What are MLM Companies? How do they Work?

Ashwin Honawar

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what is multi level marketing companies How an mlm business work

You might have surely heard of brands such as Avon cosmetics, Amway, Forever Living, Tupperware and certain others. Maybe you’ve bought and used their products too. And it’s also quite possible that you liked their products and continue using them, though some might cost a little more than other brands.

If you’ve used these products, you would most likely have bought them through a social contact, friend, neighbour or relative and not from a store, as we do normally. That’s because these products are sold to you through a system known as Multilevel Marketing or MLM and direct marketing.

This is a business model where the manufacturer or service provider directly promotes and sells a product or service through their associates instead of conventional channels such as the wholesale and retail chains.

To understand what is an MLM company, it’s important to understand its history and MLM business model. That will give you a clearer picture of what these companies are all about and how they work.

History of MLM Companies

Here’s a brief history of MLM companies. The business model started in the US and continues to grow worldwide even today.

what is an mlm company history

JR Watkins Medical Co

Broadly speaking, in 1868 or about 150 years ago, Joseph Ray Watkins, an entrepreneur from Plainview, Minnesota used the world’s first known Multilevel Marketing (MLM) business model.

He started an eponymous firm, JR Watkins Medical Company whose first product was Red Liniment. Instead of selling it through stores, the product was sold door-to-door and through the social network of the company’s salespersons.

Though JR Watkins isn’t credited with launching the first MLM business in the world, some features of his business models used to sell Red Liniment and other herbal products were later taken and modified by other companies to create what we know as today’s MLM business.

Avon Products

The first company to adapt and use the redefined MLM business model was California Perfume Company, which was launched in 1888 by David H. McConnell. McConnell was a “canvasser” or salesman for books in New York and later, a General Agent for a publishing house.

Later, he bought over the publishing house and also started a small perfume company. He would give away or sell his perfumes to customers of his books. In his own words, McConnell described that selling something directly had distinct advantages over going through a retailer.

As the perfume business grew and became popular, McConnell named it California Perfumes Company, after advice from a friend from that state, which is home to countless flowers.

Instead of selling these perfumes through stores, McConnell began selling them through associates. Soon, California Perfumes Company was a household name because of its amazing fragrances.

Today, California Perfumes Company is one of the most successful organizations of its kind in the world. The company is now known as Avon Products and has a presence in almost every country in the world, through its MLM salespersons, also known as MLM associates.


The business model was highly successful and soon adopted by California Vitamin Company, founded in 1927 by Carl F. Rehnborg. In 1939, the company was named Nutrilite. Now, all Nutrilite products are distributed worldwide using the MLM system by another US major in the field, Amway Corp.

This company offers herbal health supplements. However, its products and services had gotten into serious problems with the US Food and Drug Administration (FDA) over various issues.

Business Model of Multi level marketing Company

The business model of MLM companies is based on the financial empowerment of economically weaker sections of society.

The California Perfumes Co. began directly selling its range of fragrances and cosmetics to women looking for a source of income. The company was soon successful and hence, changed its name to Avon, to keep in line with modern times.

The MLM business model was also created to help those who could not find regular jobs due to any reasons such as lack of education or skills. They could easily do direct selling of products to their social network and earn some money.

what is mlm company business model

In those days, advertising largely depended on word-of-mouth publicity and hence, the MLM associates could expand their customer base through their social network by getting referrals.

The MLM business model works in two ways: the first is direct selling within a specific network and expanding it to get more business. Second, by recruiting more affiliates to join the network.

An MLM associate moves up the echelons when they recruit more and more people for the company. Their rank and earnings both go upwards. They also get small commissions from the earnings of the persons they’ve recruited.

In modern times and now with the advent of the Internet, MLM business has also gone online with some associates selling products of renowned companies through their own marketplaces on Shopify and other platforms.

Some companies allow you to place a direct order online. However, the order is usually fulfilled by some of their MLM associates, especially those closer to your place.

Furthermore, with some MLM companies offering superb products, their associates have set up retail stores at various locations where customers can purchase their needs.

In India, the Dutch multinational Unilever launched its own slew of MLM products as part of the financial empowerment of women in rural India. Hindustan Unilever, its Indian branch, launched a slew of household products under a different brand name for sales through the MLM network.

The objective is to make such products available to low-income rural folk in remote parts of southern India while securing a decent income for the woman MLM associate.

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Flip sides of MLM Companies

While MLM companies have flourished since the late 1800s and early 1900s, there are also several flipside.

Some renowned MLM companies offering nutritional supplements and herbal remedies or cures for certain chronic ailments have come under fire from the US FDA and their counterparts in various countries for promoting products that have no proven therapeutic or medicinal benefits.

what are mlm companies flip sides

Some such products cost a lot but don’t deliver what they claim. Usually, such MLM companies escape prosecution by printing a simple disclaimer on their packages that states: “No proven therapeutic claims.” This means the consumer is taking these supplements at his own risk.

