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Let me preface this by saying that I am not involved in any multi-level marketing (MLM) business, nor do I have an interest in joining one, whether at the top of the pyramid or somewhere in the downline.
Take a step up the food chain in a typical corporation and you’ll find that the sales manager gets a bonus based on the performance of their salespeople, and that the VP of Sales also gets a bonus based on the aggregate sales of the team. In essence, a pyramid system where that $500 product might well produce a $25 commission for the sales person, a $10 commission for the sales manager, a $10 commission for the VP of sales and (more likely than not) a $20 commission for the CEO.
Salary plans pay fixed rates of compensation and are appropriate when measurements of performance are difficult to ascertain. Commission plans pay salespeople in direct proportion to their sales and are appropriate for maximizing incentives or for predicting sales costs in direct relationship to sales volume.
A combination plan includes all variations of salary plans plus other monetary incentive plans. Even in that bastion of business capitalism, HBS, commission based sales is a recommended strategy. Many large companies also offer a bonus or reward for new employee referrals too, which extends the incentive for finding good salespeople who can close deals down to the front lines.
With a typical company, then, we have salespeople who are paid to sell their product and to find new salespeople, managers who are paid partially based upon the ability of their sales team to close sales and, through ESI (enlightened self-interest), also motivated to find new and better employees to continually maximize sales and revenue, and so on, up the chain to the CEO. Which leads us to what is the core problem with multi-level marketing companies: offering a percentage of transaction revenue from your downline or sales team without a specified duration. Seems to me that there should be hybrid MLMs that enjoy the benefits of a highly motivated, distributed affiliate-only sales team while avoiding the trap of motivating your team to the wrong end goal: finding more team members rather than selling products. MLMs generally have a miserable reputation and even asking a question about MLM businesses structures on Twitter quickly elicited sarcastic and hostile responses. For that matter, if I include an affiliate link to Amazon (NASDAQ:AMZN) or a redirect through something like Clickbank that pays me a commission because you decided to buy something through my link, is that really fundamentally different to me selling you some Avon skin lotion or a carton of Amway dishwasher soap? The biggest difference I see between flavors of MLM are that some are based on how big your downline can get, while others emphasize your own sales. The real problem with MLMs, in my opinion, is that their products are often undifferentiated and so there is no compelling reason to buy, apart from getting lured in by a good sales pitch. Another difference between MLMs and a sales hierarchy is that the middle men in the hierarchy are penalized for poor performance of those below, so there is a disincentive to recruit as many people as possible in the hopes that they make a sale. I listened to one of Rob’s podcasts where he had a guest by the name of Jon Taylor who wrote a book on MLMs. Unfortunately both the main post and a number of the comments are based on quite flawed understandings of the legitimate MLM business model. If MLMs were trying to sell computers, your objection would be perfectly valid, but I’m not aware of any MLM trying to make money doing that.
The very fact that an MLM company like Amway is celebrating 50 years of operations and is at or near the top of the sales data rankings in the main categories in which it competes should be a bit of a hint that perhaps the model does work and there might be some flaws in your assumptions. This isn’t really any different to traditional distribution, there comes a point where if you continue to add layers of markup, the product out-prices the marketplace. The other issue is poor field behaviour, and this is a legitimate weakness of the MLM model.
I think if one was going to go down that path they need to be very hard workers willing to do lead generation from the internet and other sources and spend on marketing. Without the proper training, and without a company that works with integrity from the top down, a new person coming into the business can be quite annoying and way too agressive. The popular misconceptions that MLM is all a scam or pyramid scheme, that only the top 1% make any money, that to make the big money you need to get in on the ground floor and that the only people buying the products are people doing the business is NOT my experience. Network Marketing done right, with the right company, and exceptional products is an excellent way to market products that have significant differences from what is available in the typical retail marketplace.
Because of its accessibility through a low-cost start up, it allows just about anyone, regardless of age, race, sex, income and educational ability, to join the entrepreneur ranks. MLM is the later one where the company gives the advertizing money to its distributors to sell its products. If you want to be successful you need hard work and leadership just like the tradition sale through the shops. The reason MLM gets a bad name is because the participant does not understand the business model and don’t know how to operate the system therefore they fail and blame on the system. Beijing has recently opened a China Science and Technology Museum adjacent to their famous Birds Nest.
Your article articulates perfectly the widespread confusion over network marketing as it’s typically practised.
Manufacturers typically retain only 30% to 40% to cover cost of manufacture, overheads, administration and profits. As a management consultant to direct selling companies (including home party and MLM companies) for more than 20 years, I can tell you, categorically, that very, VERY few MLM companies pay out more than 30% to 40% of the wholesale price in reality, even when the potential payout of their compensation plans claim to be as high as 80% payout or more.
