Multi-level marketing is an enterprise system which puts emphasis on recruiting distributors. It is commonly used by the industry, and this term implies that success depends on building a distributor interconnection and that payouts occur at two or more levels. In some cases, this is also used to indicate that there are links of product suppliers enabling distributors to offer a broader selection of products.

In a typical multi-level marketing or network marketing arrangement, individuals associate with a parent company as an independent contractor and are compensated based on their sales of products or service, as well as the sales achieved by those they bring into the business.

In a legitimate MLM company, commissions are earned only on sales of the company's products. No money may be earned from recruiting alone ("sign-up fees"). Some less legitimate companies produce revenues primarily by attracting new participants or selling them marketing services, as opposed to selling actual products. One must analyze the compensation plan to determine whether participants are paid from actual sales to customers and not from new-recruit bonuses or business support sales.

Multi-level marketing has a recognized image problem due to the fact that it is often difficult to distinguish legitimate MLMs from illegal scams such as pyramid or Ponzi schemes. MLM businesses do operate legitimately in most countries, and new businesses may use terms like "affiliate marketing" or "home-based business franchising". However, many pyramid and Ponzi schemes try to present themselves as legitimate MLM businesses.

A pyramid scheme is a non-sustainable business model that involves the exchange of money primarily for enrolling other people into the scheme, usually without any product or service being delivered. Ponzi schemes, however, is a fraudulent investment operation that involves paying abnormally high returns ("profits") to investors out of the money paid in by subsequent investors, rather than from net revenues generated by any real business.

Most of these schemes take advantage of confusion between genuine businesses and complicated but convincing moneymaking scams. The essential idea behind each scam is that the individual makes only one payment, but are promised to somehow receive exponential benefits from other people as a reward.

Multi-Level Market scams generally have extremely elaborate marketing materials, such as professionally directed and produced audio-video tapes to show potential commissioned sellers, conventions with "guest speakers" who offer testimonials about how much they have made on the scam and how wonderful the product is, and awards and prized for the commissioned seller with the most sales.

Clearly, the fundamental flaw is that there is no end benefit; the money simply travels up the chain, and only the originator (or at best a very few) wins in swindling his followers. Of course, the people in the worst situation are the ones at the bottom of the pyramid: those who subscribed to the plan, but were not able to recruit any followers themselves. To embellish the act, most such scams will have fake referrals, testimonials, and information.

The scams that have mushroomed have been very damaging to legal MLM companies. To avoid illegitimate multi-level marketing, we should be wary if the start-up cost for the investment is too expensive. Know the consumer market for the products and its officers. If the company seems to be making money by recruiting alone, there certainly is a bluff. And the surest way to distinguish false MLM companies is to contact your local business bureau.

Copyright 2007 Ismael D. Tabije