A Basic Guide To The
Multi-Level Marketing (MLM)
Network
Multi-level marketing (MLM)
is also referred to as
network marketing. The
MLM is essentially a
type of business model
that combines direct
marketing with
franchising. The term
business model describes
a vast range of informal
and formal models that
are used by companies to
represent various
aspects of business,
such as operational
processes,
organizational
structures, and
financial forecasts. The
MLM business functions
by enrolling unsalaried
salespeople to sell
products and meanwhile
earn additional sales
commissions based on the
sales of people enrolled
into their downline, an
organization of people
that includes direct
recruits, recruits'
recruits and so on. This
arrangement is similar
to franchises where
royalties are paid from
the sales of individual
franchise operations to
the franchisor as well
as to an area or region
manager. There can be
multiple levels of
people receiving
royalties from one
person's sales. New MLM
members may be required
to pay for their own
training and marketing
materials, or to buy a
significant amount of
inventory to start their
career.
The compensation plans
vary from one MLM
business to the other,
but there are basic
plans in place. The
Unilevel or Stairstep
Breakaway plans are the
oldest and most popular
in the MLM business.
These plans features two
types of distributors
either managers or
non-managers. The pay
method of these plans
includes Baseshop
overrides where there
are overrides of
managers from their
subordinate
non-managers. This
method is the same as
any other type of sales
organization.
Generational overrides
are overrides of
managers from the
baseshop of managers who
were previously their
subordinate. Most plans
compensate at least
three generations of
such managers. Executive
bonuses are commissions
for managers who exceed
a posted sales quota.
For example, 2% of the
total company sales
revenue may go to a
bonus pool that is
shared monthly to
managers who exceed
$10,000 in that month.
Commissions are based on
the aspect of cycles,
where a distributor is
paid a fixed amount
whenever both legs
achieve a certain number
of sales units each.
Commissions are paid
incrementally when the
sales volume in each leg
matches.
In recent years, the MLM
business has developed
an image problem due to
its resemblance to the
illegal pyramid or other
similar schemes. MLM
businesses operate in
the United States in all
50 states and in more
than 100 other countries
around the world. Many
pyramid schemes try to
present themselves as
legitimate MLM
businesses. In the
legitimate MLM
companies, commissions
are earned only on sales
of the company's
products and/or
services. No money may
be earned from
recruiting alone through
sign-up fees, though
money earned from the
sales of members
recruited is one
attraction of MLM
arrangements.
A commonly adopted test
of legality is that MLMs
follow the so-called 70%
rule which prevents
members "inventory
loading" in order to
qualify for additional
bonuses. The 70% rule
requires participants to
sell 70% of previously
purchased inventory
before procuring new
orders. There are
however variations in
interpretations of this
rule. Some attorneys
insist that 70% of
purchased inventory
should be sold to people
who are not participants
in the business, while
many MLM companies allow
for self-consumption to
be a significant part of
the sales of a
participant. The Federal
Trade Commission offers
advice for potential MLM
members to help them
identify those
activities that could be
scams.
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