Experts argue that taking these products only has a placebo effect and does not actually alleviate or heal a medical condition.

Secondly, the MLM business model was adapted to create the infamous Ponzi or pyramid schemes that perpetrate fraud by offering fake investment and savings plans claimed to provide very high returns.

In most cases, these Ponzi schemes were found to be launched by criminals or persons with little or no financial backing. Millions of people worldwide have lost billions of dollars to such Ponzi or Pyramid schemes.

Workings of MLM Companies

Now, to respond to the second question: How do MLM companies work? The above description of MLM companies would have given you some idea. However, I will now elaborate on how MLM companies around the world function.

workings of an mlm business

Usually, MLM companies advertise themselves through newspapers, magazines, TV, radio, Internet and other channels. This is done to popularize the company’s name among the broad public. Usually, such ads are associated with one or more of their products.

Secondly, they advertise that work positions- not jobs- are available with these MLM companies. They will usually invite people to a seminar held at some popular venue such as a famous hotel or community hall, among others.

Here, senior officials from the MLM companies will make presentations about the organization, showcase their products and speak about the opportunities available for becoming associates in your area.

Those who enrol to become associates will later be given extensive training courses by the MLM companies for familiarization with the product range and pricing policies.

They will also have an opportunity to taste some of the products such as food supplements or get samples of stuff such as skincare creams and lotions, toothpaste or shampoo, among others.

Those who successfully complete the training and the seminar will be appointed as associates of the MLM companies. They will get a certificate that indicates they’re representing the company for sales of its products.

The next step is usually to equip these associates with product brochures, literature and presentations. Some MLM companies also provide tester packs and samples to be given away free to prospective customers.

The MLM companies sometimes establish a small depot or warehouse from where associates can collect the stuff for delivery to customers. In other cases, associates have to send an order form, complete with the payment to the MLM companies to send the products.

This is an investment that the MLM associate has to make initially. Sometimes, associates collect the money from customers before ordering the stuff. The third system involves an MLM associate keeping a fixed cash deposit amount with the MLM companies or its distributors.

That way, the associate can buy the products worth the deposit amount and sell them to customers. They retain the profits.

The order price is always lower than the retail or sale price. In some cases, the difference can be as high as 40 per cent on certain products, MLM companies allow such a margin as an incentive to their associates.

The vast margin allows associates to give discounts if necessary to new or existing customers. The printed price of the MLM product is always higher and the associate can sell it at that rate too, if they don’t wish to get discounts.

Once a sale is made, MLM companies will register the name and other details of the client to send them emails about other products. In some cases, they might also ask the customer to join their growing army of MLM associates.

All MLM associates have to recruit more and more people to join the network. The higher the number of people an MLM associate recruits, the bigger their income. A part of the profits made by these new recruits also goes to the MLM associate who enlisted them.

These new recruits in turn have to enlist more and more persons as they progress. The person having the highest number of recruits gets a promotion and can be made in charge of an area or territory. This entitles them to some more privileges such as special prices and higher commissions.

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Regulatory Compliance for MLM Companies

Now that we know how an MLM company functions and sells its products, let us look at what such organizations have to do before entering any market. All MLM companies are required to comply with laws, rules and regulations before they sell their products.

MLM companies have to comply with the rules and regulations of the US Food and Drug Administration, financial authorities and many more government organizations.

That’s because products- whether tangible such as health supplements or perfumes or kitchenware or intangible such as investment schemes- always affect people.

regulations on multi level marketing

MLM companies cannot launch operations anywhere unless they have the necessary permits, licenses and other clearances from the government of their home country and those of foreign lands where they wish to operate.

Often, fraud companies offering Ponzi-type investment plans skip or try and circumvent government regulations. Instead, they set up bases in offshore havens where rules on financial plans and schemes don’t exist or are very ambiguous.

They exploit this loophole to flee with your money and that of others who fell for their scams. Over the decades, investigations by financial regulatory authorities of various countries have revealed that most Ponzi schemes did not even have a basic business registration.

Such companies existed only on paper. The perpetrators of these scams usually flee with the cash they’ve been entrusted with, by gullible investors.

Wrap Up

If you’re interested in becoming an associate for an MLM company and working on your own business of sorts, I suggest that you sign up with any reputed firm only.

Usually, such respected companies have been around for several years and they comply with all regulatory requirements. However, be wary of companies that offer Ponzi or Pyramid get-rich-quick schemes. You surely won’t get rich here and in worst-case scenario, you might land in prison for fraud.

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