What Is Multilevel Marketing (MLM)?

Multilevel marketing (MLM) is a strategy some direct sales companies use to encourage existing distributors to recruit new distributors who are paid a percentage of their recruits' sales. The recruits are the distributor's "downline." Distributors also make money through direct sales of products to customers. Amway, which sells health, beauty, and home care products, is an example of a well-known direct sales company that uses multilevel marketing.

Key Takeaways

  • Multilevel marketing (MLM) is a strategy that some direct sales companies use to encourage existing distributors to recruit new distributors.
  • In MLM schemes, there can be hundreds or thousands of members worldwide, but relatively few earn meaningful incomes from their efforts, indicating a possible pyramid scheme.
  • While many MLM practices are legal, the FTC has been investigating multi-level marketing companies for decades and has found many with questionable legitimate practices such as running pyramid schemes.
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Multi-Level Marketing

Understanding Multilevel Marketing

Multilevel marketing is a legitimate business strategy, though it is controversial. One problem is pyramid schemes that use money from new recruits to pay people at the top rather than those who perform the work. These schemes involve taking advantage of people by pretending to be engaged in legitimate multilevel or network marketing. You can spot pyramid schemes by their greater focus on recruitment than on product sales.

The Legitimacy of Multilevel Marketing

An issue in determining the legitimacy of a multilevel marketing company is whether it sells its products primarily to consumers or to its members who must recruit new members to buy their products. If it is the former, the company is likely a legitimate multilevel marketer. If it is the latter, it could be an illegal pyramid scheme.

The Federal Trade Commission (FTC) has been investigating multilevel marketing companies for several decades and has found many with practices that are difficult to determine as legitimate. According to the World Federation of Direct Selling Associates, there were at least 116 million independent representatives among its members worldwide as of 2017. Relatively few earn meaningful incomes from their efforts. To some observers, this reflects the characteristics of a pyramid scheme.

You can often spot pyramid schemes by their greater focus on recruitment than on product sales.

Example of a Multilevel Marketing Company

Herbalife Nutrition Ltd. is a high-profile, multilevel marketing company that manufactures and distributes weight-loss and nutritional products, with more than 500,000 distributors. Although the FTC has investigated Herbalife, it was activist investor William Ackman, who shed a national spotlight on the company by shorting $1 billion of the company’s stock in 2012. Ackman accused the company of operating a pyramid scheme and backed his allegations with a bet the company’s stock price would fall under the weight of the scam.

In 2018, Ackman gave up on his bet. As of Oct. 27, 2019, the company’s stock price traded at $40 a share.

There have been multiple lawsuits against Herbalife, accusing it of misrepresenting its sales practices. This included a settlement it reached with the FTC in 2016, under which it had to restructure its business. Herbalife argues that most of its revenue is from product sales, not recruitment, and it offers members many protections, such as a money-back guarantee, so they will not be stuck with products they could not sell.