Multilevel marketing is a popular business model that relies on relationships between salespeople and consumers rather than consumers and traditional retailers in order to sell products. Many famous products like Herbalife supplements, LuLaRoe clothing, Mary Kay cosmetics and Pampered Chef kitchen products are sold exclusively through the MLM model.
While the specific business model varies from company to company, the MLM model basically consists of teams of independent salespeople, rather than company employees, selling a product directly to consumers. These salespeople are encouraged to build their own sales teams because they earn commissions from their team members’ sales as well as their own.
Reasons for Starting an MLM
Many entrepreneurs who choose the MLM route to distribute products do so because they believe this is the route to the highest-possible revenue. This could be because they feel the product is an industry disrupter that would only get lost in a crowd of competitors on traditional store shelves or because the entrepreneur does not have the resources to launch a store or franchise to sell the product.
By distributing the product through a network of independent consultants, an entrepreneur who launches an MLM company can focus on the product rather than the logistics and potential pitfalls that come with developing a product and a retail strategy.
Develop a Product and Brand
The most iconic part of any MLM company is its product. Because an MLM cuts out the middleman of retail transactions, an MLM company cannot leverage things like store location, customer service or supplementary services to build its brand in the way other retailers can, like coffee shops and clothing boutiques.
For example, a traditional coffee shop might offer consumers high-quality coffee in a warm, cozy environment with free Wi-Fi. An entrepreneur looking to sell high-quality coffee through the MLM model cannot offer an environment or Wi-Fi, so the coffee has to be appealing enough on its own to attract buyers.
An MLM product and its brand are intrinsically linked. For example, Herbalife’s brand promotes a healthy life through natural supplements. The language the company uses in marketing materials, the packaging it uses for its products and the target demographic for Herbalife consumers are all based on this brand identity. When developing a new product, an MLM owner should keep brand identity at the forefront and develop assets like logos, color palettes and marketing strategies around the brand.
Connect With Manufacturers
The next step in starting an MLM is finding manufacturers for the product. Because an MLM product’s key characteristic is that it cannot be purchased anywhere else, purchasing a white-label product is generally discouraged for MLM entrepreneurs. Rather, you are encouraged to bring the specs for the unique product you created to a manufacturer who can make that product solely for your company.
There are product manufacturers in the United States as well as abroad. You can find manufacturers around the world through online directories like:
- Maker’s Row
After weighing the cost to work with various manufacturers and all other relevant considerations, like the timeline for getting inventory from the factory to a distribution center, you sign a contract with a manufacturer.
Develop a Business Plan
Once the product and its manufacturer are secured, you write a business plan. This is the comprehensive document that outlines everything related to the business, like its financing sources, its mode of operation, how the product will be marketed and how its leadership team is organized. Other key information includes:
- How the company is incorporated
- Detailed descriptions of all its products
- Short-term and long-term growth projections
- Target market
- Short-term and long-term business goals
- All relevant copyrights and trademarks held by the company
- The benefits the product provides its buyers
- How the product and company will be marketed
- All logistical information, like how the product will be distributed and how costs will be calculated
- All relevant financial information, such as previous earnings, financing sources and capital expenditure budgets for the coming years
Multilevel Marketing vs. Network Marketing
For an MLM company, a huge part of the business plan is the description of how the company will operate. It is not uncommon for the term “network marketing” to be used in discussions about multilevel marketing, and although these two business models are similar, they are not the same.
A multilevel marketing company is a company where salespeople generate profit by selling products and by taking a percentage of the profits earned by the more junior salespeople operating under them, typically referred to as their downlines. With network marketing, individual salespeople earn profits solely by selling products directly from the manufacturer to the consumer.
While many salespeople involved in network marketing recruit sales forces and take percentages of those sales forces’ profits, a recruited sales force is not inherent to the network marketing model like it is to the multilevel marketing model. In fact, many network marketing companies operate according to the MLM model.
Make Sure the Business Is Legal
One issue many entrepreneurs encounter when starting an MLM company is the legality of operating this type of business. Many people do not realize the difference between an MLM and a pyramid scheme. In short, pyramid schemes are illegal. MLM companies are not.
The difference between an MLM and a pyramid scheme is that with an MLM, an actual product is sold to consumers. With a pyramid scheme, there is no actual product, and this is why they are illegal. Under a pyramid scheme, involved individuals profit from new members signing up to be part of the scheme.
Consulting with a business lawyer regarding the legality of a proposed MLM is one of the first steps to take when starting an MLM company. Although a company with a legitimate product should have nothing to fear from the Federal Trade Commission, working with a lawyer to ensure that everything regarding the company is in compliance with federal law can help the business owner avoid potential headaches later.
Register the Business
With any new business, registering the business with the state and the IRS is an important step. Registering the business as a limited liability corporation or another type of corporation, like a C corp, establishes it as its own taxable entity. This means the business rather than its owner is responsible for all related tax liabilities and that the business’s assets are completely separate from its owner’s assets. If the business is sued, its owner will not face losing personal assets in a court ruling.
When a new business is registered with the IRS, it is assigned an employer identification number. This number is used to identify the business for tax and payroll purposes. Registering a business with the state where it is headquartered secures the business’s name and subjects the business to all required state fees and taxes.
Registering a business name does not trademark the name. After registering a new MLM company, you should register the business name’s URL and take steps to protect all intellectual property associated with the company, like its name and tagline. This can be done online through the United States Patent and Trademark Office.
Connect With Prospective Affiliates
The last step in launching a new MLM is marketing it to potential members, commonly referred to as affiliates. These are the people who will sell the product to consumers. MLM companies connect with prospective salespeople in a variety of ways, such as:
- Product demonstrations at community events
- In-home parties
- Social media marketing
Because MLM salespeople are tasked with creating their own small business, you can improve their success rates by offering business starter kits and training for every salesperson who signs on. Typically, marketing an MLM as the means to build one’s own business and be one’s own boss is an effective strategy for connecting with affiliates.
- If you want to be successful in your MLM venture, you will need to get some experience closing sales over the phone. There are many tapes and instruction materials online. You can also take a telemarketing job for awhile and get experience. Finally, the matrix payment plan is one of the most common and effective payment plan for MLM businesses. A matrix payment plan limits the number of distributors that fall under each of your levels as a sponsor. For example a 2x2 matrix allows two people on level one and four on level two (two under each distributor). The rest of the people who join the business under you would fall into level three, four or further down, which can help your downline members earn more money. If you use a matrix payment structure, pay 10 to 15 percent on level one, three to five percent on level two, and one percent on the other levels.
Lindsay Kramer has been a full-time writer since 2014. In that time, she's experienced the ups, downs and crazy twists life tends to take when you're launching, building and leading a small business. As a small business owner, her favorite aspect about writing in this field is helping other small business owners and aspiring entrepreneurs become more fluent in the terminology and concepts they face in this role. Previously, she's written on entrepreneurship for 99designs and covered business law topics for law firms.