This is due to various factors, including breakage (unclaimed bonus income that flwos up to the company through distributors’ failure to qualify) and the use of point systems for qualification that can reduce the potential payout dramatically. That leaves a substantial amount available for other incentives and promotional activities by the company. So, regardless of the hype, buzz and spin surrounding compensation plans and the projected earnings possible, the reality is that, at some point, for EVERY distributor, the payout gets blocked.
These are demonstrable fallacies — but they do NOT make the fundamental concept underlying MLM invalid or unworkable. They may represent the way most people practise it, but that doesn’t make it any more accurate.
Too many people have been peeing in the MLM pool for far too long, either for reasons of their own (usually from higher above the water line) or because the others have told them that’s what they should do. There’s no such thing as a sensitive, understanding, sympathetic, well-informed regulator.

In your closing paragraph, you asked how selling Clickbank products as an affiliate was any different from selling Avon or Amway products. The Clickbank model is basically a flat sales distribution arrangement with every affiliate at the same positon and compensation rate. With Clickbank, I can do my own marketing through PPC or SEO to be successful whereas with Amway, my success is dependent on the activity of the pyramid workforce linked under me.
Personally I am more comfortable with controlling my PPC and SEO eforts than motivating people with a diversity of business and sales competencies! We are now starting to see companies that are leveraging the internet for generating leads in addition to offline marketing.
Since Robert Kiyosaki himself, who is not a network marketer, has just published a book praising the virtues of mlm, we now have a serious authority figure and entrepreneur backing our cause. I think so, but more significantly, even though he has no axe to grind, so does Robert Kiyosaki. Of course this also happens in other industries but we do seem to have a a big share of these scoundrels in the MLM industry. Other companies have a very poor product line where the main attraction seems to be the money involved. The second reason for the bad reputation of mlm is: No or very poor training of distributors leading to very unprofessional bahvior and wild and hyped up claims. Dispite all the bad press In the late years the network marketing and direct selling industry has improved the reputation and gotten endorsements from many famous business and political leaders Including Bill Clinton, Donald Trump and Robert Kiyosaki. AS I see it MLM business model is superior to many business models, but being a new and growing industry we have some problems that need to be ironed out. Well one important aspect that has to be taken into account is the education and training that an individual who joins a good company can benefit from. Not all mlm companies have a good training but the ones that do help a great deal in enhancing an individuals overall business knowledge and personal development. Having experienced some success at the top of my network marketing program’s comp plan, I was for a long time prejudiced in favor of the MLM model.
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This is to introduce myself as a passionate marketer with diverse experience in consumer and business research, analytics, segmentation, integrated marketing communication, developing and executing sales campaigns, devising strategic marketing plan for product launch, CRM. Clipping is a handy way to collect and organize the most important slides from a presentation.
A respected Lecturer writing in the Harvard Business Review proposes that all aspiring entrepreneurs need to do is to focus on knowing their customers and testing their hypotheses to ensure business success. In the experience of Pro-actions however,  most business owners are not at the leading edge of entrepreneurship.
The Business Plan may be the boring side of Entrepreneurship, but it is the sure-fire route to success for us ‘lesser mortals’! The demands of running any enterprise can mean that some of the basic disciplines are sometimes over looked. Since few businesses can afford to be philanthropic efforts, good intentions inevitably meet harsh reality at the sales desk, so it makes sense.
Indeed, the CEO of the company is also likely to get a bonus based on the growth of the company revenue year over year.
In other words, $65 (13%) of the $500 sale might well go to commissions in this sort of scenario. This plan is more complex to administer; however, it allows for greater incentive and flexibility. Now try to imagine the motivation for the sales manager when she (or he) is interviewing a potential hire. Now everyone in the sales loop is trying both to help sell product and find new salespeople who can maximize product sales.
The sales manager has a similar structure and sits one rung higher up on the ladder, on and on, up to the Amway or Avon corporate team itself.
If I can earn 5% of every sale you make as part of my sales team or 10% of any sale I make, I’d rather just get you on board and take some leisure time while you do the hard work of closing the sale.
Assuming MLMs operate the same way as illegal pyramids, then analyse the operations based on this assumption. Product value is an important issue, and if you operate a business marketing products at a price higher than the perceived market value, then you have a problem. Dave, your analysis is flawed because you’ve completely missed 2 major components of the MLM model. What it can be compared to is traditional product distribution, where there are various levels of markup between Manufacturer and Consumer. The exporter buys in large lots and sells in smaller lots at a markup to a number of different importers, who sell at a markup in smaller lots to a number of distributors etc etc. For example, in Amway in the United States, the multi-level payment compensation structure stops when an individual generates around a certain amount of sales volume in a month.
