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What’s A Multi-Level Marketing (MLM) Company? (2020 Update)

What’s A Multi-Level Marketing (MLM) Company? (2020 Update)

Multilevel Marketing (MLM) companies operate by paying a commission fee to those who sell their products. However, signing up to an MLM can be risky.

17th January 2020

You’ve probably seen ads on television for products that can be sold for a commission that goes right into your pocket. The premise itself is simple – buy the stock, sell it and keep the profits. Companies that operate on this business model run on a system called Multilevel Marketing (MLM). In this article, we’ll explain how MLM works and what you should be careful of. 

Multi-Level Marketing

Perhaps you’ve seen products being pushed or advertised by your friends, or maybe they’ve even tried to get you to join the business as a salesperson as well. MLM companies sell all sorts of things including makeup, skin care products, vitamins, cooking equipment, essential oils, and more. 

MLM is a system where a company representative earns a commission for the products they sell on behalf of a company. This requires you, the seller, to market the product and convince those in your network to buy it.  Further, as an MLM seller you can also earn extra money by recruiting other sellers. However, if you don’t sell the products or recruit other sellers, you don’t earn money – in fact, you lose it. This has led to debate as to whether Multilevel Marketing (MLM) companies are pyramid schemes, or legitimate businesses.

Other names

Multi-level marketing also goes by the name of referral selling, network marketing or pyramid selling. An existing company hires you to sell their products to individuals. There is usually a joining fee along with an extensive lock-in contract. However, the things to look out for in a MLM is whether they provide commissions for just the product, or sign-ups as well.

If there are commissions for signing up new members, this is likely to be a pyramid scheme.

Does it work? 

That depends. For those who want to “get rich quickly”, the promises MLM companies make seem appealing. Although you may receive short-term profit from selling these products, it can be difficult to sustain. 

Another selling point that is normally put forward is that you can be your own boss. This is semi-true, as you get to pick your own hours and choose how to sell your products. Despite this, there are still profits to be earned or lost, and targets to reach. Ultimately you don’t have control over the direction of the business nor complete control over profit and earnings. On the other hand, you will have the advantage of not needing to create a product or come up with a new idea. But, you may be left with hundreds spent on a product to sell, all while it gathers dust in your house.

Multi-level marketing  v pyramid schemes

In 2018 there have been 286 reports alone of pyramid schemes. Among these reports, 28% are reports of financial loss. The two most significant ways this happened was through social media or in person. The distinguishing feature of a pyramid scheme is the need to recruit more people. A pyramid scheme survives on new members recruiting more members. Each time someone joins the cause, they have to pay a fee. The allocation of this fee and income ends up being spread thin with the majority going to a few high ranking people at the top. The products are usually hard to sell and are of low quality.

Is it legal? 

Both a pyramid scheme and multi-level marketing involve the sale of a product. A referral selling scheme (MLM) is where a product is sold and a commission is made. A pyramid scheme relies on the participation and joining fee instead even when a product is sold. This is per the Competition and Consumer Act 2010 (Cth) Schedule 2 chapter 3 div 3. To determine whether there is a MLM or pyramid scheme depends upon whether the business is leading the new members to believe they will eventually gain a share of the recruitment fee if they recruit new people. The reasonableness of the price of the joining fee along with whether the emphasis is placed on the joining fee or selling of the product.

Starting your own business

If you decide selling under an Multilevel Marketing (MLM) is not for you, then you can always start your own business as a sole trader. This gives you the advantage of being your own boss without having to deal with joining fees and commission targets. You can then set out your own supply agreements.

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Conclusion

As always, the choice is yours. Whether you want to enter into an agreement and use an existing product or create your own business as a sole trader is up to you. Just make sure that the contract you enter into isn’t illegal, or filled with complex termination clauses, hidden fees and penalties. Likewise, double check that the Multilevel Marketing (MLM) business isn’t actually a pyramid scheme.

Don’t know where to start? Contact us on 1800 529 728 to learn more about customising legal documents and obtaining a fixed-fee quote from Australia’s largest lawyer marketplace.

 
Author
Justin Pasqualino

Justin is a legal intern at Lawpath as part of the content team. He is currently studying a Bachelor of Laws and a Bachelor of Economics at UTS.