What is MLM?

Business, Marketing

Written by Tobias Mikalsen

November 20, 2019

Multi-level-marketing often triggers skepticism from potential customers. While there are many legitimate programs out there, some cross the line. How do you know if you’re dealing with a legitimate MLM company or a pyramid scheme? Let’s dive inn.

MLM, or multi-level-marketing, is a program designed to be highly scalable by making customers act as sales agents (I’ll refer to them as affiliates). In short, affiliates that sign up for the program can earn commission from selling the company’s products. The affiliate can then also have others—such as friends and family—enroll in the program to sell products. The original affiliate will then not only earn commission from personal sales, but also for sales of the affiliates they brought onboard.

You can find an example of a 3-level MLM program below.

More often than not, I would say setting up an MLM program is a bad idea. The risks are simply too high.

What differentiates a legal MLM program from a pyramid scheme?

In a pyramid scheme, there are no physical or tangible goods or services involved. Therefore, the affiliate does not receive anything of real economic value in return for their money. It’s basically an investment in “thin air”. The affiliate earns money by recruiting new affiliates and earns commission through their investments. This practice is illegal. An MLM program, however, involves selling tangible goods or services. Affiliates receive commission from selling goods of real economic value. The affiliate can recruit others and receive commission off of their sales as well. This type of MLM program is legal.

Unfortunately, some companies have tried to stretch boundaries, and sometimes crossed the fine line between a pyramid scheme and a legitimate multi-level marketing program. Both law enforcement and MLM-companies have suffered great defeats in court as a result. Worth mentioning that laws might not be the same in different jurisdictions. Northern-European countries, for example, tend to have strict laws on MLM.

Here are some examples of pyramid schemes and legal MLM programs:

 

Pros and Cons of MLM programs

Pros:

  • Highly scalable (obviously, this will always depend on the competitiveness of the product).
  • Relatively low customer acquisition cost.
  • Attractive to customers that are intrigued by the idea of earning additional income.
  • Effective word-of-mouth strategy.
  • Low-cost distribution.

Cons:

  • MLM is often associated with fraud and scam.
  • Expect skepticism from potential customers, including customers of the affiliate.
  • MLM products are often expected to be of low quality.
  • There is always a legal risk, even if you’re running a legal program, especially in countries and jurisdictions where pyramid schemes are heavily and frequently prosecuted.
  • It’s often difficult to retain both affiliates and customers, primarily because affiliates rarely have a wide enough network to make a significant amount of money.
In conclusion, is MLM the right marketing strategy for you?

More often than not, I would say setting up an MLM program is a bad idea. The risks are simply too high. One final issue to consider is that once you’re recognized as an MLM company, retailers and online platforms are often hesitant to bring your product or service inn to their customers since it could potentially be controversial for a major company to be affiliated with a multi-level marketing program. On the other hand, if you’re confident that your products will sell effectively through such a program, you’re willing to take the risks, and you’ve made yourself familiar with your local laws and regulations on this topic, it’s worth considering.

If you follow my regular recommendation and don’t choose use MLM as a business model and marketing strategy, have a look at this article for some other ideas: Digital Marketing 101: Musts for Small Business.

If you have questions or would like to consult with one of our marketing specialists on how to proceed with effective, modern digital marketing, use the chat box in the lower right corner of your screen.

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