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How Does Multi Level Marketing (MLM) Work?

Updated 19 Oct 2018 – By Loanstreet


A long time friend that you lost touch with for the last 10 years gives you a call and asks to meet up. After meeting up and breaking the ice, he/she then introduces a new revolutionary product and how you stand to get rich by selling it. Throw in jargons like passive income and downlines, you suddenly realise you’re beginning to be sucked into the dream they are selling.

Sounds familiar? But is MLM/Network Marketing a really bad? Is this practice legit or is a scam? In this article, we will discuss and answer these questions.

What is MLM?

Multi Level Marketing (MLM) is a business model or marketing strategy in which the distributors' income includes their own sales, and a percentage of the sales group they recruit, which is commonly known as their ‘downline’. Customers can also sign up as a distributor to sell the company’s product. Usually, the sign up fee will be the price paid to purchase the product.

In other words, MLM companies build and manage their sales force by recruiting and motivating independent distributors to go out and sell!.

We came up with a fairly simple image to get the point across

How Does Multi Level Marketing (MLM) Work?

Is MLM a Pyramid Scheme?

MLM itself is a legitimate business strategy. However the subject of ethics can be rather vulnerable. The pyramid scheme, unlike MLM, is clearly a scam. In a pyramid structure, a member pays a fee to join. A portion of the money will then be remitted back to them when they bring a new member into the scheme. No products are involved in this scheme, simply get more people to dump in money for your chance to make more money.

There are clear differences between the pyramid scheme and the MLM scheme. Because generating income in a pyramid scheme comes at the expense of another person, a win-win situation will never be possible. In MLM however, the sales of products can generate true revenue thus creating a sustainable ecosystem for both themselves and their downlines.

How does MLM differs from traditional marketing?

Difference in selling or distributing products

In traditional marketing, the supply chain is longer as compared to MLM. (see the image below)

How Does Multi Level Marketing (MLM) Work?

For the distribution of goods after manufacturing, the product has to go through the distributor, wholesaler and finally the retailer before reaching the hands of the consumer. A MLM company shorten the supply chain shorter by directly selling to consumers. A claim they say helps to save cost for consumers. Speaking about cost savings, find out the best rate using our  home loan comparison and  personal loan comparison  tool

Difference in marketing or advertising

How Does Multi Level Marketing (MLM) Work?

Traditional companies advertise their products mostly through media outlets. On the other hand, MLM companies advertise their product through aggressive sales agents (different companies employ different names but essentially you sale products and recruit downlines. EG: Business owner) and recruitment drives.

Conclusion  

By theory, the MLM mode of operation is simply more cost efficient and easier to run. However the recruitment of sales agents revolve largely around the idea of hitting the jackpot of financial freedom. Simple math will tell you that most people will obviously not make it big through MLM. A certain individual even goes as far to say that 99% of people don’t ever make a profit during his interview with CNBC.

Because of the nature of recruitment and the dream of living the life of riches, it is no stretch to the imagination that sometimes, the real picture gets blurred between the lines. Also, MLM is notoriously known for getting you on the bad books of friends and family. This is of course a general stereotype against the industry and not a concrete consequence.

That being said, getting involved in MLM may not be all that bad. You might enjoy the flexible working hours coupled with the chance to generate a healthy revenue stream. Plus, you really do stand a chance to make it big.

With over 68 MLM companies registered in Malaysia, there is no scarcity in companies to choose from should you be looking to embark on your journey with MLM. In any case, take the necessary considerations and decide wisely before making the plunge.

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