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

However, I want to give some real solid guidelines that can be followed to:

A- As an MLM Company: Help bring your existing/start-up MLM into better compliance
or
B- As an MLM Participant: Aid you in selecting an opportunity

First some basic information… the 4 major agencies/groups involved in governing and enforcing US laws (administrative, legislative, or judicial laws) for direct sales / MLM are:

- State Attorney General, predominately concerned about the safety of the citizens of a particular state and enforcing state pyramid/ponzi laws

- Federal Trade Commission, predominantly concerned about fair trade/commerce practices and policing federal pyramid/ponzi laws

- Food & Drug Administration, predominantly concerned drug/nutritional/food products and claims that are made about these products

- Securities and Exchange Commission, predominantly concerned with investment issues and claims of “returns on investment”.

Predominantly governmental agencies and officials want to ensure that the public at large are “getting what they pay for” and are “safe from fraud/misrepresentation”. They want to see that when we as US citizens spend our money on a product/service that the product/service is safe, that we pay a fair price, and receive a reasonable product/service for the price paid.

Below I’ve listed 6 starting, fundamental and important KEY items of concern that must be considered. This group of items could also be a high level litmus test on legality.

Concern #1- Someone pays to JOIN a business/program/plan, doesn’t receive a product/service in return, and IF a commission is paid, then you have cause for concern.

A company can only pay commission when a product/service is sold. Commission can only be paid on the sale of product/service to an END-USER. A company cannot pay commission on membership fees (IE. No head hunting fees).

Issues: What activity generates commission? Is it the sale of product or some other activity, like recruiting others? Pyramid and Ponzi schemes, chain letters, “pay it forward” programs, gifting programs will typically get stopped at the door on this issue. If any kind of “gift” or commission is earned/paid for “enlisting”, “recruiting”, or “selling” someone on JOINING the program/business/opportunity then this is an issue that needs to be looked at. A commission can be earned/paid on a product or service that was sold, period.

The Cycler Issue: Product must not only be delivered upon cycle. The money spent to join a cycler is what is used to pay commission, if a product is not purchased and delivered at the time of payment, this becomes an issue. If “what someone pays for” can’t be delivered or received until recruiting is preformed (as in many cyclers), then this becomes an issue.

The first question: Is commission paid on a product/service and NOT on a membership/participation fee?

If Yes, see the next question…

Concern #2- A product/service has no commercial value or is unreasonably priced or if people are asked to buy an unreasonable amount (front end loading)… and IF a commission is paid, then you have cause for concern.

Products/Services must have a reasonable value in comparison to the price paid and people cannot be asked to purchase an unreasonable amount of that product/service in conjunction with commission being paid. Obviously if there are no “strings-attached”, like a commission plan, then if someone buys a product/service way over priced, or some huge quantity… that’s their business. This isn’t the case when a commission plan is attached to that sale.

Issues: A company can’t just decide to sell the “unique” dirt from their back yard for $X amount and create a business around it. What value does it have? eBooks are gray areas: what value do they have? Is what is charged reasonable? How many eBooks will 1 person use? How many ‘positions’ in a binary or cycler or re-entry is reasonable? Subscriptions pose an issue if it’s for a one time product like “access to a group of eBooks”. Who needs $10,000 worth of website malls? And are those malls really worth $10,000? Why?

A good benchmark to hold next to any product/service is: are similar products sold by another company that is not doing a business opportunity? If so, what is the price they charge? If not, why?

Ask yourself this question: would I buy this product if I was not doing the business? If not, why buy it now? Compulsory purchase of product to participate in the business is an issue (see #5 below).

The second question: Is the product reasonably priced, have value, and sold in reasonable quantity?

If Yes, see the next question…

Concern #3- The product/service is only of value to someone doing the business, if so, you have cause for concern.

A product/service must have value to someone NOT in the business.

Issues: Training, business cards, leads, starter kits, promotional CD’s, websites, downline reporting, etc. are all “items” that are typically only of interest to someone doing the business. If I am a training company selling training that helps anyone in any company, or a business card company selling business cards to anyone in any company, or a leads company selling leads to anyone in any company… then these items become commissionable. BUT, if you are a nutritional company and offer business cards to your business members to help them promote their business… you CANNOT pay commission on the cards. Websites are the same way… no commission can be paid on any tool used to promote your business.

The third question: Does this product/service have value to an end-user/customer who is not participating in the business?

If Yes, see the next question…

Concern #4- When purchasing a product/service as a customer IF that customer is automatically put in the business, then you have cause for concern.

A product/service MUST be sold separately to end-users from the process of joining the business. This cuts 2 ways: a) someone not doing the business must be able to buy your product/ service without being put into the business and b) someone joining the business cannot be forced to buy a product (see #5 below). It may not cost anything to get into the business, but a position in the business needs to be an optional secondary opt-in process after someone buys the product.

Issues: Businesses where everyone in the business is a customer and every customer is in the business presents a problem. A company should be customer focused. A legit business is one where the sale of product, not the recruitment of new business participants is the primary focus. It is important to distinguish between end-users/customers and business participants.

The fourth question: Can a customer/end-user buy a product and not be in the business?

If Yes, see the next question…

Concern #5- Someone is required to purchase a product in order to participate in the business, if so, you have cause for concern.

Participation in a business must not be conditional on the personal purchase of product. In a business opportunity personal consumption may not be a requisite for participating in the business. However, once someone is participating in the business a purchase may be required to advance through the “ranks”.

Issues: To sell a Porches’ why would you need to personally buy one? You don’t. Many may say, which I do agree with, that the use of a product enhances ones understanding of the value of that product. We often hear in this industry, “be a product of the product.” However, while the use of a product/service may enhance our understanding of it, provide a deeper value and thus increase our passion and ability to share it with others, access to the business opportunity cannot be predicated on personal consumption.

The fifth question: Can a business participant join an opportunity without purchasing
product?

If Yes, see the next question…

Concern #6- During introduction to the business or product/service IF income claims or product/service claims are made, you have cause for concern.

Hype is deadly. Making claims of any type that cannot be proven scientifically or empirically to be applicable universally to some guaranteed degree can present massive legal challenges. Fraud and misrepresentation are major pitfalls of many who would hype their business and product/service in its promotion.

Issues: A clearly stated phrase of excitement and love or adoration for a company or something is not an issue. But to cross the line with statements of how a product/service impacted your life or how you earned $X amount pushes the envelope which might and often does result in a legal issue of fraud or misrepresentation. This is a difficult area for most to clearly grasp, but it’s one that gets more distributors in trouble than any other area.

The sixth question: Is the product/service or business opportunity explained without making claims?

If Yes, you’ve likely found a company/opportunity/plan that will remain free of legal challenges.

Every company should have retained and worked with a qualified MLM attorney and MLM consultant to put in place all solid business strategies, rules, and policies that are in line with the laws of the country and states that business will be conducted in.

MLM Consultant: http://www.melatwood.com/
MLM Attorney: www.YourSolutions.net/mlm_law.php

You should also ensure that the MLM Software company works closely with your MLM Consultant and Attorney to put in place the needed distinctions and tracking required by law and by good business strategy.

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Disclaimer: The materials available through this site are for informational purposes only and are not legal advice. The transmission of any information is not intended to create, and receipt does not constitute, an attorney/client relationship. Internet subscribers and on-line readers should not act upon this information without seeking professional counsel.

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