MLM Explained

This page is for anyone that has little knowledge about Multi-Level Marketing, and is looking for more information

Common Terms & Definitions

Multi-Level-Marketing (MLM)

A new distributor pays a fee [fees typically range from $99-$1000] to become a?independent contractor for an MLM. The MLM works by having the people above (the person who recruited) distributor [called an up-line] get a percentage of whatever the distributor sells. A distributor is encouraged not only to sell the product, but to sign up other people below her [called a down-line] so that they can make even more money.

Pyramid Scheme

In a Pyramid Scheme they promise consumers or investors large profits based primarily on recruiting others to join their program, not based on profits from any real investment or real sale of goods to the public. Some schemes may purport to sell a product, but they often simply use the product to hide their pyramid structure.

How to tell if an MLM is a Pyramid Scheme:

  • Your income is based mainly on the number of people you recruit, and the money those new recruits pay to join the company — not on the sales of products to consumers
  • You’re required to buy lots of inventory
  • You’re forced to buy other things you don’t want or need just to stay in good standing with the company
  • You’re likely to lose money if you sign up for a pyramid scheme.

If you’re planning to buy into a multilevel marketing plan, get the details:


Ask these questions to learn if it’s a pyramid scheme.

  • Make sure your income is based on sales to the public, not on what you have to buy yourself or the number of people you recruit……
  • Ask your sponsor and other distributors tough questions, and dig for details.
  • Don’t consider it nosy or intrusive: you are on a mission to check out a potential business deal that will require your money and your time.

Their responses can help you detect false claims about the amount of money you may make and whether the business is a pyramid scheme.

Here are some questions to ask before making any decisions

  • What are your annual sales of the product?
  • How much product did you sell to distributors?
  • What percentage of your sales were made to distributors?
  • What were your expenses last year, including money you spent on training and buying products?
  • How much money did you make last year — that is, your income and bonuses, less your expenses?
  • How much time did you spend last year on the business?
  • How long have you been in the business?
  • How many people have you recruited?
  • What percentage of the money you’ve made — income and bonuses less your expenses — came from recruiting other distributors and selling them inventory or other items to get started?

It’s important to get a complete picture of how the plan works: not just how much money distributors make, but also how much time and money they spend on the plan, how long it takes before they’re earning money, and how big a down-line is needed to make money.


One sign of a pyramid scheme is if distributors sell more product to other distributors than to the public — or if they make more money from recruiting than they do from selling.

  • Be skeptical of rags-to-riches stories or portrayals of lavish lifestyles made possible by participating in the program. These stories may not represent the experiences of most members.
  • Exercise doubt. Even if a company sells products or services you’re familiar with — or boasts celebrity members — it may not be legitimate.



Typically the person that is doing the recruiting, and also can act as their mentor.


The person that is being recruited into the MLM.

Income Disclosure Statement

An annual income/earning statement published by an MLM company, to show how much a rep for that specific MLM makes a year.

Direct Sales

Face to face (door to door) sale of products or services, with a focus on sales and not recruitment.

Network Marketing

A Direct selling (MLM) method in which independent contractors act as distributors of goods/services, and are encouraged to build and manage their own team by recruiting other independent contractors. Commission is earned on their own sales, as well as the sales of his or her recruits (down-line). Also known as multilevel marketing (MLM).


Compensation Plan/Structure:

The model of a relationship between the MLM and its independent contractors, and on which commissions are calculated and paid.


Ponzi Scheme

A group of people are enticed with the promise of very high returns in a very short time, but is based on paying off the early ‘investors’ from the cash from new ‘investors.’ The structure collapses when the cash outflow exceeds the cash inflow. The originators of the scheme, however, usually disappear with large sums a few days before the collapse.

Market Saturation

The Point at which a company (MLM) is no longer generating new demand for it’s products, due to competition, need, or some other factor.

If the money you make is based on your sales to the public, it may be a legitimate multilevel marketing plan (MLM).


If the money you make is based primarily on the number of people you recruit and your sales to them, it’s highly likely It could be a pyramid scheme.


Pyramid schemes are illegal, and the vast majority of participants lose money.

Recruitment driven MLMs:

Uses a compensation plan that allocates the majority of its payout to participants to those who recruit a large down-line of participants, rather than to front-line sales persons for sales to persons not participating in the scheme.

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