So what exactly is Multi Level Marketing (MLM) or Network Marketing? Is it one of those pyramid scheme thingamajigs?
These are common and valid questions for people curious about starting a MLM or Network Marketing business.
FACT: MLM or Network Marketing companies are NOT pyramid schemes. What’s the difference you ask?
Pyramid schemes are founded on members being paid to recruit members who are then encouraged to recruit more members and so on and so forth. There is NO product involved. The main revenue stream of a pyramid scheme is based on recruiting new members. Pyramid schemes are ILLEGAL, plain and simple.
MLM or Network Marketing companies base their compensation plans on the distribution of products or services. If new members bring in other members who don’t sell products or services, profits are minuscule at best.
MLM companies differ from conventional companies in that their marketing budget is not paid out to run major ad campaigns in the mainstream media, but to its sales or distributor force in proportion to the amount of product that these individuals and their down lines, or the sales force that they bring in to the company distribute. It’s basically a word of mouth marketing strategy which pays through multiple levels down to a point determined by the amount of products or services that are sold.
These different points are typically called pay ranks, or simply ranks. You cannot advance in rank if you or your downline does not sell product.
So again, MLM or Network Marketing is NOT a pyramid scheme.
To get started with a company, individuals typically pay a small start up fee ($100 – $500), far less than the tens of thousands required to start a conventional business. Subsequently new members are granted with the rights to distribute products and services, access to training materials, and are sent sample products, brochures and other marketing materials.
Creating a successful MLM business is as simple as finding customers of your own that use or consume the products or services offered, and recruiting a motivated sales force downline to do the same. Most MLM companies have simple steps to follow to build a proper business with them.
Now let’s take a look at a standard MLM downline model and talk money.
Imagine that you’ve sponsored five people on your first line and each went out and sold $500 of products and services. Now $500 is not much, and some could sell quite a bit more, but we’ll stick with $500 for the demonstrations purpose.
Now if your compensation plan pays…say 15% on first level sales, that’s $375 in your pocket.
Since your upline (sponsor) trained you well, you trained these people to do the same thing that you did, and they go out and sponsor 5 people each that individually sell $500 of products or services. These people are located on your second level and you get paid 10% on any product that they sell.
That’s $500 x 25 people x .10 which equals $1250 from your second level plus the $375 from your first level. That’s $1,625!
Lets take it down a bit further.
Third level: 25 people find 5 each that sell $500 at 5% to you.
25 x 5 x 500 x .05 = $3,125 + $1,625 = $4,750
Fourth level: 125 x 5 x 500 x .05 = $15,625 + $4,750 = $20,375
Can you see the potential that the MLM business model offers?
Imagine what you could do with an extra twenty, thirty or forty thousand dollars a month.
Now lets be clear that not every individual that is sponsored will work, and that’s OK, it’s part of the natural attrition of this industry. At the same time you’re not going to sponsor 5 individuals on your first level and then quit sponsoring. You’ll continue to bring in new individuals into the business.
What MLM is NOT – Linear Income. Linear income is a revenue stream that directly correlates to the amount of time invested in acquiring it. More hours = more wages. See the diagram below.
As you can see, to make a specific amount of money you must invest a specific amount of time.
The important key that separates this type of income from standard linear income is the fact that it is residual. It harnesses a system of automation to complete the work required once you make the initial sale. Simply put, you sell a product or service once, you get paid over and over. You can take a sick day and still get paid. You can take a vacation and still get paid. Make sense? You leverage your time. This is why MLM proponents talk of “time freedom”.