Multi-level marketing, also known as network marketing, is a business model that combines franchising and direct selling. In this approach, individuals become independent contractors associated with a company to expand their business by recruiting and selling products or services.
Members earn money based on their own sales and the sales of the people they have recruited. However, pyramid schemes or Ponzi schemes, which are illegal, have given network marketing a bad reputation. To avoid this association, some companies use alternative terms such as “home-based business franchising” or “affiliate marketing.”
In legitimate network marketing, commissions are earned through the sale of a product or service, not just for recruiting new members. Nevertheless, the recruitment process and revenue source have been criticized, as sales are derived primarily from members and new members, who also act as distributors.
To address these concerns, in the early 1980s, many companies shifted their focus to marketing rather than distributing or stocking products. Nowadays, multi-level marketing firms often function as fulfillment companies, handling shipping, commission payments, and client orders.
Illegal schemes in multi-level marketing often require participants to buy expensive products that are difficult to resell, leading to their eventual collapse.
