MLM stands for multi-level marketing, also referred to as network marketing, which falls under the direct sales category.
All companies, whether traditional or direct sales, need to sell products to remain in business.
Traditional companies chose the route of advertising, passing through national distributors, regional distributors, and eventually local distributors before it hits the consumer shelf.
All of those different “steps” take away part of the profit, which the company then factored into the value of the product.
Multi-Level Marketing companies instead chose to go straight from the company to the client through “representatives,” “distributors,” or “party hosts.”
Essentially they save the value of advertising and branding, which may be a massive chunk of the pie. Instead, they chose to place those profit into better quality products, research, or into savings for the customer.
Because these companies have less overhead and fewer employees, which is often another source of serious amount of savings, and reps only get paid a percentage commission based on their performance to sell the company products.
Now let’s talk about how they profit.
The companies set the maximum payout for “residual income/commission.” And to make sure the compensation plan doesn’t hit a hitch, there are all kinds of regulations and caveat put in place.
First of all, it’s not true that MLM companies pay recruit to join in. If that’s so, it might be considered a pyramid scheme because the money flow is from recruiting (which may be a red flag), so if you noticed this anywhere, run from such opportunity.
Well-founded companies pay their recruit based on services or products they sold, and sometimes these recruits get bonus incentives from the companies.
Let’s say that an MLM company pays out 60% of its revenues. Meaning, on every product or service sold, they collect 40%, and only 60% is to be split within the compensation plan.
I’ve also seen 100% payout commissions, but when you analyze the compensation plan carefully, you understand you can get 100% commission of the product or service you have sold.
So, depending on the sales volume the recruit made, sales will be considered to be good or bad. So, no matter what you do or how much you make or lose, MLM is a business, and it has to make a profit to stay in existence.
When the Network Marketing company receives the money, the cut goes 40% to the company, and 60% is split with the distributors or the sales team that they have recruited. The compensation plan or money shared never goes beyond the total revenue the company will make, which means that the companies payment never surpasses or goes above 100%.
The above example was for illustration purposes only. The MLM compensation structure is a bit more complicated than what is explained above. However, the book is balanced correctly, so they never get to pay more than what is allowable in the company’s budget.