In his book, According to Kotler, Paul Kotler defined this subject as follows: "Multilevel marketing (also called network marketing), describes systems in which companies contract with individuals to sell a set of products door to door or office to office. It is called multilevel because a contractor can also invite others to work and earn money on their performance." The sales representative thus has incentives to enlarge the sales force and to earn added commissions on the sales of his or her recruits.
Multilevel marketing (MLM) is, strictly speaking, not marketing at all but a form of direct sales with special features, of which recruiting is fundamental. A person, recruited by the company to sell a product, earns commissions; if that person recruits others, this second layer is called the person's "downline." The person earns a cut on the sales of people in the downline, called an "override." But those in the second level may also recruit others and create their own "downlines." The first person in the chain gets an "override" from every level, however many there may be, although always less the farther removed the source is. Often recruits are required to purchase an initial "starting inventory" of the product. In many cases the MLM company will not repurchase this inventory or will do so at a very reduced price. These characteristics have caused MLM to be associated with pyramid schemes; and some technically are such schemes. Not surprisingly, reputable direct marketing companies and the associations to which they belong are continuously engaged in policing the field and in advocating legislation aimed at setting clear and unambiguous rules. The term "network marketing" is in part used because "multi-level" marketing has at best an ambiguous reputation.
Andrew Sherman has reported (in his book Franchising & Licensing) that six states explicitly regulate MLM: Georgia, Maryland, New York, New Mexico, Wyoming, and Louisiana. So does Puerto Rico. Laws regulating MLM typically 1) require that MLM companies explicitly permit their agents to cancel their agreements and to agree to repurchase inventories at not less than 90 percent of the original transfer price; 2) prohibit inducements under which the agent is told that he or she will earn a specific amount of money; 3) prohibit the purchase of a minimum inventory; and 4) prohibit operations under which agents are only paid for recruiting others. Many states without MLM regulation nevertheless have laws prohibiting pyramid schemes under which they attempt to police MLM companies that overstep the line.
In a strictly functional sense, MLM is a way to exploit natural networks of acquaintances, with participants (predominantly women), first selling/recruiting others in their circle; these latter, in turn, do the same, and so (in the hopes of the MLM company) ad infinitum.. Many individuals participating in these networks do so part time. In due time they've sold all of their friends; success begins to fade. For this reason MLM companies are frequently tempted to make all sales final in the early stages so that inventories don't come trickling back.
In the hands of effective sales companies with appropriately chosen products, MLM has produced some very successful organizations. Among them are Amway, Mary Kay Cosmetics, Pampered Chef, and Longaberger Baskets, to name a few.
MLM businesses appeal to people who want to work part-time and need a flexible schedule, like students and mothers of young children. The Direct Selling Association has concluded from its studies that 90 percent of MLM sales representatives work fewer than 30 hours per week, and 50 percent work fewer than 10 hours per week. In addition, MLM businesses usually do not require a long-term commitment from their sales representatives.
An agent can enter an MLM business on very little capital (around $100)—and yet will feel as if in business for him of for herself. Jeffrey Gitomer, writing in the Business Journal, noted that many people value the opportunity to be their own boss and control their own destiny. "The secret to successful network marketing is you—the messenger—and your willingness to dedicate and focus on preparation," he wrote. "Your willingness to become a salesperson who believes in your own ability to succeed. Everyone wants success, but very few are willing to do what it takes to be successful."
Of course, like any other entrepreneurial venture, reaching significant success requires much more than a bit of selling here, a bit there. Only a tiny proportion of people entering this form of direct sales stay in it and make a good living. They do so because they work the job like any other successful sales agent operating between a customer and a producer.
"Federal Legislation Will Differentiate Legitimate Multilevel Marketing Businesses from Illegal Pyramid Schemes." Press Release. Direct Selling Association. 14 April 2003.
Gitomer, Jeffrey. "Financial Freedom through Network Marketing." Business Journal. 14 April 2000.
Kotler, Paul. According to Kotler: The World's Foremost Authority on Marketing Answers Your Questions. AMACOM, 2005.
"Multi-Level Marketing." World Federation of Direct Selling Associations. Available from http://www.wfdsa.org/legal_reg/multimarketing.asp. Retrieved on 20 April 2006.
Sherman, Andrew J. Franchising & Licensing: Two Powerful Ways to Grow Your Business in Any Economy. AMACOM, 2004.