Many types of products, rather than being available on store shelves, are sold through a distribution technique known as network marketing or multi-level marketing (MLM). In this type of distribution pattern, independent salespeople represent a parent company and are paid on commission based on the volume of product that they sell. It is sometimes difficult to distinguish reputable MLM businesses from illegal pyramid or Ponzi schemes, since these try to portray themselves as MLM companies.
The salespeople in MLM companies are often called distributors, consultants, dealers, or any other name which indicates that they sell a product for the larger parent company. Many products sold through MLM are nutritional supplements or are otherwise related to health care, but they can be any type of product. Distributors can earn money through MLM in either of two ways: by retailing the products they purchased at a wholesale price, or by recruiting other distributors who build a customer base in order to expand the whole organization.
In most legitimate MLM companies, no commissions are paid based on recruiting alone, but only on the sale of products. If new participants are paid based on their number of recruits, or if they are required to purchase a larger amount of “inventory” than they will likely be able to sell, then the organization may be a pyramid scheme. These are illegal in most countries, including the United States.
Compensation plans vary from one MLM company to the next, but there are a few common patterns. The simplest are called unilevel plans, and they pay commissions based on the number of levels a representative is from the original one who purchased the product. Advancing in rank or title does not increase compensation. From that point, compensation plans get more complex and varied, and may involve sales quotas, incentives, bonuses, or any combination thereof. There are literally hundreds of MLM companies, each with its unique structure.
MLM companies became very prevalent during the latter part of the 20th century. With their increased popularity came much harsh criticism, because of the low likelihood of making significant income through these types of businesses. There are legitimate network marketing opportunities available, and it is possible to create income in this way. However, it is important for someone considering them to employ a proper amount of skepticism regarding outlandish or unverified claims of wealth generation. The old proverb still holds true that “if it sounds too good to be true, it probably is.”