Multi-level marketing
Multi-level marketing (MLM), also called network marketing[1] or pyramid selling,[2][3][4] is a controversial[5] marketing strategy for the sale of products or services in which the revenue of the MLM company is derived from a non-salaried workforce selling the company's products or services, while the earnings of the participants are derived from a pyramid-shaped or binary compensation commission system.[6]
In multi-level marketing, the compensation plan usually pays out to participants from two potential revenue streams. The first is based on a sales commission from directly selling the product or service; the second is paid out from commissions based upon the wholesale purchases made by other sellers whom the participant has recruited to also sell product. In the organizational hierarchy of MLM companies, recruited participants (as well as those whom the recruit recruits) are referred to as one's downline distributors.[7]
MLM salespeople are, therefore, expected to sell products directly to end-user retail consumers by means of relationship referrals and word of mouth marketing, but more importantly they are incentivized to recruit others to join the company's distribution chain as fellow salespeople so that these can become downline distributors.[1][8] According to a report that studied the business models of 350 MLM companies in the United States, published on the Federal Trade Commission's website, at least 99% of people who join MLM companies lose money.[9][10][11] Nonetheless, MLM companies function because downline participants are encouraged to hold onto the belief that they can achieve large returns, while the statistical improbability of this is de-emphasized. MLM companies have been made illegal or otherwise strictly regulated in some jurisdictions as merely variations of the traditional pyramid scheme.[12][13]
Direct selling versus network marketing
"Network marketing" and "multi-level marketing" (MLM) have been described by author Dominique Xardel as being synonymous, with it being a type of direct selling.[8] Some sources emphasize that multi-level marketing is merely one form of direct selling, rather than being direct selling.[26][27] 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 these and other different terms and "buzzwords" is an effort to draw distinctions between multi-level marketing and illegal Ponzi schemes, chain letters, and consumer fraud scams—where none meaningfully exist.[28]
The Direct Selling Association (DSA), a lobbying group for the MLM industry, reported that in 1990 only 25% of DSA members used the MLM business model. By 1999, this had grown to 77.3%.[29] By 2009, 94.2% of DSA members were using MLM, accounting for 99.6% of sellers, and 97.1% of sales.[30] Companies such as Avon, Electrolux, Tupperware, and Kirby were all originally single-level marketing companies, using that traditional and uncontroversial direct selling business model (distinct from MLM) to sell their goods. However, they later introduced multi-level compensation plans, becoming MLM companies.[26] The DSA has approximately 200 members[31] while it is estimated there are over 1,000 firms using multi-level marketing in the United States alone.[32]
Several sources have commented on the income level of specific MLM companies or MLM companies in general:
Legality and legitimacy
Bangladesh
In 2015, the Government of Bangladesh banned all types of domestic and foreign MLM trade in Bangladesh.[46]
China
Multi-level marketing (simplified Chinese: 传销; traditional Chinese: 傳銷; pinyin: chuán xiāo; lit. 'spread selling') was first introduced to mainland China by American, Taiwanese, and Japanese companies following the Chinese economic reform of 1978. This rise in multi-level marketing's popularity coincided with economic uncertainty and a new shift towards individual consumerism. Multi-level marketing was banned on the mainland by the government in 1998, citing social, economic, and taxation issues.[47] Further regulation "Prohibition of Chuanxiao" (where MLM is a type of Chuanxiao was enacted in 2005, clause 3 of Chapter 2 of the regulation states having downlines is illegal).[13] O'Regan wrote 'With this regulation China makes clear that while Direct Sales is permitted in the mainland, Multi-Level Marketing is not'.[12]
MLM companies have been made illegal in China as a mere variation of the traditional pyramid scheme and as disruptive to social and economic order.[12][48] MLM companies have been trying to find ways around China's prohibitions, or have been developing other methods, such as direct sales, to take their products to China through retail operations. The Direct Sales Regulations limit direct selling to cosmetics, health food, sanitary products, bodybuilding equipment and kitchen utensils, and they require Chinese or foreign companies ("FIEs") who intend to engage into direct sale business in mainland China to apply for and obtain direct selling license from the Ministry of Commerce ("MOFCOM").[49] In 2016, there are 73 companies, including domestic and foreign companies, that have obtained the direct selling license.[50]
Some multi-level marketing sellers have circumvented this ban by establishing addresses and bank accounts in Hong Kong, where the practice is legal, while selling and recruiting on the mainland.[12][51]
It was not until August 23, 2005, that the State Council promulgated rules that dealt specifically with direct sale operation- Administration of Direct Sales (entered into effect on December 1, 2005) and the Regulations for the Prohibition of Chuanxiao (entered into effect on November 1, 2005). When direct selling is allowed, it will only be permitted under the most stringent requirements, in order to ensure the operations are not pyramid schemes, MLM, or fly-by-night operations.
