Everything you need to Know about Multi-Level Marketing(MLM) and Direct selling

Published by Pradeep K.J on

Direct selling, Multi-level marketing (MLM), and sometimes called network marketing. These 3 are nothing but a marketing strategy. Standing apart from traditional and other kinds of marketing strategies. 

Binary model

What is the Definition of Multi-level marketing (MLM) and Direct selling? 

Direct selling is a marketing strategy/method used to exchange goods or services. Unlike in traditional marketing, the help of intermediaries or advertisements is not used in direct selling…  This is possible through distributors. Distributors deliver the company’s products or services directly to the customer. 

note: distributor is representative of the company by means of any type of contract. 

Multi-level marketing is a business model most used by direct selling companies. And scams and pyramid scheme companies also using this concept.  

Where the products or services are selling person to person like in direct selling. And more that, distributors recruiting more distributors to boost the sale.  

The one who recruited another will get a small dividend of his/her sales. 

The difference between direct selling and multi-level marketing (MLM) is. In multi-level marketing, the distributor adds more distributors into the system for money and benefits. They also receive a small share of their turnover.    

And thus, making many levels of marketing teams forming a network. So that is sometimes called network marketing.   

Distributors joined in the system for payment, commission, and royalties awarded by the companies.  

These are based on the MLM company’s income Plan. 

How Multi-Level Marketing and Direct selling Works 

Difference between Network Marketing and Traditional business

In Traditional business (marketing) strategy, the intervention of intermediaries occurs at several stages. this occurring between the delivery of a product from a manufacturing company to a consumer. At each stage, each intermediary receives a small share of the profits. Usually, a product goes through the hands of at least 4 – 5 intermediaries. 

In addition to that, the money companies spend on advertisements also needed to pay by the consumer.  

So, the retail price has to be 5 times or more of the construction cost.   

If MRP is less than that, the product cannot sell profitably (which means, If the maximum retail price is one or two times more than the manufacturing price. It will be very difficult to retail globally. Because the product cannot meet the profit for intermediaries)   

Besides their profits, the money they spend on advertising is also consumed by the consumer. So, the retail price has to be 5 times or more of the construction cost. And this is the same in all most all cases. 

In MLM there are no intermediaries such as national distributors, state distributors, Controlling and forwarding agents, wholesalers, retailers… and other advertisements.   

The sales are going through a group of people(distributor) as a network, so it is also called network marketing.  

The commission is paid to the intermediaries. And a huge amount needed to spend on the advertisement is divide into the distributor network with the help of an income plan or compensation plan.   

 The commissions and other royalties are divided through a compensation plan (income plans) by the MLM companies.  

The compensation plans vary with the companies. because they sell different products or services.   

The Multi-level marketing companies recruit more and more distributors into the system (distribution system). And it’s going everlasting. And thus, companies increase their sales volume.  

 
This is by other distributors refers to new personals into the system. The one who refers to more distributors gets more money according to the income plan.  

No distributor is enrolling on a salary basis. A distributor will get a small share of sales done by the person referred by him and his references.  

And thus, one can generate more income by recruiting more into the system. 

A binary system with example

All MLM systems working under an income plan to provide the money to the distributors. All the systems are working on the basis of sales volume. And the sales volume is based on points or Business Volume (BV) of the products that you are sell. Each product has a definite BV calculated by the company based on the profit of the company.   

The company will give ‘X’ and the amount of money for each BV  

In a binary system, there are two channels. For ease, we can say A and B. consider these as teams team A and B. the one will be the power team and the other will be the money team. The team has more sales volume in the power team and less sales volume in the money team.  

Suppose, power team has 100BV in total and the money team has 80 BV in total. The total in the power channel matches (80BV) to the money channel  

And, the distributor gets 80*X amount of money.  

Note: if there is only one team or no sales volume on the money channel, you won’t get any money. 

Untold History of Multi-Level Marketing and Direct Selling 

Presumably, the current direct selling models originated in the United States. The roots go back to the mid-1930s.   

Direct selling is a model marketing strategy that emerged from the global economic downturn of the 1920s and 1930s. And the aftermath and ripples of World War I. The purpose was to regulate distribution and marketing costs. And the need for the live demonstration for certain products in the absence of technology and advertisement.   

There are those who say that California Perfume company is the first direct selling company and the number of people who argue that Nutrilite is the first direct selling company is not at all small. 

In any case, the marketing model of direct selling began in the 1930s. But The role of Nutrilite and Amway in the history of direct selling is not insignificant.   

Then a lot of companies came and went. Direct selling has grown rapidly since 1970. The 1990s were a golden era for MLM companies. There are now more than a thousand companies operating around the world.   

History in India

In India, MLM has introduced by Oriflame in 1995. Since then, many American and European giants have introduced their products and systems in the great market of India.  

