This concept started in 1980s when most of the companies started handling the stocking and distribution issues and indulged in compensating all the individuals involved. This increased the interest of each member in promoting sales based on the chance to earn bonuses and since then the Multilevel Marketing companies have taken the responsibility of taking orders, shipping goods, and paying revenue. Things became easier with the transition to the Web. Product promotion, advertising and sales were made online and hence, the whole process took on the Web definition of online MLM/network marketing.
There are various MLM compensation plans. According to the uni-level or stairway breakaway plans there are two types of distributors involved; managers and non-managers. According to certain matrix plans, the width of each level in a distributor’s group is regulated. In binary plans, the limit of each level’s width is comprised of two legs. Commission was paid when both the legs reached a specific target. In the elevator scheme, distributor's pay splits after a certain number of units have been paid.
Commissions are paid in two ways. The first is that commission is paid only if the product is sold and the second involves paying commission even if the customer just signed-up, without having to make any purchases. Because of the second method, illegitimate schemes disguised as MLMs and illegal pyramid scams came about. Under such scams intermediate members encouraged (arm-twisted) proxy customer sign-ups in order to boost their own commissions, and they enticed willing participants to buy more products than they could ever sell.
However, as most of these businesses present themselves as legal, people began taking precautions against being "roped" into no-win situations. Hence it bacame better to approach businesses that follow the first method of commission, where it’s compulsory to make a sale and not just recruit customers. Here money isn’t paid for customer sign-up at all. MLM marketing is being practiced all over the United States and in hundreds of other countries.
In 1979, Amway Corporation was accused of price fixing. They exaggerated sales claims, while their distributors sold the products at the minimum price. After that, FTC issued warnings to all multi-level companies whose commission was based on recruiting and not sales. In 2006, all the business sellers including MLM organizations were asked to provide customers with thorough information, according to the Business Opportunity Rule introduced by the Federal Trade Commission, so as to save them from deception. Before that many motivating programs were started which hid the truth. Such programs were known as cult programs, but took on other negative names (pyramids, scams, and illegal money networks), as time passed.
Laws have been made stronger. As a measure, pyramid schemes are banned in most of the countries, an effort led by the United States. All the newly hired salespeople have to bare the cost of initial training and material. Some independent distributors even have to buy a large enough amount of inventory in order to support their distributorship businesses. To test the legality of MLM marketing, companies have implemented the 70% rule which means that members (distributors) are restricted from over-loading product inventory so as to increase their commission. Based on today's standards, only when seventy percent of the inventory is sold can orders be made for new product.
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