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.