Multi-level marketing (MLM) is a marketing strategy in which the sales force is compensated not only for sales they personally generate, but also for the sales of others they recruit, creating a downline of distributors and a hierarchy of multiple levels of compensation. Other terms for MLM include network marketing, pyramid selling, and referral marketing.
Most commonly, the salespeople are expected to sell products directly to consumers by means of relationship referrals and word of mouth marketing. Some people equate MLM with direct selling, although MLM is only one type of direct selling.
MLM companies have been a frequent subject of criticism as well as the target of lawsuits. Criticism has focused on their similarity to illegal pyramid schemes, price-fixing of products, high initial start-up costs, emphasis on recruitment of lower-tiered salespeople over actual sales, encouraging if not requiring salespeople to purchase and use the company’s products, potential exploitation of personal relationships which are used as new sales and recruiting targets, complex and sometimes exaggerated compensation schemes, and cult-like techniques which some groups use to enhance their members’ enthusiasm and devotion
Direct selling, network marketing, and multi-level marketing
“Network Marketing” and “Multi-level Marketing” are generally considered to be synonyms, and a subset of direct selling. While “direct selling” and “network marketing” refer primarily to the distribution system, the term “multi-level marketing” emphasizes the compensation plan more. Other terms that are sometimes used to describe multi-level marketing include “word-of-mouth marketing”, “interactive distribution”, and “relationship marketing”. Critics have argued that the use of different terms and “buzzwords” is an effort to distinguish multi-level marketing from illegal Ponzi schemes, chain letters, and consumer fraud scams. Some sources classify multi-level marketing as a form of direct selling rather than being direct selling.
The Direct Selling Association, an American industry body, reported that in 1990 twenty-five percent of members used MLM, growing to 77.3 percent in 1999. 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. By 2009, 94.2% of members were using MLM, accounting for 99.6% of sellers, and 97.1% of sales. The DSA has approximately 200 members while it is estimated there are over 1000 firms using multi-level marketing in the US alone.