At that time also, the first Indian-born company, Modicare have introduced (1996). MLM has flourished in India during the first 2000s and it was very quick. The golden age and the fall also took place at the same time.

Due to the lack of a clear legal framework or guidelines, a lot of scams have sprung up. The vast majority of fraudulent companies operate using the MLM system to make easy money.

It caused a huge money loss for lots of people. As it is a new method in India, which is not possible to identify which is fake. In such a situation, there was no option rather than to stop this new method completely. In 2012, it has done under ‘The Prize Chits and Money Circulation Schemes (Banning) Act, 1978.’  

The sector has revitalized through the 2016 MLM Guidelines. Yet, it is a coincidence that there are still over 1000s of fraudulent companies is operating in India using various loopholes. 

A simple overview of the Legitimacy of MLM or Direct Selling 

Since MLM or direct selling has many definitions and also it is not illegal or fraudulent activity.  

Many countries have specific laws for controlling and monitoring MLMs. And it is very difficult to define the proper direct selling ways in law to filter fraud companies. It’s a fact that still there are much more fraud companies are working around the globe than real and legal companies.    

The most famous nations that have a proper working force on MLM are America, Singapore, Malaysia, India….  

It is a fact that many countries are banned MLM activities including China, Saudi Arabia, Bangladesh…   

In general, paying commission for recruiting new distributors and focusing or relying only or more on recruiting is illegal. Because after some extend, a stage where there are no distributors can be recruited, the whole system will collapse. And there will be money loss for the distributors.   

The illegal schemes can call as pyramid schemes. The systems relying more on recruiting new distributors rather than selling products they promote. 

Important terms used in MLM 

terms used in MLM

There are some common terms used by MLM companies. You should get more familiar with these terms to understand the system and plans.  

Team: 

The group of people under your referral tree are your team. And you will be under someone’s team.  

Upline: 

The team members that came before you in the system of the referral tree. For example, there A and B are coming before you in the referral tree then A and B are your uplines.  

Downline:

 The whole team-members who fall under your team are your down lines.  

Sponsor: 

The one who recruits into the system is the sponsor of that member. For example, A recruits B into the system. then, A is the sponsor of B  

Compensation Plan: 

The guidelines and the ways to earn money through the company. You are getting money only in accordance with the Compensation Plan.  

Spill: 

If there is no vacant position immediately down in your team, and you sponsor someone under vacant position. Then the new member is a spill for the recruiter(you).  [Here, If YOU are sponsoring C. Then it is a spill]

Why MLM is misunderstood by common people?  

Have you heard of any MLM compensation plans? 

 If you’ve heard of an MLM compensation plan, many of you may have wondered how a company can give so much money to distributors.  

The answer is; the only money spent on intermediaries and advertisements marketing hierarchy of traditional marketing is distributing by the MLM companies to the distributors through the compensation plan.   

 In direct selling,60-70% of the maximum retail amount can distribute in this way besides the profit of the company.  

The reason for that is that here, there are no intermediaries, no advertising, no other marketing costs. This amount (60 – 70%) is spent on marketing in a traditional marketing way.   

Sometimes a person who hears an MLM plan thinks that if there is a chance to get so much money, there is something wrong with it. The normal marketing costs are dividing into distributors in MLM. there is no hidden agenda or secret behind it

Why MLM is not a good strategy for corporate companies?

You may have wondered why direct marketing / MLM (Multi-Level Marketing) is not used by big corporates if it is such a good marketing method.   

Multi-level marketing or direct selling is most ideal for products or services that need educative selling. 

The product that needs education before use. Or it is difficult to show the specialties and benefits of products by advertisements.  

FMCG (fast-moving consumer goods), clothing, seasonal items, metals (gold, platinum), and beverages are very difficult to market in a direct selling model. Because the rate is always fluctuating difficult to fix the exact rate for long period. 

It will take time to reach the bottom market    

Being oral or person-to-person marketing, it takes a longer time to reach the bottom. Or takes time to increase the company’s market share. This is because ads are not used. Advertising has a huge impact on the life of an ordinary person. Advertisement has a quick impact.       

Branding is very difficult   

The well-known companies in the world are now brands. Every company wanted to be a brand. When we hear or see a name, a picture, or something more than once, we are more likely to remember it. This is the basis of branding. Advertising is not used in multi-level marketing / direct selling, making it less likely that outsiders around the supplier will hear or know. Or it takes too long.                             

It takes more time to increase market depth.   

It takes much more time to reach more people than traditional marketing. So, it also will take much more time to make the market share bigger.   

Marketing is slow   

Since marketing is through mouth publicity, it is very slow than other marketing models.   

Winding Up 

Direct selling and Multi-Level Marketing are the marketing strategies that evolved after world war I or the 1920s or 1930s. This is most suitable or ideal for the products or services that need educative selling.  And still have an impact on the new digital world 


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