In the USA direct selling was a substancial industry by the 1920s.
Companies tended to have a number of brnch offices around the country, these being central points of deliveries by the manufacturer and collection by the region’s sales people.
An experienced salesman in that area would run the office,co-ordinate the sales and recruit and train new sales people. It was necessary for the companies to offer incentives to compensate the branch manager for the time spent on these activities instead of selling, and this was normally done by giving prizes and percentage of the sales of the new recruits.
The first direct sales organization to develop this principle into what we today recogn ize as mult-level or network marketing, was probably developed by William Casselberry and Lee Mytinger.
They had been selling products of the California Vitamin Company, Nutrilite XX vitamins, since 1934.
In order to give their salespeople an incentive to increase the company’s sales by finding and training more of them, they developed ‘the C&M marketing plan’ in 1941.
Under this arrangement salespeople were given a bonus of 3 per cent of the sales of people they had personally recruited.
As the team grew it became impractical for the original ‘sponsor’ to deal with the wholesaling of large amounts of products, buying from the company and selling on to people he had recruited.
When a team had sold $15,oo worth of goods, the head of this group was allowed to set up a ‘breakaway’ wholesaling relationship with the company, rather than his original sponsor.
To encourage the formation of more breakaway groups the company gave the original sponsor of the group an ‘over-ride’ royalty of the sales of the new brealaway group.
The whole system was rather primitive by today’s standards, but it avhieved the basic aim of rewarding distributors proportionately according to the contribution they made to the overall profits of the company.
Reference: Multi-level Marketing: 2nd ED: Peter Clothier