United States
MLM businesses operate in all 50 U.S. states. Businesses may use terms such as "affiliate marketing" or "home-based business franchising". Some sources say that all MLM companies are essentially pyramid schemes, even if they are legal.[14][22][23] Utah has been named the "unofficial world capital of multi-level marketing and direct sales companies" and is home to at least 15 major MLMs, more MLMs per capita than any other state.[53]
The U.S. Federal Trade Commission (FTC) states: "Steer clear of multilevel marketing plans that pay commissions for recruiting new distributors. They're actually illegal pyramid schemes. Why is pyramiding dangerous? Because plans that pay commissions for recruiting new distributors inevitably collapse when no new distributors can be recruited. And when a plan collapses, most people—except perhaps those at the very top of the pyramid—end up empty-handed."[54]
In a 2004 Staff Advisory letter to the Direct Selling Association, the FTC states:
The Federal Trade Commission warns
In re Amway Corp. (1979), the Federal Trade Commission indicated that multi-level marketing was not illegal per se in the United States. However, Amway was found guilty of price fixing (by effectively requiring "independent" distributors to sell at the same fixed price) and making exaggerated income claims.[56][57] The FTC advises that multi-level marketing organizations with greater incentives for recruitment than product sales are to be viewed skeptically. The FTC also warns that the practice of getting commissions from recruiting new members is outlawed in most states as "pyramiding".[58]
Walter J. Carl stated in a 2004 Western Journal of Communication article that "MLM organizations have been described by some as cults (Butterfield, 1985),[59] pyramid schemes (Fitzpatrick & Reynolds, 1997),[60] or organizations rife with misleading, deceptive, and unethical behavior (Carter, 1999),[61] such as the questionable use of evangelical discourse to promote the business (Höpfl & Maddrell, 1996),[62] and the exploitation of personal relationships for financial gain (Fitzpatrick & Reynolds, 1997)".[60][63] In China, volunteers working to rescue people from the schemes have been physically attacked.[64]
MLM companies are also criticized for being unable to fulfill their promises for the majority of participants due to basic conflicts with Western cultural norms.[65] There are even claims that the success rate for breaking even or even making money are far worse than other types of businesses:[66] "The vast majority of MLM companies are recruiting MLM companies, in which participants must recruit aggressively to profit. Based on available data from the companies themselves, the loss rate for recruiting MLM companies is approximately 99.9%; i.e., 99.9% of participants lose money after subtracting all expenses, including purchases from the company."[66] (By comparison, skeptic Brian Dunning points out that "only 97.14% of Las Vegas gamblers lose money .... ."[67]) In part, this is because encouraging recruits to further "recruit people to compete with [them]"[14] leads to "market saturation."[25] It has also been claimed "(b)y its very nature, MLM is completely devoid of any scientific foundations."[68]
Because of the encouraging of recruits to further recruit their competitors, some people have even gone so far as to say at best modern MLM companies are nothing more than legalized pyramid schemes[14][22][23] with one stating "Multi-level marketing companies have become an accepted and legally sanctioned form of pyramid scheme in the United States"[22] while another states "Multi-Level Marketing, a form of Pyramid Scheme, is not necessarily fraudulent."[23] In October 2010 it was reported that multi-level marketing companies were being investigated by a number of state attorneys general amid allegations that salespeople were primarily paid for recruiting and that more recent recruits cannot earn anything near what early entrants do.[69] Industry critic Robert L. FitzPatrick has called multi-level marketing "the Main Street bubble" that will eventually burst.[70]
Religious views
Islam
Many Islamic jurists and religious bodies, including Permanent Committee for Scholarly Research and Ifta[71] of Saudi Arabia, have considered MLM trade to be prohibited (haram). They argue that MLM trade involves deceiving others into participating, and the transaction bears resemblance to both riba and gharar.[72][73]