I don’t believe in reinventing the wheel; therefore, the following definition comes from Wikipedia’s definition of Multi-Level Marketing. It has been slightly modified to simplify the explanation and to correct a common misconception about MLM, which I will address in a different section.
Modified Wikipedia Definition of Multi-Level Marketing
Multi-level marketing (MLM), also called network marketing, or referral marketing, is a marketing strategy where the revenue of the MLM company is derived from independent representatives promoting the company’s products or services.
Earnings of the representatives are derived from sales earned by the representative, sales earned by the people they have directly, and sales earned by the lineage of their direct recruits. Hence the term multi-level marketing.
Although each MLM company dictates its own specific financial compensation plan for the payout of any earnings to their respective participants, the common feature that is found across all MLMs is that they pay out commissions on multiple levels of the representatives recruited lineage or downline.
Generally, MLM representatives earn larger commissions for direct sales, and smaller commissions from their downline organization. The larger commissions are an incentive to achieve direct sales, while the passive income from productive downline growth is an incentive to recruit more representatives
Multi-Level Marketing Verses Pyramid Schemes
Understanding the difference between pyramid schemes and legitimate MLM opportunities is extremely important because you’ll need to be able to effectively communicate the difference to overcome objections from skeptics who don’t know the difference.
Pyramid schemes are illegal. MLMs are completely legitimate. While both have a hierarchical structure, as most organizations have, there is a distinct difference. Illegal pyramid schemes pay participants for the sole act of recruiting participants, while legitimate multi-level marketing opportunities only pay participants for product sales achieved by the representatives themselves or by their lineage of recruits.
With a legitimate MLM opportunity, you are marketing a real product, so you can recruit until you are blue in the face, but if no product is sold, you will not get paid.
With pyramid schemes, there is no real product or service involved; only an arbitrary membership to participate in a hierarchical cash flow scheme. Hence the term pyramid scheme.
With a clear understanding of this distinction, you will be well equipped to overcoming objections concerning pyramid schemes, which will make you much more effective at recruiting new representatives into your company.