Multi-Level Marketing - What To Watch Out For!

Published by MBA Skool Team, Published on October 12, 2012

Multi-Level Marketing (MLM) is one of the most criticized marketing strategies entangled between legal and ethical issues. The practices that the MLM organizations employ are highly questionable but can we really pronounce these organizations guilt just by mere association to MLM, is to be answered.

We need to analyze a few aspects before arriving at a fair judgment as to whether the organization follows legitimate practices or not.

The Pyramid Structure: Recruitment Driven or Product Based

First, what kind of an MLM scheme does the organization follow? How do they compensate their employees? Are the employees paid to recruit people out of which the organization creates multiple levels of compensation or do they make money by means of sales alone?

Most of the organizations that follow the MLM strategy are bound to use the former method. This is how the model works. An employee who signs up with the firm makes an initial payment, say Rs.2000. He is encouraged to rope in many more people by word of mouth, encouraging friends and relatives to join the bandwagon. Each person pays the initial payment out of which the first level employee in the pyramid receives a pre-decided percentage, say10%, which is Rs.200 and the rest moves to the organization. When the second level employee brings in a new person, the first level and second level person receive a share out of the third level person’s recruitment fee. The rest moves into the hands of the organization. Now, the issue here is we have a fund flow without the sales of any product. This has triggered the question “Are Recruitment-driven Pyramid Structures in MLM legitimate?”

Having had to fight a lot of legal battles in this context, these firms have now moved towards another marketing gimmick, where they have restricted movement of funds, which is the prime issue in these legal cases, but have begun loading the person with inventory, which could be used for Sales. This ensures that the employee is washed into satisfaction that he is a beneficiary (as he is receiving goods valued at the same commission), alongside making money with no real transaction.

Quick Money

Human behavior is always inclined towards making big money in limited time periods. MLM strokes this point to allure people into this business. Making quick money with practically no investment lures many more to venture into this arena.

But the same rationality sometimes also backfires on the organization with a huge number of employees turning in, being under-qualified leading to more of an uncultivated group which can really not mint money without tarnishing the brand image or creating problems all the way.

Rocket Pricing Strategy

The pricing strategies these organizations employ are deemed to be ridiculously high, their justification being the extraordinary and superior benefits that their products deliver to the consumer. Interestingly, the difference in prices quoted by MLM organizations and the ones sold in retail markets show a percentage increase of almost 40% - 50%!

Why do these organizations tag their products at such preposterous prices? The commission which needs to be paid to the employee is included as a part of the product’s distribution costs, thereby increasing the product price to the end user significantly. But this indirectly affects the Value for Price concept, one of the most importantfactors for customer satisfaction. The unreasonable cost compounded with less value for price can only result in narrowing down the market from the general public to the employees alone. Due to this reason, the organization also needs to bring out products that assure repeated purchase by these sophisticated customers or employees.

Fancy requires much; Necessity but little

Peter Drucker defines Marketing as, “Marketing is viewing the enterprise from the viewpoint of the customer.”

Any start-up organization should look into the requirements of the market they want to target and deliver these products at a price more than the cost at the same time providing value for price which is relatively attractive compared to their competitors.

But in the case of these organizations we are talking about, we need to answer, if not enrolled as a representative with the organization, would these people actually go forward to buy the kind of products they do, given the exorbitant pricing of the products from these organizations? Much of the consumption figures projected by the organization would be the outcome of inventory loading, by which the member is urged to buy a huge amount of inventory at a price which is claimed to be subsidized. Whether these products are really goods of necessity if such marketing strategies did not exist is still a question which remains unanswered!

Commercialization of Personal Relationships

One of the most harmful issues in the MLM strategy is the commercialization of relationships. It is assumed that friends and relatives are natural prospects for this marketing strategy but this does not always hold true. Personal relations never appreciate being nagged for buying a product. Business entities term this “Networking”. People however would love to hold relationships and business apart from one another as it would only result in strains in the relationship. Businesses and their marketing strategies should focus on the attitudes of people, their perceptions on the product and must respect their personal relationships instead of tending to exploit the same.


Organizations employing the MLM technique have been frantically denying all charges against them, shielding themselves and lobbying for themselves in courts. Though they might like to distance themselves from the Pyramid structure we spoke of, the hard truth is that they do follow this illegal method of making money. It is an arduous task to break something as big as the MLM mafia, but these facets need to be looked into before exploring business opportunities in this arena.

This article has been authored by Vignesh.C from NMIMS.

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