If Most "Sales" are Internal, It's not Retail, It's a Warning Sign.
In the world of direct selling, one of the most debated and misunderstood concepts is Multilevel Marketing (MLM). The term evokes both opportunity and scepticism, sometimes unfairly, sometimes rightly so. Let's unpack what MLM really means, why it is under scrutiny, and how ethical direct selling companies can bring much-needed clarity to the industry.
What is the "MLM" Element of Direct Selling?
At its core, the MLM element in direct selling refers to a compensation structure that is used to reward direct sellers. Here's the simple breakdown: An independent contractor (commonly called a Direct Seller) can earn commissions not only from the products/services they consume or sell, but also from the purchases made by individuals they introduce to the company.
These commissions (in the form of points) can extend multiple levels deep, beyond just the first or second generation of recruits.
When practised ethically, this model enables genuine entrepreneurs to build sustainable customer networks while maintaining a focus on product sales and customer value.
So, Why is MLM "Under Fire"?
The criticism is not without reason. Many so-called "MLM companies" operate more like pyramid schemes, which are unsustainable and exploit participants.
What's a pyramid scheme? It's a structure where the majority of product consumption happens only by participants themselves, not genuine external customers. And why do participants keep buying? Often, not out of real product demand but to maintain rank, qualify for higher commissions, or unlock income potential from their downlines. This quickly transforms the emphasis from selling products to customers into recruiting participants for internal consumption.
This is where most legal and ethical concerns arise.
What Ethical Direct Selling Companies Should Do?
For Direct Selling companies that choose to follow an MLM compensation plan responsibly, transparency and role clarity are critical. A healthier model acknowledges the different motivations of people and creates distinct tiers:
- Customer – For those who want to buy and enjoy the products.
- Affiliate – For those who prefer to promote products online through links and content, earning commissions on actual sales generated.
- Direct Seller – For entrepreneurs who combine both approaches:
- Consuming products themselves,
- Selling to their own customer base,
- Signing up affiliates and benefiting from their sales,
- Onboarding new direct sellers and earning from genuine product sales and consumption.
Why This Matters?
With such a tiered approach, companies can track real consumption versus business-driven consumption. Since the direct selling entity itself manages distribution to each tier of customers, affiliates, and direct sellers, credible data is readily available. This ensures that: Regulators can clearly see where product movement is happening.
The distinction between a legitimate direct selling company and a pyramid scheme is transparent.
Participants align with roles that genuinely reflect their intent, whether it's consumption, promotion, or building a sales network.
The Legal Grey Zone
Interestingly, many legal challenges do not continually target companies with a single-level pay plan (like traditional affiliate marketing). Instead, scrutiny usually falls on direct selling entities using the MLM model, even when joining fees are absent and no mandatory purchase to activate the position requirements exist. This is why setting the proper structure, capturing consumption data, and maintaining transparency is not just good practice; it's essential.
Bottom Line
MLM in direct selling isn't inherently unethical. It's simply a compensation strategy. The real issue arises when a company prioritises recruitment and internal consumption over genuine customer sales. By introducing clear tiers for customers, affiliates, and direct sellers, ethical companies can protect both their distributors/direct sellers, as well as their reputation, while providing regulators with the transparency they expect.
