Many well-known brands exist, such as Avon, Amway, Forever Living, Tupperware, and more. You may have bought and used their goods, too. Also, you can still use some of their products even though they cost more than other brands because you like them.
If you’ve used these items, you probably got them from a friend, neighbour, or family member instead of a store, which is how most people do. You can get these items through direct marketing and Multilevel Marketing, or MLM.
In this type of business, the company that makes or provides the service sells and promotes it directly through its partners rather than through general channels like wholesale and retail chains.
To understand What is an MLM Company, you need to know its history and how it works. After reading that, you will have a better idea of what these businesses are about and how they work.
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HISTORY OF MLM COMPANIES
Here’s a quick look at the history of MLM businesses. The business model began in the US and is still spreading worldwide.
The JR Watkins Medical Co.
Joseph Ray Watkins, an entrepreneur from Plainview, Minnesota, used the first known Multilevel Marketing (MLM) business model in 1868, about 150 years ago.
He made Red Liniment the first product for his company, JR Watkins Medical Company. No stores sold the product; instead, salespeople went door-to-door and used their social networks to sell it.
It’s not true that JR Watkins started the first MLM business in the world, but other companies took parts of his business models and changed them to make what we now call an MLM.
Products by Avon
David H. McConnell started the California Perfume Company in 1888, the first business to use the new MLM business model. At first, McConnell sold books in New York as a “canvasser.” Later, he worked for a publishing house as a General Agent.
After some time, he took over the publishing house and started a small perfume business. People who bought his books would get free perfumes or pay for them. In his own words, McConnell talked about the differences between selling something directly and going through a store.
As the perfume business grew and became well-known, McConnell named it the California Perfumes Company based on advice from a friend from California, which has a lot of flowers.
McConnell stopped selling these perfumes through stores and started selling them through his employees. Soon, everyone knew about California Perfumes Company because of its beautiful scents.
This company, California Perfumes Company, is now one of the world’s most successful. People who work for the company, now called Avon Products, sell its products in almost every country. These people are called MLM salespeople or associates.
The Nutralite
The business model worked well, and Carl F. Rehnborg’s California Vitamin Company quickly copied it. The company’s name in 1939 was Nutrilite. Now, Amway Corp., another big name in the US field in this field, uses the MLM system to sell Nutrilite products worldwide.
This business sells herbal health products. However, the US Food and Drug Administration (FDA) had severe problems with its products and services for several reasons.
BUSINESS MODEL OF MULTILEVEL MARKETING COMPANY
MLM companies make money by giving people who could be better off the chance to make money.
At first, the California Perfumes Co. sold its perfumes and cosmetics directly to women looking for ways to make money. To keep up with the times, the company quickly became successful and changed its name to Avon.
There’s also an MLM business model for people who can’t find regular jobs because they need more education or skills. It would be easy for them to sell things directly to their social network and make money.
People used to get most of their information about ads from others, so MLM members could get new customers through their social networks by getting referrals.
The MLM business model has two ways to work. The first way is to sell directly to people in a network and grow that network to get more business. The second way is to get more affiliates to join the network.
When an MLM associate brings in more people for the business, they move up the ranks. Both their rank and their pay go up. They also get tiny commissions from the money that people they’ve hired make.
These days, with the rise of the Internet, MLM businesses have also gone online. Some members sell products from well-known companies through their marketplaces on Shopify and other platforms.
You can place a direct order with some businesses online. However, some of their MLM partners, especially those closer to you, usually fulfil the order.
Also, because some MLM companies have great products, their representatives have opened stores in different places where customers can buy what they need.
To help rural women in India get more money, the Dutch multinational company Unilever launched many MLM products. Its Indian branch, Hindustan Unilever, put out a bunch of household goods with different brand names to sell through the MLM network.
The goal is to get these kinds of products to poor people in rural areas of southern India while ensuring the female MLM associate has a good income.
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FLIP SIDES OF MLM COMPANIES
There are some excellent things about MLM companies that have grown since the late 1800s and early 1900s, but there are also some bad things.
Some well-known MLM companies that sell nutritional supplements and herbal remedies or cures for some long-term illnesses have been criticized by the US Food and Drug Administration (FDA) and similar agencies in other countries for pushing products that have not been shown to help with health or medicine.
Some of these items are very expensive, but don’t do what they say they will. A simple disclaimer that says “No proven therapeutic claims” is usually all these MLM companies need to stay out of trouble with the law. This means that the person who buys these supplements does so at his own risk.
Some experts say that taking these products doesn’t help with or heal a medical condition; they make people feel better.
Second, the MLM business model was used to make the well-known Ponzi or pyramid schemes, which are scams that offer fake investment and savings plans that promise very high returns.
