Multi-Level Marketing: What Are MLMs? How and Why Do They Work?

This was originally posted on Planner Bee.

Marketing via Multi-Level Marketing (MLM) is a tactic embraced by select direct sales firms for product and service promotion.

MLM operates by enlisting current members to champion and sell their products to fresh prospects, while also enlisting new members.

Compensation involves a cut of the sales generated by recruits. These recruits, referred to as the distributor’s network or downline, are in turn motivated to clinch sales for their own earnings.

Here are some of the key components of an MLM:

1. A product or service to sell
2. A network of distributors
3. A commission structure
4. A training programme
5. A promise of wealth and financial freedom

Isn’t it illegal?

Strictly speaking, MLMs are illegal in SG. Under the Multi-Level Marketing and Pyramid Selling (Prohibition) Act, those who promote or participate in MLM schemes are liable to a fine of up to S$200,000 and/or a jail term of up to five years.

However, there are two types of companies that are exempted from the MLM ban. These companies either (1) operate in a direct-sale manner and are registered with the Singapore Direct Selling Association (DSA), or (2) are master franchises.

As a result, there are some businesses that employ MLM-like mechanisms that operate legally in Singapore. Some of them operate under direct selling or network marketing.

Registered MLM

There are 27 members listed in the Direct Selling Association of Singapore (DSAS) website, but that’s not to say that there are only 27. Due to different structures, some companies may not be legally required to register with DSAS, but you can still find key elements of requiring to purchase their product and earning some commission by recruiting others.

Here’s the list:

1. AMC Allied Metalcraft
2. Amway
3. Atomy
4. BE International
5. Best World Lifestyle
6. Creative Network International
7. DXN
8. Elken
9. Enagic
10. Extra Excellence
11. Forever Living Product
12. HDI Network
13. Healthy Homes Marketing
14. Herbalife
15. Mary Kay
16. Morinda
17. Nefful
18. Nuskin
19. Oriental Inchaway
20. PM International
21. Qnet
22. Sante & Beaute
23. Stemey (Singapore)
24. Sucessmore Being (Singapore)
25. Tupperware
26. Unicity
27. Usana

Understanding the MLM structure

At its core, an MLM involves two key components: product distribution and recruitment. Members of an MLM, also known as distributors or representatives, are tasked with both selling the company’s products and recruiting others to do the same.

Levels and compensation

MLM compensation or commission plans vary, but they typically involve several levels or tiers. When a distributor recruits someone, they become their “downline,” and the distributor earns a percentage of the sales made by their downline.

If the downline further recruits others, the original distributor earns a percentage of their sales as well. This hierarchical structure creates multiple levels of commissions, hence the term “multi-level.”

Empowerment or exploitation?

In the world of MLMs, success stories often shine a spotlight on the promise of financial independence and flexible work hours.

CNA recently featured an article on one such successful MLM member.

Acting as a distributor for Best World International, Chanee Yap generates a monthly income in the “five figures” range—marking an increase of “10 times more” compared to her previous role as an accountant.

Additionally, due to the flexibility of her work hours, Yap, who is 40 years old, is able to allocate a substantial amount of time to spend with her family.

Another eye catching success story comes from a member of BE International, Chong Ca, who became a millionaire in Malaysia at 30 years old. The son of a farmer took the leap of faith after graduation to explore the MLM business, and the charismatic and hardworking Chong has since made this a profitable profession for him and his family.

Stories like these are what draw potential members to join, especially when it’s from within their own social circle.

Learning and Earning

On top of it all, companies like Best World International pride themselves on not just being a form of living – they also help practitioners acquire skills. They emphasise the potential to earn an income independently, flexibly, and develop your sales and marketing skills.

Understanding the risks

The money gap: winners and strugglers

Not everyone walks away rich. Every company has its superstar earners. Only about 25% of those who work with MLMs make a profit, according to The Balance SMB. Furthermore, picture this: targets, recruits, and events. That’s the pressure cooker of MLM life. It can fire you up, but it can also burn you out.

