Concept and structure
Network marketing is a form of direct selling that uses sellers' personal networks as the distribution channel instead of stores or advertising. Sellers earn a margin on what they sell themselves and also receive sponsor commissions in proportion to the sales of the sellers they recruited, the so-called downline. When downline sellers recruit others in turn, the organization grows into many levels.
- Claimed advantages: lower distribution margins and advertising costs, a side business that needs little capital, and selling based on word of mouth.
- Compensation structure: each company has its own compensation plan with rank- and level-based commission rates and sales requirements.
Distinguishing it from pyramid schemes
A pyramid scheme pays earlier members out of new members' entry fees or required purchases without real product sales, so it collapses once recruitment stops and most people at the bottom lose money. In the 1975 Koscot case the US Federal Trade Commission set out a test: a scheme is a pyramid when participants pay for the right to sell products and to receive rewards for recruiting that are unrelated to sales to end users. The FTC's 2018 business guidance on multi-level marketing likewise stresses that compensation should be based on sales driven by real consumer demand.
Regulation in Korea
Korea's Act on Door-to-Door Sales, Etc. defines multi-level sales and requires multi-level sellers to register, join a consumer damage compensation scheme or similar arrangement, keep total sponsor commissions under a cap, and allow withdrawal of orders. Unregistered multi-level business and recruitment aimed only at money transactions are prohibited.
Ethical issues and criticism
Koehn (2001) noted that because MLMs resemble pyramid schemes, they raise ethical problems: sellers are led to use relationships with family and friends for sales, and earning potential is easily overstated. Biggart (1989) analyzed how direct selling organizations motivate sellers through charismatic leadership and family-like bonds. Critics also point out that many sellers earn little net income after inventory purchases and expenses. General distribution and promotion strategy continues in the marketing mix.
References
- Biggart, N. W. (1989). Charismatic capitalism: Direct selling organizations in America. Chicago: University of Chicago Press.
- Koehn, D. (2001). Ethical issues connected with multi-level marketing schemes. Journal of Business Ethics, 29(1-2), 153-160.
- In re Koscot Interplanetary, Inc., 86 F.T.C. 1106 (1975).
- Federal Trade Commission (2018). Business guidance concerning multi-level marketing. Washington, DC: FTC.
- 「방문판매 등에 관한 법률」.