Network Marketing

Network Marketing (MLM): What it Is and How It Works

Network marketing — also called multilevel marketing (MLM), affiliate marketing, consumer‑direct marketing, referral marketing, or home‑based business franchising — is a sales model that uses independent representatives to sell products and recruit others to do the same. Representatives typically earn commissions on their own sales and, in many plans, a percentage of sales made by recruits (their “downline”). Those who recruited them are their “upline.”

The model’s legitimate form focuses on real product sales to customers. When the emphasis shifts to earning mainly from recruiting new members rather than selling product, the program may resemble an illegal pyramid scheme. The U.S. Federal Trade Commission (FTC) monitors MLMs and issues guidance to help distinguish lawful operations from fraudulent ones.

Key Points

• Network marketing builds sales through personal relationships and recruitable sales teams.
• Compensation often includes direct sales commissions plus overrides on downline sales, creating tiers of earnings.
• Top-tier members usually earn substantially more than lower-tier members.
• The FTC warns consumers to watch for MLMs that prioritize recruitment over product sales.

How Network Marketing Operates

• Representatives sell products directly to customers (often friends, family, social networks).
• They are encouraged to recruit new salespeople; recruits form the recruiter’s downline.
• Commissions are paid on personal sales and, depending on the plan, on a portion of downline sales.
• Multiple tiers can magnify commissions for people higher in the structure.
• Because recruitment can drive income, some MLMs have been compared to pyramid schemes; regulatory scrutiny focuses on whether compensation is tied primarily to product sales.

Consumer Protections and “Buyback” Provisions

Buyback provisions allow distributors to return unsold inventory for a refund. These provisions are an important safeguard because distributors can otherwise be left with unwanted inventory. The FTC has supported buyback policies and required them in some enforcement actions and settlements to protect participants.

Examples and Notable Cases

• Herbalife: Faced FTC action alleging deceptive income claims and paid a large settlement; required changes included clearer compensation disclosures and buyback policies.
• Rodan + Fields: Transitioned away from a traditional multilevel direct‑sales model to an affiliate program in response to changing online retail dynamics.
• Longstanding companies: Avon (founded 1886), Tupperware (1946), and Amway (1959) are among the older firms historically associated with network marketing.

How to Research a Network Marketing Opportunity

Before joining, evaluate the company and the opportunity carefully:

• Use or genuinely like the product — enthusiasm for selling matters.
• Read the compensation plan: is income based mainly on retail sales to customers or on recruitment and inventory purchases?
• Ask for the company’s income disclosure statement and review realistic earnings data.
• Confirm whether the company has a clear buyback or product return policy.
• Search for FTC actions, state enforcement, or class‑action lawsuits involving the company.
• Talk to current and former distributors about typical earnings and how they were achieved.
• Be wary of high upfront inventory requirements, pressure to recruit, or promises of quick, large income.

Bottom Line

Network marketing is a legal business model when compensation is grounded in genuine product sales and distributors are protected from excessive inventory risk. However, because some MLMs operate like pyramid schemes, careful due diligence is essential. If a program emphasizes recruitment and inventory purchases over retail sales to real customers, it’s a red flag and should be avoided.