Network marketing systems, also referred to as multi level marketing (MLM), pyramid marketing, or direct selling, establishes a hierarchy where managers not only are compensated for their own sales, but also for the sales of other distributors that they are able to recruit. Most network marketing systems rely on word-of-mouth sales and relationship referrals to sell directly to customers. Managers and their downline of distributors are, therefore, able to expand the company's presence.
MLMs and network marketing systems have come under fire in the United States (US) from the Federal Trade Commission (FTC) and others over the years for some of their tactics and compensation schemes. Most network marketing systems, however, are above-board and offer income opportunities for their distributors. Network marketing systems have various compensation plans, depending on the company and the system. One of the most common and simplest is the unilevel structure where sponsors can hire their frontline of distributors and receive an override from their sales. There is no limit to the depth or number of people a sponsor can have on board; the distributors then are encouraged to do the same, and the sponsor can receive commissions from distributors that are five to seven levels deep.
Stairstep breakaway plans have representatives responsible for individual and group sales goals. When the numbers are met, the representative then moves up one level in commission structure. Group leaders are considered to be anyone with one or more downline recruits. Also, groups that reach their top sales volume then break away from their upline. Distributors up the ladder, however, usually will still receive commission and overrides from the breakaway group.
Matrix plans are similar to the unilevel structure with the exception of a limit on the number of representatives at the first level. Beyond that number, new recruits are automatically put in lower-tier downline positions. When the maximum number of distributors is reached, a new matrix structure is started. With both unilevel and matrix plans, there usually are limited levels of volume and minimal sales quotas.
In a binary structure, the distributor needs to only have two representatives; any more than two are automatically set in downline positions. With only two representatives required, it gives a distributor the chance to start seeing commissions quickly. The main drawback to the binary structure is the problem of balancing the two legs of the binary — most plans stipulate that each leg of the binary can account for no more than a set percentage of sales. It is then up to the distributor to keep the representatives motivated toward reaching their numbers.