Also known as network or referral marketing, MLM is a distribution-based marketing strategy that contains two or more tiers of commission overriding (depending on the company). It offers the opportunity to become involved in a system for distributing products to consumers.
In other words, MLM companies build and manage their sales force by recruiting and motivating independent distributors to go out and sell products - REAL products from dietary supplements to kitchenware to beauty products. Some of the brands that you might be familiar with are Avon, Amway, Mary Kay, Herbalife, Cosway, Tupperware, etc.
It’s easy to see why people are tempted to join MLM businesses. Unlike a person starting a business from scratch, you don’t need a huge capital to join in. In a statement, Lawrence Cheah, Direct Selling Association of Malaysia (DSAM) Executive Director shared that the ‘starter kit’ for legit companies is usually below RM200 (sign up fee will be the price paid to purchase the product).
That said, there also some companies that only don’t require you to make a minimum purchase upon registration, like NuSkin, for example.
On top of that, the MLM participant has the support from the direct selling company that supplies the products and sometimes offers training as well. So nice, right?
Basically, the goal of MLM is to move products without extra costs like marketing collaterals, but using the network of distributors instead. The more product the business will be able to sell, the more money they’ll make.
In Malaysia, there are about 253 licensed MLM companies (as of 2015) - which means MLM is legal in Malaysia. The companies need to register with the Direct Selling Association of Malaysia (DSAM) and are regulated by the Ministry of Domestic Trade-endorsed Code of Conduct.
So, MLM is NOT a Pyramid Scheme?
NOPE. Many MLMs blur the lines between being borderline scammy versus being legit direct marketing companies. There are some telltale red flags to watch for. The more red flags that are checked, the more the MLM borders on being a scam.
Here are some differences between MLM and Pyramid schemes:
Also, take note that although MLM itself can be a legitimate distribution strategy, many MLM companies have shady/exploitative practices and schemes. It’s almost like they were set up to make money off its distributors than from customers outside the network.
Take LulaRoe (an American MLM clothing company), for an example. In October 2017, this company kena class-action lawsuit for being a pyramid scheme. Apparently, it required distributors to pay an onboarding fee and invest in stock to join (which could be up to US$9,000). Not only that, LulaRoe consultants were encouraged (read: pressured) to recruit new members so that they can receive bonuses that are based on how many new recruits (who also need to pay tak masuk akal fee) they brought to the company.
Malaysia also got a case - A local daily reported that the Penang Domestic Trade and Consumers Affairs Ministry raided an MLM company (they didn’t mention the name) and seized RM201,136.00 worth of health products. The company was charged under Section 4 of the Direct Sales and Anti-Pyramid Schemes Act 1993 for conducting direct sales without a valid license.
According to the State Director, it was likely that the company, which has a license for retail sales, had resorted to direct selling and pyramid scheme to rake in faster profit. On top of that, it also attracted members by offering lucrative bonuses with the sales of the health products, which are priced KAW KAW - from RM500 to RM3,000 per product.
You must be thinking, “Aiseh, how to know if this MLM business in Malaysia is legit onot?”
Must have a Direct Selling Association Malaysia (DSAM) and Suruhanjaya Syarikat Malaysia (SSM) certificates.
Based on the business model, as an MLM distributor, you’ll make money from two revenue streams:
Money through sales of the products/services you sell - this part typically makes up the majority of your revenue when you first started.
Commission on sales made by team members/downlines. Over time, once you (distributor) have expanded your network through recruitment of downlines, this typically overtakes the revenue made from the individual distributor’s sales.
This means the more downlines a distributor has and the products are selling like hotcakes, the more money they will be making. Do this enough times and you’re a dancin’ millionaire, right?
Well, let’s take a look at the compensation plan from the largest MLM company in the world, Amway, for an example...
As an Amway distributor, your income is linked to overall sales and is calculated using a points system rather than per unit or purchasing cost.
NOTE: Here are some terms Amway use in their business:
Point Value (PV) – the numerical value is given to a product. Used to calculate the rebate percentage earned.
Business Value (BV) – equal to the Distributor Acquisition price (DAP) of Amway products minus taxes.
Distributor Price (DP) - purchase price as a distributor.
Customers Price (CP) – the selling price of the product to non-member customers.
https://www.paymentsecret.comAnyway, according to Amway Global, you can make money from:
Distributors are able to sell their products at a mark-up (the difference between cost and retail price) to earn a retail margin on the sale. They can set their own prices, but Amway does establish a suggested retail price for every product it sells.
For example, you bought a product at RM100 (DP) and sold it at RM113 (CP). You basically made RM13. So, if you can sell 3 of that in a day, you’ll get RM39, and if you can sustain that every day for the next 30 days, you can earn RM1,170 for that month!
But, don’t forget that you have to invest in 90 units of the said product which will cost you RM9,000.
Now, we believe that this can be a significant risk for you to take as a distributor. You'll only turn a profit if you sell most (or all) of the items that you buy for at least as much as you pay. Plus, the products from Amway aren't especially cheap (RM37.80 for a deodorant!) even when discounted - definitely not for the mass market.
As a distributor, you can receive monthly bonuses based on your sales volume – how many products and what types of products you sell.
Okay, let’s use the previous scenario as an example. So you’ve bought products worth RM9,000 (DP). The BV is 9000 (the figure would usually follow DP). To know what’s your PV, you’ll need to divide your BV with 3.92 (the PV/BV ratio set by Amway) - your PV is 2,296.
Based on the Performance Bonus table above, you’ll get a 9% bonus of your BV of the month which is RM9,000. So you are making additional… 9% of RM9,000 = RM810 aside from the profit margin.
This surely sounds great because you can earn some bonus income simply from sales – even if you haven't recruited anyone. You could even get your bonuses fairly high (in theory) just by simply making enough sales.
As your business grows and new members join your group, you’ll receive monthly bonuses based on the product sales volume of your team. This is where most of the income potential comes.
And it’s largely because your performance bonus is based on BV, rather than your own sales volume. If you had a large successful team under you, then the amount earned as a performance bonus could be high.
For instance, you have 10 downlines and everyone, including you, bought a product worth RM100 each. This means that your group sales volume is RM100 x 11 = RM1,100. Your team made 1,100 BV and the PV is 280. Based on the performance bonuses table you’ll get 3% from your BV, which is 3% x RM1,100 = RM33.
As for your downlines, they won’t be getting anything because each of them has low PV so they’re not entitled to the bonuses.
Bear in mind that this structure is only effective if you can get a decent number of people under you and ensure that they're making sales - the idea is the more downlines you have, the more money you make.
Imagine these 10 people are doing what you’re doing - each downline recruits another 10 distributors under them, then you’ll have 111 people in total. Your BV is 100 x 111 people = 11,100. So your PV then would be 2,806. If we look back at the performance bonus table, your team will receive a 9% bonus from BV 11,100 which is RM990.
BUT, you have to give 3% to each of your direct downlines because it’s also part of their team effort. This is because each of your direct downlines is entitled to a bonus. So, in the end, you’ll get RM990 – (RM33x10 people) = RM660. Basically, you just need everyone to spend RM100 a month to make that extra cash.
