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What is multi-level marketing (MLM) /Direct selling? Everything you needed to Know

Author: Pradeep Joseph
by Pradeep Joseph
Posted: Mar 12, 2021

What is multi-level marketing (MLM) /Direct selling? Everything you needed to Know

direct selling, Multi-level marketing and sometimes network marketing and it is nothing but a marketing strategy standing away apart from traditional and other marketing strategies.

Definition for Multi-level marketing (MLM) and Direct selling

Direct selling is a marketing strategy/method used to exchange goods or services without the help of advertising, infrastructures (franchisees, online platforms), or intermediaries as in the traditional marketing way. This is made possible by the distributor/ distributors (representatives of a company) of a Direct selling company delivering the company's goods or services directly from person to person.

Multi-level marketing is a business model most probably used by direct selling companies and scams related to it. Where the products or services are selling person to person like in direct selling. And more to that recruiting more distributors to boost the sale.

The difference between direct selling and multi-level marketing (MLM) is that, in addition to the above, in multi-level marketing, the distributor adds new distributors for money and other benefits. They also receive a small share of their turnover.

And thus, making multiple levels of marketing teams forming a network. So that sometimes-called network marketing.

Distributors are joined in the system for remuneration, commission, and royalties awarded by the companies.

How MLM works

In Traditional marketing strategy, the intervention of intermediaries occurs at several stages between the delivery of a product from a manufacturing company to a consumer. At each stage, each intermediary receives a small share of the profits. Usually, a product goes through the hands of at least 4 - 5 intermediaries.

In addition to their profits of intermediaries, the money they spend on advertising also needed to pay by the consumer. Therefore, the retail price has to be 5 times or more of the construction cost. If it is less than that, the product cannot be sold on the price (which means, the maximum retail price is just one or two times more than the manufacturing price. It will be very difficult to retail globally. Because the product cannot meet the profit for intermediaries)

In addition to their profits, the money they spend on advertising also comes from the consumer. Therefore, the retail price has to be 5 times or more of the construction cost. And this is the same in all most all cases.

In MLM there are no intermediaries such as national distributors, state distributors, Controlling and forwarding agents, wholesalers, retailers... and other advertisements.

The sales are going through a group of people(distributor) as a network, so it is also called network marketing. The commissions that probably going to the intermediaries and huge amount in the advertisement is divided into the distributor with the help of an income plan or compensation plan.

The remuneration and commissions and other royalty are divided through a compensation plan (income plans) by the companies. The compensation plans may vary in each company because they sell different products or services.

The Multi-level marketing companies recruit more and more distributors into the network system (distribution system) and it's going everlasting. And thus, companies increase their sales volume. This is done by other distributors refers to new personals into the system. The one who refers to more distributors gets more money according to the income plan. No distributor is enrolled on a salary basis. A distributor will get a small share of sales done by the person referred by him and his references. And thus, one possibly can generate more income by recruiting more into the system.

By explaining how a binary system works you may understand deeply how MLM works.

All MLM systems working under an income plan to provide the money to the distributors. All the systems are working on the basis of sales volume. And the sales volume is based on points or Business Volume (BV) of the products that you are sold. Each product has a definite BV calculated by the company based on the profit of the company.

The company will give ‘X’ and the amount of money for each BV

In a binary system, there are two channels. For ease, we can say A and B. consider these as teams team A and B. the one will be the power team and the other will be the money team. The team that has more sales volume is the power team and fewer sales volume in the money team.

Suppose, power team has 100BV in total and the money team has 80 BV in total. The total in the power channel matches (80BV) to the money channel

And, the distributor gets 80*X amount of money.

Note: if there is only one team or no sales volume on the money channel, you won't get any money.

Important terms used in MLM

There are some common terms used by MLM companies. You should get more familiar with these terms in order to understand easily the team mentors are telling to you or the conversations between your mentors

  • Team: the people under your referral tree are your team. And you will be under some one's team

  • Upline: the team members that came before you in the system of the referral tree. For example, there A and B are coming before you in the referral tree then A and B are your uplines.

  • Downline: the whole team-members who fall under your team are your down lines.

  • Sponsor: the one who directly recruits into the system is a sponsor of that member. For example, A recruits B into the system. then, A is a sponsor of B

  • Compensation Plan: The guidelines and the ways to earn money through the company. You are getting money only in accordance with the compensation plan.

  • Spill: If there is no vacant position immediately down in your team and you sponsor someone under vacant position, then the new member is a spill for the recruiter(you).

About the Author

A passionate blogger from India. Blogging in the marketing niche

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Author: Pradeep Joseph

Pradeep Joseph

Member since: Mar 09, 2021
Published articles: 1

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