The transparency issue in MLMs

Not all MLMs are clear about the game, the stakes and the winnings. Even the commission structure can be complicated with their own tier and point systems. For some less savvy clients of MLMs, they may be misled to believe that they, too, can easily recruit and maintain their downlines, when in reality the odds can be quite stacked against them.

Why MLM schemes work for some

They foster a sense of community and belonging.

MLMs often create a strong sense of community and belonging among their participants. Team-building exercises, group meetings, and motivational events foster a feeling of camaraderie, which can be a significant appeal for people seeking social connections.

They promise financial independence.

MLMs often present themselves as an opportunity to achieve financial freedom and success. The allure of making significant income with flexible working hours can be appealing, especially in a fast-paced city like Singapore where financial security is a top priority for many. For example, Atomy focuses on the independence aspect, assuring that you can “Customise Your Business, Your Way”.

Additional perks such as annual travel are common as well: Naturally Plus promises that you get to “travel to exotic places every year with friends and colleagues for free”.

They promise empowerment and self-Improvement.

Like we mentioned above, MLMs frequently emphasise personal development and self-improvement, attracting those who wish to better themselves. They may offer training programmes, motivational speakers, and self-help materials to boost participants’ confidence and self-belief.

They capitalise on cognitive biases.

First, it starts with being contacted by someone you know that has achieved some success in the MLM. This is a concept called “social proof”, where showcasing successful participants can lead potential recruits to believe that they can achieve success too.

Perhaps the most difficult bias to overcome when one has joined an MLM is the sunk cost fallacy. People who invest time and money into the venture may be reluctant to quit, even when faced with evidence of low returns. Individuals feel they must continue investing to recoup their initial investment or maintain their original position as advocates of the product, which keeps them stuck in MLMs.

Feeling entrepreneurial? Here are some other routes to explore

If you or your loved one is keen on building a business, there are many options apart from MLM to seek out:

1. Franchise Opportunities

Franchises provide a well-trodden path into entrepreneurship, but of course requires a certain amount of capital to start. Brands like drinks store Koi or tuition centres like MindChamps offer a ready-made business model, training, and support.

2. E-Commerce and dropshipping

From Amazon to Shopee, e-commerce platforms let you sell products online. Dropshipping takes it up a notch – you sell products without keeping inventory. The usual advice is to pick a niche, like fitness gear, and start small to learn the ropes.

3. Service-based businesses

If you’re a whiz at web design or consulting, monetise your expertise. Sites like Upwork or Fiverr connect you with clients seeking your skills. Define your services, build a strong portfolio, and get networking.

4. Home-based businesses

Unleash your creativity from the comfort of your home with baking or crafting. Whip up delicious treats or craft unique handmade items. Turn your kitchen into a bakery or your workspace into a crafting haven. Make your passion your business, one cake or craft at a time.

5. Traditional retail and F&B

Opening a local store or cafe has its charm, but it can be tricky given high rental, manpower and ingredient costs. Focus on customer experience, unique offerings, and providing a warm atmosphere that keeps customers coming back.

6. Subscription-based services

Services like meal kits or streaming platforms thrive on subscriptions. Come up with a unique offering that keeps customers coming back.

7. Import-export opportunities

Tap into global trade by importing goods in demand or exporting unique local products. Coffee beans from Vietnam, anyone? Research regulations, build connections, and navigate customs smoothly.

Beyond generating a secondary active income source, you can also consider setting up ways to generate passive income.

Read more: Passive Income: 5 Realistic Ways To Earn Money While You Sleep

Conclusion

MLMs operating in Singapore offer both potential rewards and risks. While some do profit from being in an MLM, the reality is that more often than not, many end up with unwanted products and failed recruitment drives.

If your loved one is in an MLM or considering joining one, it’s essential to have a candid discussion with them to help them make informed decisions.

Read more: How to Set Financial Goals For The Future Without Losing Yourself