Multi-level marketing (MLM), also called pyramid selling, network marketing, and referral marketing, is a controversial, pyramid-shaped marketing strategy where profit is theoretically derived from two revenue streams: from direct sales to customers and from commission based on the sales of recruited team members, also known as down line distributors. MLM salespeople are expected to sell products directly to consumers by means of relationship referrals and word of mouth marketing. They are also incentivized to recruit others to join the company as distributors.
MLMs have been made illegal in some jurisdictions as a type of pyramid scheme, including in mainland China. In jurisdictions where MLMs have not been made illegal, many illegal pyramid schemes attempt to present themselves as MLM businesses.Some sources define all MLMs as pyramid schemes, even if they have not been made illegal through legislative statutes. According to the U.S. Federal Trade Commission (FTC), some MLM companies already constitute illegal pyramid schemes even by the narrower existing legislation, exploiting members of the organization.There have been calls in various countries to broaden existing anti-pyramid scheme legislation, or enact specific legislation, to make all MLMs illegal, as has already been done in some jurisdictions.
Even if the legal distinction is merely a legal fiction, jurisdictions that retain a legal distinction between MLM businesses and illegal pyramid schemes retain said distinction on a key distinguishing feature: namely, that MLMs rely on the sales of actual products. However, significant profit cannot realistically be made by MLM salespeople through such a sales model structure, despite MLM corporations themselves generating multimillion dollar profits for the MLM corporation and its shareholders from the collective sales of all their salespeople.
Profit (after the recoupment of losses) by MLM salespeople can only be reasonably achieved by the recruitment of other salespeople to cumulatively supplement the salesperson's profits by the addition of sales generated by the salesperson's new recruited salespeople. In this way, a salesperson's first cycle of recruits is augmented by a second cycle of recruits (recruited by the first cycle of recruits), and so on.
MLM salespeople are not employees of the MLM business, so they do not derive a salary/wage nor reimbursement from the MLM business for their invested labor and expenses, with their income from the MLM business derived only from the profits that are able to be generated in the MLM structure. As non-employees they are not protected by legal rights of employment law provisions. Instead, salespeople are typically presented by the MLM business as "independent contractors" or "business owners"; however, salespeople do not possess a business in the traditional legal sense, as they do not hold any tangible business assets or intangible business goodwill which could be sold or purchased in the sale or acquisition of a business.
Companies that use MLM models for compensation have been a frequent subject of criticism and lawsuits. Criticism has focused on their similarity to illegal pyramid schemes, price fixing of products, high initial entry costs (for marketing kit and first products), emphasis on recruitment of others over actual sales, encouraging if not requiring members to purchase and use the company's products, exploitation of personal relationships as both sales and recruiting targets, complex and exaggerated compensation schemes, the company and/or leading distributors making major money off training events and materials, and cult-like techniques which some groups use to enhance their members' enthusiasm and devotion