The term “network marketing” was hatched by MLM companies and promoters who were desperate to re-label their programs to sound legitimate. “Multi-level marketing” sounded too much like a pyramid scheme, but “network marketing” was accepted by participants, consumers, and the media as a legitimate business model.
Actually, network marketing (MLM) has been labeled many things, depending on who is doing the naming. Terms such as referral sales, sales referral schemes, and endless chain marketing schemes have been used by regulators. I have labeled these programs as “recruitment-driven MLMs” and “product-based pyramid schemes” after reviewing hundreds of network marketing programs.
Network marketing (MLM) sponsors have also vigorously sought to be recognized as legitimate “direct selling” companies. A good analogy for this is the farmer who gets more money selling his horses than his pigs. So he fastens horse hairs on the buttocks of the pigs and marches them into the horse corral and announces, “See there. They are no longer pigs, buthorses.” Then he sells them as horses.
In a similar way, hundreds of MLMs joined the Direct Selling Association (DSA) to gain greater credibility as direct sellers. This also benefitted the DSA, as direct selling was disappearing with the growth of discount chains and internet sales.
But network marketing, or MLM, is no t legitimate direct selling. In the days of the door-to-door salesman, the bulk of the commissions went to the person doing the selling. But network marketing uses an upside-down commission structure that rewards those at the top of a pyramid of participants at the expense of a downline of recruits at the bottom who invest in products to qualify for commissions and rank advancement. They may be able to sell some products at a profit, but the prices are seldom competitive with retail outlets, and any sales markup is a pittance in comparison to the huge payout to TOPPs (top-of-the-pyramid participants).
Clearly, with MLM compensation plans – as with all pyramid schemes – the rewards for recruiting a large downline greatly eclipse the rewards for selling products to non-participating consumers. The label does not change the fundamentally unfair and deceptive nature of the business model.