We found that criminals or people with little or no money often started these Ponzi schemes. Millions of people worldwide have lost money in Ponzi or Pyramid schemes.
WORKINGS OF MLM COMPANIES
To answer your second question, how do MLM businesses work? After reading this, it would help if you had a better idea of what MLM companies are like. But now, I will talk more about how MLM businesses work worldwide.
MLM businesses usually advertise in newspapers, magazines, TV, radio, the Internet, and other places. By doing this, the company’s name will become more well-known. These ads usually have something to do with one or more of their products.
In addition, they say that work positions, not jobs, are open at these MLM companies. They usually invite people to a seminar in a well-known place, like a community hall or a famous hotel.
Senior representatives from MLM companies will give talks about the company, show off their products, and talk about how you can become an associate in your area.
When people sign up to become associates, MLM companies give them a lot of training to help them learn about the products and how the prices work.
They can also try some products, like food supplements, or get free samples of toothpaste, shampoo, creams and lotions for their skin.
Affiliates of the MLM companies will be people who successfully finish the training and the seminar. They will get a certificate that says they are selling the company’s products on behalf of the operation.
The next step is often to give these employees brochures, literature, and presentations about the product. Some MLM companies also give away free tester packs and samples to people who might become customers.
MLM companies often set up a small depot or warehouse where employees can pick up items to deliver to customers. Sometimes, partners must send an order form and payment to the MLM company to ship the products.
This is an initial investment that the MLM partner has to make. Employees will sometimes take money from customers before they order the goods. In the third system, an MLM member keeps a set amount of cash on deposit with the MLM company or one of its distributors.
That way, the worker can buy the goods worth the deposit and sell them to customers. They keep the money they make.
The order price is always less than the sale or retail price. On some products, the difference can be as much as 40%. MLM companies let their partners earn a significant profit as a reward for their work.
The vast profit margin lets employees offer discounts to new and old customers if needed. The MLM item’s printed price is always higher, and the associate can also sell it at that price if they want to avoid getting discounts.
When a customer buys something, MLM companies will keep track of their name and other information so they can send them emails about different products. Sometimes, they ask the customer to become an MLM affiliate and help them grow their business.
All people working in MLM must get more people to join the network. A person in an MLM company makes more money when they recruit more people. Part of the money that these recruits make goes to the MLM worker who got them to join.
As they move up, these recruits must bring in more people. It’s possible to put the person with the most recruits in charge of a whole area or territory. This gives them more benefits, like lower prices and more significant commissions.
REGULATORY COMPLIANCE FOR MLM COMPANIES
Let’s look at what MLM companies must do before entering any market. This way, we know how they work and sell their products. Before selling their products, all MLM companies must follow the laws, rules, and regulations.
MLM businesses must follow the rules of the US Food and Drug Administration, the financial authorities, and many other government agencies.
This is because products like health supplements, perfumes, kitchenware, or ideas people can’t see or touch always affect people.
A multilevel marketing (MLM) business can only start somewhere if it has the proper permissions from the governments of its home country and the countries where it wants to do business.
Fraudulent businesses that offer Ponzi-style investment plans often don’t follow the rules set by the government or try to get around them. Instead, they set up bases in safe havens far away from the United States, where rules about financial plans and schemes are either not in place or unclear and need clarification.
They use this weakness to get away with your money and the money of other people who fell for their scams. Over the years, investigations by different countries’ financial watchdogs have shown that most Ponzi schemes did not even have an essential business registration.
These kinds of businesses only existed on paper. The people who pull these scams usually run away with the money investors have invested in trusting them.
Wrap Up
If you want to join an MLM company and run your own business, you should only enter a reputable company.
Companies with this kind of reputation have usually been around for a while and follow all the rules set by the government. But watch out for businesses that offer Ponzi or Pyramid schemes to get rich quickly. In the worst case, you could go to jail for fraud. You’re not going to get rich here.
FAQ About MLM (Multi-Level Marketing)
Q: How does an MLM make money?
A: MLM companies make money through product sales and recruitment. Distributors earn commissions on their sales and the sales of their recruits.
Q: What is the downside of MLM?
A: Downsides of MLM include high start-up costs, emphasis on recruitment over product sales, and the potential association with pyramid schemes.
Q: Is MLM the same as Pyramid selling?
A: While similar, MLM involves selling products or services, while pyramid schemes focus on recruitment and do not usually involve legitimate products.
Q: How does the MLM model work?
A: The MLM model works by creating a network of distributors who sell products. Distributors earn commissions on their sales and the sales of their recruits, forming a multi-level structure.
