Multi-level marketing (MLM) is a form of direct selling in which independent agents “build and manage their own sales force by recruiting and training other independent agents.” Also known as Network Marketing, “commission is earned on the agent’s own sales revenue” and “the sales revenue of the sales-force recruited by the agent and his or her recruits, called downline.” MLM is like owning a retail business and being entitled to a percentage of the sales of someone else’s retail business. Although MLM is legal, it is unethical: You earn commissions from the sales of agents in your downline who are risking a financial loss.
Any business venture requires taking a financial risk. If a person starts their own business, they invest their own money and/or borrow money from the bank. The bank may require the owner’s home (or other assets) as collateral if the business goes bankrupt. When you start your own business, you risk losing your savings and wealth. Even in a company with limited liability, the shareholders can lose their initial investment if the company goes bust. If the shareholders receive dividends, they do so by risking a financial loss.
With MLM, you take a financial risk: You buy sample product, so that you can promote it and sell it. You also pay membership fees, training fees, travel costs, and other expenses. However, no one in MLM becomes successful by selling product to customers for their personal consumption. As Robert L. Fitzpatrick points out, “The business is primarily a scheme to continuously enroll distributors and little product is ever retailed to consumers who are not also enrolled as distributors.” To achieve financial success in MLM, you must sign up as many distributors as possible. The individuals you sign up will purchase the product for their own consumption, try to sell it to other people, and sign up distributors who will do the same. With MLM, you make money not only from the people you signed up, but also from the people they signed up, and you make that money without risking a financial loss.
Consequently, MLM is not a legitimate business—it is a money-making scheme. Independent agents make money from other people’s financial investment and labour. In a normal business enterprise, the owner has a legal and moral right to the profits. The workers are paid for their labour, and the owner makes a profit by risking a financial loss. (The workers may not be paid fairly, but apart from the risk of not getting paid, they don’t risk any of their savings.) In a normal business, if you want a share of the profits, you have to take a financial risk.
The moral and ethical problem with MLM is you get a share of the profits without taking any additional financial risk. The independent agents in your downline take the financial risk for their own inventory. They also do the work of promoting and selling the product, while people above them receive a commission on their sales. This makes MLM a form of legalized theft. To receive a royalty on a product that you invented is fair and just. To receive a commission on a product that someone else bought and sold (for no other reason than signing them up as a distributor) is morally and ethically wrong.
Christopher John Lindsay 
Hi Christopher, as alreayd mentioned in many cases (for instance Herbalife) the downline does not take a risk in purchasing, they simply market and the customer buys directly online and they share the profit margin. So yes, there are profits higher up the line but not at the cost of anyone and nobody is taking a risk. Seems like your argument is based on feeling. Which I understand, usually these organisations feel like a cult with people selling products within their personal network. That part could be immoral, but should never be illegal.
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Hi Lobke, Thank you for commenting.
MLM is immoral and unethical because a seller makes a profit (commission or royalty) on everyone in their downline while the people below them take the risk of buying the product and selling it.
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I realise this is an older blog, but since it came up in Google I would like to respond to it.
The model you describe sounds more like a pyramid scheme, not necessarily the structure for MLM businesses. There are lots of examples that don’t require you to take any financial risks (in the insurance business for example) or purchase your products (for example herbalife, where your clients can buy directly online). You are simply being rewarded for doing marketing, sales and distribution efforts by setting up your retail channel (clients from which you will receive a normal retail fee) and downline (new agents). Everybody has the same opportunity but you have to start at the bottom of the line and work your way up and create your own downline when also your income will increase. And you will still have to nurture your clients and agents. Not very different from any usual business, really.
In case of Herbalife, the profit (retailprice-costprice) that would normally go to wholesale, marketing, retail, etc. now goes directly to the agents and the percentages go up the more you move up in line. Nothing immoral about it !
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Thanks, Dave! Too often, MLM is like joining a religious cult.
