Learn more about MLMs and how they work.
What Is Multi-Level Marketing (MLM)?
Multi-level marketing is a distribution model companies use to get their product to consumers. Instead of directly offering their products to consumers online or in brick-and-mortar stores, they use sales representatives to distribute and sell their products.
Sales representatives typically work from home and buy inventory to sell at in-person or online parties. They aren't considered employees; instead, each sales representative owns their business. The multi-level aspect refers to each representative's ability to recruit and train other representatives to start their own business. As recruits make sales and recruit their own representatives, each person above them earns a commission.
Income earned in MLM comes from the commission earned on personal sales and a percentage of the sales earned by other reps recruited by you.
- Acronym: MLM
How Multi-Level Marketing (MLM) Works
With an MLM, you typically are recruited by someone who's already in the business. You may have attended one of their sales events and enjoyed the products.
Once you show interest, you may attend a meeting to learn more about the business. You'll be asked to sign a contract and buy inventory. Once those steps are done, you can get started.
To understand how MLMs work, it also helps to be familiar with industry jargon, including:
- The plan: This is the overall program, including the company's marketing and compensation plans.
- Sponsor: This refers to the representative who directly recruits another person into the business. For example, MLM member A recruits member B into the business. Member A is the sponsor and is responsible for training member B.
- Recruit: Also referred to as a team member, this is a person brought into the business by a sponsor as a new member. Recruits are trained by their sponsor or other more experienced representatives.
- Downline: These are the recruits brought in below you. This can include members you've recruited as well as those your recruits have brought into the business.
- Upline: This consists of the sponsors who came in before you. For example, if rep A recruited rep B, who recruited rep C, who recruited you, your upline is C, B, and A.
- Compensation plan: This outlines all the ways reps earn money. Along with commissions on sales made by you and your team, many companies pay bonuses and increase commission splits based on sales volume.
According to a survey of MLM participants by AARP, 47% reported they lost money, 27% reported that they broke even, and 25% reported making a profit.
Is Multi-Level Marketing (MLM) Worth It?
Whether an MLM is right for you depends on factors like whether you have the money to invest, your passion for the products being sold, and if the specific MLM you're considering is legitimate.
You may have heard MLMs referred to as pyramid schemes, which are illegal. For an MLM to be legal, it needs three things:
- A quality product or service
- Income earned from sales of products or services
- A focus on sales, not recruitment
To be legal and not a scam, money needs to be primarily earned from the sales of products and services rather than the recruitment of new members. MLM programs with no or a low-quality product or a focus on getting paid per recruit could be an illegal pyramid scheme.
Legitimate MLM businesses are like any other business. If you're interested in pursuing one, consider the following before you get started:
- Find a company that's a member of the Direct Selling Association, which requires members to uphold a code of ethics.
- Study the company's history and compensation plan. Understand how money is made and their recommendations and support for marketing your business.
- Treat your MLM business like a business, not a hobby, even if it's a side hustle. MLMs aren't get-rich-quick schemes. Like any business, they require you to define your target market, reach out to your market, and make sales.
- Multi-level marketing (MLM) is a form of direct sales in which independent representatives sell products or services from a company to an end consumer.
- Sales representatives typically work from home and buy inventory to sell at in-person or online parties.
- Getting started with an MLM is relatively simple. You sign a contract, buy inventory, then start selling.
- Whether an MLM is right for you depends on your finances, your enthusiasm for the product, and whether the company is reputable.