What Is MLM? How Multilevel Marketing or Network Marketing Works

What Is Multilevel Marketing?

If you’ve ever wondered why your neighbor suddenly started selling essential oils or why your college roommate keeps inviting you to join “exciting” business opportunities, you’ll want to know about multilevel marketing (MLM). It’s a controversial industry whose annual valuation is subject to debate—figures range from $35 billion a year for the industry into the hundreds of billions—and where words like “cult,” “scheme,” and “scam” are often tossed around, even if particular enterprises are safely on this side of the law.

Companies like Amway Corporation, Herbalife Nutrition Ltd., and Mary Kay Inc. have become household names with millions of distributors worldwide. But the question remains: Is MLM a legitimate path to entrepreneurship or a predatory scheme targeting vulnerable individuals? This article dives into how to separate the legitimate forms of the business from the red flags that should send you running.

How Multilevel Marketing Works

MLM, network marketing, or direct selling is a business model in which independent distributors sell products or services directly to consumers while recruiting new distributors into their network. Under this model, distributors earn income from two primary sources—their personal sales and commissions based on the sales made by their recruits (known as their “downline”).

This creates multiple levels of earnings potential, with those at higher ranks earning from many levels below them. That’s why laypeople often confuse MLMs with pyramid schemes. According to the Direct Selling Education Foundation, about 13 million people in the U.S. were MLM participants in 2023, and other studies have found that about one in 13 American adults has participated in an MLM organization at some point in their lives.

A 2024 Federal Trade Commission (FTC) report that analyzed 70 income disclosure statements of dozens of MLMs found that most MLM participants make less than $1,000 per year. In addition, while most MLM income disclosure statements don’t account for expenses incurred by participants, the FTC noted that these costs often outstrip the income for many involved.

The FTC also found that many firms’ disclosure statements were “misleading” at best. A sampling of the report’s subject headings gives an idea of why:

• “Most Depict an Income Distribution that Excludes Some Participants Who Received Little or No Income”
• “Most Income Figures Do Not Account for Expenses”
• “Most Emphasize the High Income of a Small Number of Participants”
• “Most Present Income Data in Potentially Confusing or Ambiguous Ways”
• “Many Income Disclosure Statements Disclose Important Information Inconspicuously”
• “Many Make Claims for Which the Basis of the Claim Is Not Immediately Apparent”
• “Analysis of the Data and Fine Print Reveal that Many Participants Had No Reported Income or Only Limited Reported Income”

Components of the MLM Business Model

MLMs are a structured network of independent distributors who sell products and recruit new members. Here’s how the MLM business model typically works:

1. Company structure: An MLM company develops products or services and establishes a compensation plan that rewards direct sales and recruitment activities.

2. Distributor recruitment: Individuals join as independent distributors (not employees) by buying starter kits or initial inventory. They pay membership fees and often commit to regular product purchases to remain “active” in the system.

3. Dual income streams: Distributors earn money through:

• Direct sales commissions from selling products to customers
• Commissions and bonuses based on the sales generated by people they recruit (their “downline”)

4. Rank advancement: Distributors advance through company-defined ranks (often with names like “silver,” “gold,” and “diamond”) based on personal sales volume and the performance of their downline network.

5. Training and support: Upline members typically train their recruits, focusing on product knowledge and recruitment techniques. Companies also often host motivational events and provide marketing materials.

6. Compensation plans: These complex structures determine how commissions flow upward through multiple levels. The FTC has found that in many MLMs, significant income is only possible through building and maintaining a large downline, not through product sales alone.

Examples of Multilevel Marketing

Several well-established companies use the multilevel marketing business model across various product categories. Here are some prominent examples:

Tupperware, which filed for bankruptcy in 2024, is one of the most recognizable MLM companies, known for its plastic food storage containers. The company pioneered the “home party” sales model, where consultants demonstrate products in social settings. Tupperware says that these parties occur frequently worldwide, with consultants earning commissions on direct sales while building their own sales teams.

Amway, founded in 1959, is likely the largest network marketing company globally, with annual revenue of about $1.5 billion. The company offers health, beauty, and home care products. Its “independent business owners” (IBOs) buy products at wholesale prices for resale and can build downlines of other IBOs, earning from personal sales and their network’s performance.

LuLaRoe, a clothing MLM, has faced significant legal challenges. It was also the subject of a documentary on Amazon Prime, “LuLaRich.” In 2019, after the Washington state attorney general filed a lawsuit alleging the company operated as a pyramid scheme, LuLaRoe settled for $4.75 million and agreed to make significant changes to its business practices.

Herbalife Nutrition‘s distributors often establish “nutrition clubs” to sell products and recruit new members. In 2016, Herbalife agreed to pay $200 million in consumer redress and restructure its multilevel marketing operations to settle FTC charges, with the settlement requiring the company to base distributor compensation primarily on verifiable retail sales rather than recruitment.

How to Identify Problem MLMs

Distinguishing between legitimate MLM businesses and predatory schemes requires careful evaluation:

1. Revenue focus: Be wary if the emphasis is on recruitment rather than product sales to actual customers.
2. Income claims: Be skeptical of promises of significant or easy income. According to FTC data, 99% of MLM participants earn little to no money, with most making less than $84 a month on average.
3. Required purchases: Be wary of operations that mandate significant product purchases to maintain “active” status, regardless of actual demand or your ability to sell those products.
4. Income disclosure transparency: Look for complete and clear income disclosures that include all participants (not just “active” ones) and account for typical expenses.
5. Startup costs: Be cautious of high initial investment requirements or expensive “starter kits” that may lead to immediate debt before you’ve made any sales.
6. Product pricing competitiveness: Evaluate whether products are reasonably priced compared with similar non-MLM alternatives. Significantly overpriced products often indicate a problematic business model.
7. Training content: Note whether training focuses primarily on product knowledge and sales techniques or disproportionately on recruitment strategies.

Before joining any MLM, research the specific businesses through the FTC and Better Business Bureau, carefully review any income disclosure statements, and look for signs of high rates of failure.

The Bottom Line

Multilevel marketing can be a legitimate business model where independent distributors sell products and recruit others. However, FTC data shows the vast majority of participants earn very little—most make less than $84 per month on average, and some lose money after expenses.

Before joining an MLM, carefully check the company’s compensation structure, product viability, and your personal ability to sell and recruit.