If you understand that we’re looking at a distribution chain, not a sales incentive chain, then the idea is obviously silly. One MAJOR component is the many, many scams *claiming* to be MLM when they are indeed pyramid and other scams. With virtually no barriers to entry it’s very difficult to properly train and monitor the field, and some folk do some pretty whacko things.
At our most recent National convention there were 6000 distributors there and 1 in 6 had earned over $1 million dollars in their career. I also have built an organization of trained distributors who don’t annoy their friends and family and earn good money working part-time from their home.

I particularly enjoyed your comparison between a MLM and a traditional corporate sales team.
They have a wing devoted to mathematics and inside this is an excellent exhibit about multi-level marketing.
The problem is that what’s typically practised is a bastardized, distorted version of the concept, one created by company owners and high-flying team leaders to maximize their own incomes. There is a huge difference, both in terms of compensation as well as where in the totem pole you are located. The Amway model has many different compensation determined by when you started up with them and how successfully you’ve grown your pyramid base under you.
If you go to the headquarters of NuSkin, Amway, and many others your eyes will pop out upon seeing the Fortune 500 type buildings. As is see it, it doesnt have anything to do with an intrinsically bad or flawed business model. Unfortunately as long as there are greedy people in the world that doesn’t do their homework on the company they are about to join these kind of businesses will continue to excist.
I'm an executive MBA from International Management Institute, New Delhi and also a Post-Graduate certificate degree in Business Marketing Analysis from George Brown College, Toronto, Canada. Building a product or service, and undertaking market research to test their theories about business challenges.
It should be a living document that generally projects 3-5 years ahead and outlines the route a company intends to take to grow revenues. The Growth Accelerator Hyper Growth Insights Study 2014 found that 96% of the companies experiencing significant growth had planned for it in the prior year; 88% reviewed the plan in year regularly and as a result 64% met or exceed their targets! This applies just as much to large corporations but can be especially true in an SME where the hard pressed owner is often wearing many hats.
It’d produce chaos and, more importantly, would continually dilute the accountability chain. The MLM industry unfortunately suffers greatly from a large number of companies that *call* themselves MLM in order to claim respectability (and legality). For many products in the world today the chain goes something like this – Manufacturer -> Exporter -> Importer -> Regional Distributor -> Retailer -> Consumer. The equivalent would be to say that after a wholesaler has had a retail store as a customer for a certain period of time, they have to stop adding a markup to the sales to that retail store, no longer profiting. It’s poor logic, but also perfectly human, for people to attribute the failings of these scams to companies that are legitimate MLMs. Given the sheer numbers involved, even a tiny, tiny, percentage of folk operating like this can be a substantial number, and by their very nature they’re more visible.
The reason they’re so hard to spot is because there are so few examples of what REAL network marketing companies should be. That said many of the distributors barely make enough to cover their costs, while a very few at the top are making insane levels of income. Despite the downsides of MLM I still think it is an excellent business model especially for new entrepreneurs without a lot of business experience. A paper approved by the research committee and to be presented at the 9 th International Conference Marketing Trends – Venice, January 2010. He suggests that entrepreneurs will learn from their failures and grasp the true meaning of pivoting or changing to meet the needs of the market. If sales drop, who is actually responsible when the sales team could be arbitrarily wide and deep? When you start an MLM business you primarily earn income through sales direct to customers, retail sales. I am not even sure why as I have never purchased anything through a MLM, however my guess is you are right on the money – it was the individuals pushing the product. If the model, the company, the comp plan, or the product doesn’t work for you, just say no. Products with small margins and low turnover, such as electronic equipment, are not sensible products for an MLM business model.
That component is perfectly comparable to any other sales business, and I have a friend who earns thousands of dollars a month with Amway purely through that model. In the FTC’s investigation into Amway in the 70s for example, they found the average length of the distribution chain was less than 4 most of the time, and 7 or less virtually all of the time. My gut feel has always told me to stay away from such arrangements, which of course is tough to quantify, however I have learned to trust it over time. Having a down-line is like starting a small business, you must train, help then automate and watch the money come. The top leaders in a MLM structure take down 95% of the commissions and feed off the little guy down stream who is paying too much for products, sign-up fees and sales kits, etc.
Sensible products have high margin and high turnover – consumables, and preferably higher-end consumables. In order for me to make money I have to take advantage of others I can sign up so I start making my small share of the $50. Artistry has been independently judged as competing in the same market category as brands such as Estee Lauder and Clinique. There is something honest about buying a disk drive for example when I know that is costs Seagate 45-50% of my dollars just for the parts and labor they put into my purchase.

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