It’s impossible to understand the variations in compensation plans without defining MLM.  So, what is MLM?  Go to Google type in “what is MLM” and you’ll get an onslaught of varied opinion.  The best descriptions are those that start by defining it from a surface, face value approach.

Multi-Level Marketing:

Multi:  More than one.

Level: Generation or degree of separation.

Marketing:  “the total of activities involved in the transfer of goods from the producer or seller to the consumer or buyer, including advertising, shipping, storing, and selling.” (reference.com)

So, what is MLM?  Any business where “participants in the marketing program may recruit other participants”[1] and where “commissions, cross-commissions, bonuses, refunds, discounts, dividends, or other considerations in the program are or may be paid as a result of”[1] a sale of a product or service “for valuable consideration”[1]  “through independent agents, contractors, or distributors, at different levels.”[1]

The key’s:

a- A product or service of value is sold to a customer;
b- and thus, a remuneration of some type is given (commission, override, bonus, etc.);
c- to more than one independent contractor (1099).

What industries or entities utilize such a model?    Insurance, Real-Estate, Telecommunications, Travel Agencies, Large E-tailers, and companies selling all kinds of products and services.

Each month over 40,000 searches are done on Google alone by people or companies looking to get software for MLM.   5000 searches a month are done by those looking for consulting services specifically related to MLM.   Over 80,000 searches each month from those looking for technology to track Affiliate programs.

Making a leap, I would assume that the majority of those searching are NEW start-up companies.  Even considering overlap from searchers from multiple computers, multiple executive team members searching from different locations independently, redundant searches across months, and mis-searches… it is probably safe to extrapolate that over 10,000 new ventures/companies are looking at the possibility of starting their own MLM each month.  120,000 a year.

The Direct Selling Association reports that 55% of the us population have purchased a product from a Direct Selling company,  20% have participated in an MLM or Direct Sales business, and 77% have attended an MLM or Direct Sales presentation.

In my opinion, those numbers paint an entirely different picture of MLM than what Alarmists would have you believe.  I can sympathies with those Alarmists to the extent that a large majority of companies that get started do so without a full grasp of the legal and financial requirements of an MLM business.  As a result, many companies are NOT true MLM’s, but rather pyramids or ponzi schemes dressed up to look like an MLM.  You can refer to my article on “Rules of Thumb to Keep You Safe” for more information of guides to use to sort out if a company is operating an MLM or and illegal something else.

MLM is a solid business model like any other, when implemented properly.

The evolution of MLM really parallels American consumerism and technology.

Tim Sales pulled together a few numbers and documented in greater detail the time line of MLM.  Below I’ve summarized parts of Tim’s time line and elaborated on it:

1861 – 1000 Peddlers / Carpet Baggers
1868 – Watkins: Pioneered natural remedies in Direct Sales
1885 – 100,000 Participants
1890 – California Perfume company – become Avon in 1937
1903 – 300,000 Participants
1905 – Fuller Brush
1931 – Stanly home products – Group Sales
1937 – Avon emerged from the California Perfume company
1945 – Nutrilite – first multi-level  (Unilevel)
1945 – Tupperware (Party Plan)
1956 – Shaklee
1959 – Amway: DeVos & Van Andal: From Nutrilite
1963 – Mary Kay: From Stanly
1970’s – First MLM Software Developed
1979 – Amway Decision – establishing the first real guides for MLM companies to follow
1980’s – Hyper Growth & Innovation: Services & Consumer Direct (Shipping Companies) (Matrix, Hybrid)
1990’s – Excel, Morinda  (Binary, 2-up, new bonus structures)
1996 – First “Replicateable” Websites and Internet Marketing is born
1999 – First real “Online Marketing System”
2000 –  11MM Participants in the US & 38.71MM World Wide    (Matching bonuses)
2001 – Sophisticated and complex hybrid comp plans dominate  (Compliance)
2003 – CAN-SPAM Act changed the way Internet marketing is done  (–> PPC & SEO)
2005 – Complex compensation plan & automated online system back-lash
2006 – 15.2MM Participants & 61.45MM World Wide
2007 – FTC Business Opportunity Rules
2009– FTC Testimony Rules updated

The influence of shipping companies in the 1980’s made it possible for companies to shift the distribution channel  from distributors/participants to a direct to customer process. Ultimately, this shift changes the value of the MLM model.  Participants in most new MLM’s aren’t distributing anything, thus they can’t really be called Distributors.  A participates value in the current MLM model is two fold:  A- Those who they know (their warm market network)  B- Their effort & marketing dollars to share/sell/introduce the companies products/services or opportunity with others.

The internet changed the way the business was able to be done by the mid 90’s internet marketing started.  By the end of the 1990’s solid web-based technology with website replication, lead capture, online orders, and registrations became the core method of doing business for New Start-up MLM companies.  Today, without a web presence, online genealogy reporting, replicating websites, back offices for participants, full MLM tracking and commission software… a company will find themselves unable to compete at a serious level.

Compensation plan evolution has paralleled these trends and advancements.
The Three most highly used compensation plan structures are:

Unilevel (including break-aways) – 1940’s
Matrix – 1980’s
Binary – 1990’s (late 80’s)

Twists and turns off of these base structures and combination/mixtures of these structures are refereed to as Hybrid compensation plans.  In the effort to create unique compensation plans, compensation plan consultants, and companies typically create Hybrid plans.

It’s important to understand that structure itself plays no real role in the legality of compensation plans.  It is the activity and business processes of what commission/remuneration is paid on that ultimately determines if a plan is MLM, pyramid or ponzi.

MLM Compensation Plans

Special:  60 things you should know about MLM compensation plans.

[1]  “Are all two-tier programs multi-level marketing?”; Gerald P. Nehra; 2009; Network Marketing Business Journal