans usually promise to pay commissions through two or more levels of recruits, known as your "downline."
While direct selling can be a rewarding and enjoyable experience for the budding entrepreneur, it is also a great deal of work, especially if your objective is to sell products rather than "opportunities".
Be cautious of plans that claim you will make exponentially larger amounts of money through continued growth of your "downline" —the commissions on sales made by new distributors you recruit —rather than through sales of products you make yourself.
Most laws against pyramiding say that a multilevel marketing plan should only pay commissions for retail sales of goods or services, not for recruiting new distributors.
Avoid any plan that includes commissions for recruiting additional distributors. It may be an illegal pyramid.
Also beware of plans that ask you to purchase a large and expensive inventory. These plans, which may be thinly-disguised pyramids, can collapse quickly.
Many plans claim to sell miracle products or promise enormous earnings. Just because a promoter makes a claim doesn't mean it's true.
Ask him to substantiate claims with hard evidence.
Operators of these plans who make income claims must disclose, in writing, the amount of money typically earned by participants.
Beware of shills —"decoy" references paid by a plan's promoter to describe their fictional success in earning big money through the easily operated plan.
Don't pay or sign any contracts in an "opportunity meeting" or any other high-pressure situation. Insist on taking your time to think over a decision to join.
Talk it over with your spouse, a knowledgeable friend, an accountant or lawyer.
As well, make sure that the operator or participants of a multi-level marketing plan provide you with fair, reasonable and timely information about the plan.
This information should include:
|the different levels of earnings or compensation received by all participants in the plan;|
|the amount of money earned by a typical participant;|
|a description of the time and effort required to reach specific levels of income; and|
|any changes in income levels of participants.|
Amway's "Rule of 10" and "70% Rule"
In an effort to distinguish itself from a pyramid scheme Amway cited its so-called "Rule of 10," whereby an Amway rep supposedly has to prove that he/she has made at least ten retail sales each month to someone who is not also an Amway distributor.
It also stressed that it has a buyback of product policy for distributors who leave and a "70% of sales" rule.
The intended purpose of the 70% rule is to prevent purchases of inventory in unreasonable or excessive quantities by distributors which could be deemed front-end loading, inventory loading or sales of inventory that are not in commercially reasonable quantities.
It typically requires that distributors procure orders for inventory only when they have disgorged themselves of at least 70% of previously purchased inventory to the ultimate users which may include their personal or family use.
According to its own literature, Amway states that only 18% of its income is from retail sales made to non-Amway distributors.
If less than 70% of income comes from sales to these non-distributors, some courts have concluded the MLM company is in the business of endlessly recruiting distributors who in turn recruit distributors.
In short, they are pyramid schemes, not sales and distribution companies.
While some companies have allowed their distributors to be piled with unnecessary inventory, in order to qualify for higher levels in a compensation plan, ethical companies promote a restriction on initial purchases during the first 30 days and beyond unless the person can substantiate the orders.
The court noted that the "70% rule" and "10 customer rule" are meaningless if commissions are paid based on a distributor's wholesale sales (which are only sales to new recruits), and not based on actual retail sales.
The court also noted that an inventory buy-back policy is an effective safeguard only if it is actually enforced.
Meeting Likely Marks
My first experience with MLM happened one time on my trip overseas while I still was in college.
On the plane a lady (older than I) initiated a sociable conversation which ended, as we parted, with the statement that she had a nice business for me to do part-time at home (and full-time when I graduate).
We agreed to meet at a place of my choice (she wanted to come to my home but I said "No") which meant she ended up driving about 100 miles to meet with me to discuss this "opportunity". She drove a Porsche, mind you.
It turned out, she was "with" Amway. At that time I didn't know what Amway was but I couldn't understand why I would need to distribute products that are sold in stores.
She showed me catalogues full of pictures but the thing that alarmed me AND SHOULD RING ALARM BELLS IN EVERYONE'S HEAD was that there wasn't any employment application or request for references nor was I told to whom, how and when I would report for work.
Another encounter I had was when I was working at a grocery store.
A well-dressed man approached me and after very friendly small talk handed me his business card and said I should call him if I would like to work for myself and make more and be happier.
He said something to the effect I wasn't of course going to stay at that job forever.
I couldn't get out of him what exactly I would be doing but it sure seems odd how a prospective employer would go around searching for employees on the streets and in the shopping malls.
I now tend to avoid dealing with well-dressed, smooth-talking strangers that approach me in unlikely places.
After these encounters I concluded that people who easily make your acquaintance, share conversation with you on any subject and then begin to mention an "opportunity" are probably con-artists.
For advisories and views from dissatisfied MLM participants visit the following sites:
MLM Watch Multi-level marketing related.
WorldWideScam A quirky but detailed look at actual pyramid schemes operating now.
DMOZ Opposing Views Section on MLM opportunities
mlmLEGAL - A legal perspective on the MLM industry.