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Thank you for this brief but precise case on this topic. I have lost friends to these companies. It’s an incredibly tragic and sinister issue. It is certainly unethical, but many distributors are “cultured” into believing they are doing something good for society. They are the voice of the future of business and Theta re doing people a favor to attract them into this business.
Hearing your own friend repeat the messaging of these companies doesn’t sound as though it comes from their own tongue. I’m still in pain and looking for ways to free not only them, but others from the grip of these life-altering scams.
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Sounds like a pyramid scheme to me.
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Kind of like Scientology a la franchisee model. Having seen the ugly vast financial disasters created by faux MLMs, Ponzi schemes always the cornerstone block out of the arch – the critical component of any structure. There’s no moral structure to support the money mongering mongrels’ of greed and gluttony, even the pink Cadillac driving Mary Kay herself.
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I doubt many master’s degree programs in business administration bother to point this out.
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Hi Christopher, very good article on MLM’s you summed it up quite nicely. Your right in saying that most MLM’s make you buy a product or service and are recruitment based. Your article is a little dry but I feel you are accurate in your assessment.
I feel you left out one critical aspect of MLM’s that make them vulnerable to failure. Most MLM’s fail there participants in the training an support department and that’s why they have such a high failure rate. Training and support seem to be nothing more than an afterthought, actually they are not even a thought for some. Providing adequate training and support for their members is a huge investment for MLM operators. Many of the MLM’s I review seem to be more preoccupied with generating income while incurring minimal operating costs.
Great post, you can guest write for me any time, cheers Mike.
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MLM is Not Proper Business this is Wrong Selling by the Agent and loss of time and Money to Normal Peoples.
I Support to this Articles
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I love that you look at this from a moral point of view. It would be nice if more people factored morality into their view of the world.
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MLM is not a legitimate business because as a supposed business owner, an MLM distributor makes a profit off people in his or her downline without buying the product that those individuals sell or without risking any additional financial loss.
While your employer pays you a wage, commission, or salary, (and risks a financial loss by employing you) an MLM business owner does not suffer any additional financial loss if the people in his or her downline do not succeed.
MLM is a money-making scheme to reap a financial reward without taking any financial risk beyond the product you purchase for your own distribution.
Thus, MLM is immoral, unethical, and it should be illegal.
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I’m not a fan of MLM, but I’m not opposed to it. Your article seems to address common practices more than the model. Hypothetically, there don’t have to be subscriptions and enrollment fees. It could be simply about promoting a product and building a downline.
Also, everyone is in business. I work a day job as an analyst for a bank paid a wage, but I’m still in the business of consultation. I sell myself and my deliverables. That business agreement can end anytime my client (employer) chooses to. Typically that happens if my client isn’t getting enough value from my service anymore or I’m no longer able to service my client and I end that business with them.
MLM is a business, but may not be a good one because of the kinds of opportunities available, but because of the structure. Granted the structure usually calls for higher prices or bigger margin products to do the payout (I.e. Insurance), but again, that has nothing to do with MLM in general and everything to do with that company’s specific opportunity.
I took a risk getting my education, investing in developing my skills and took time to build my acumen no different than a business owner or MLMer. We all earn basses on the value we bring. I take a risk by not being able to keep my business arrangement or not delivering my value.
Here is a hypothetical scenario:
Imagine you like hot pockets, you get paid an incentive by referring people to buy hot pockets. (Assuming it were trackable) You could build an MLM structure around this with no ethical or moral dilemma. This scenario wouldn’t be that profitable because of low margins on hot pockets relative to their potential market, but again, that has nothing to do with MLM, it is all about the opportunity of which I have yet to see many that compelling.
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This reminds me of a sales pitch for Amway which I recently overheard. Sounds like their business model might fit the qualifications of what you’ve focused on, yes? In any case, I appreciate your article as it’s right up my alley (in terms of my studies). –Paul
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