Multilevel marketing (MLM) portrays itself as a method of distributing products through a network of supposedly independent distributors. I say “portrays itself” because in my opinion most companies which refer to themselves as MLM (or “network marketing”, “relationship marketing,” “affiliate marketing,” “consumer-direct marketing,” “referral marketing” or any number of other euphemisms) are in reality in the business of selling business opportunities which, even if they do not meet the legal definition of “pyramid scheme,” are the functional equivalent of pyramid schemes. To put it another way, most MLM offerings do not meet the test which should be asked of any business opportunity: Does it offer a reasonable opportunity to succeed? Every MLM that I have studied has dismal failure rates, generally well over 90%, and they all use deceptive earnings claims to market their distributorships.
Notwithstanding this, I will offer a definition of MLM as if it were just another method of product distribution. In a multi-level marketing system, the distributors acquire the right to both sell the manufacturer’s products and the right to recruit additional distributors, who will themselves have the right to both sell the products and recruit still more distributors, and so on. The key attraction for MLM distributors is that they can qualify to earn commissions based on the sales volume generated by their recruits, and the distributors recruited by their recruits, and so on. As described by Arthur Leff in Swindling and Selling, MLM systems work like this:
But what if the deal is this: as a distributor you can sell the goods to consumers, and you can also sell the right to sell the goods to other sellers, who in turn also get both these rights, ad infinitum. … If you talk five friends into each recruiting five friends of theirs, and each of those persuades but five more, there will then be one hundred and fifty-five people working for you. … If you get some rake-off on all of the business they do, your earnings are no longer limited by the amount of time and labor you can expend on selling goods. More importantly, neither are your recruits’ earnings limited by their labor, for they can do the same thing you are doing. You can, that is get them into the plan at bargain prices for the same reason you were initially willing to join.[1]
Accordingly, the MLM model reverses the natural inclination of distributors to want to limit the total number of distributors (see What is Direct Selling). MLM distributors are trained and motivated to enthusiastically recruit more and more distributors, despite the fact that every new distributor is a competitor. MLM firms do not grant exclusive territories and there is no limit on the number of distributors.
In the United States, traditional direct selling has almost disappeared; 96% of the companies that call themselves “direct sellers” are in fact following the MLM model.[2] More information about the dismal chances for success in MLM is available here. The difficulties in determining the difference – if any – between MLM offerings and pyramid schemes are addressed in the tab What is a Pyramid Scheme?
[1] Leff, Arthur, Swindling and Selling (New York 1976) at 104.
[2] Bosley, Stacie, Greenman, Sarah and Snyder, Samantha, Voluntary Disclosure and Earnings Expectations in Multi-Level Marketing, 58 Economic Inquiry 1643 (2020).