What Is Multi-Level Marketing
Multi-level marketing 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 multi-level marketing.
Understanding Multi-Level Marketing
Multi-level 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 multi-level marketing. You can spot pyramid schemes by their greater focus on recruitment than on product sales.
Legitimacy of Multi-Level Marketing
An issue in determining the legitimacy of a multi-level 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 a legitimate multi-level marketer; and if it is the latter, it could be an illegal pyramid scheme. The Federal Trade Commission (FTC) has been investigating multi-level marketing companies for several decades and has found many with practices that are difficult to determine as legitimate. According to industry data, there are 90 million members worldwide, but relatively few earn meaningful incomes from their efforts. To some observers, this reflects the characteristics of a pyramid scheme.
[Important: You can spot pyramid schemes by their greater focus on recruitment than on product sales.]
Example of a Multi-Level Marketing Company
Herbalife Ltd., is a high-profile, multi-level marketing company that manufactures and distributes weight-loss and nutritional products, with more than 500,000 distributors. Although the FTC had been investigating 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 2013. 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 August 28, 2018, the company’s stock price traded at $57 a share.
The courts also dismissed a lawsuit filed against Herbalife, accusing it of misrepresenting its sales practices. Herbalife proved that most of its revenue was from product sales, not recruitment, and it offered members many protections, such as a money-back guarantee, so they would not be stuck with products they could not sell.
- Multi-level marketing is a strategy some direct sales companies use to encourage existing distributors to recruit new distributors.
- There are 90 million members worldwide, but relatively few earn meaningful incomes from their efforts, indicating a possible pyramid scheme.
- The FTC has been investigating multi-level marketing companies for decades and has found many with questionable legitimate practices.