MLM How does it Work?

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How are these large earnings possible? First, let’s look at three types of income.

Linear income: This is familar to everyone; you work for a month, you get paid for a month’s you work another month.. or perhaps you knie a jumper, you get paid for that jumper, you knit another jumper, and so on. Even though certain professions offer the opportunity to earn incredibly large linear incomes, they are in almost all cases limited to certain levels and require a daily commitment. Often a very long day is demanded.

Residual income: This is income earned in respect of work done at some time in the past which remains economically relevent for a certain period of time. The obvious example is a music artist whose recordings continue to sell for long periods after being made.

Residual earnings are a prime source of income in the world of insurance, as policies sold in previous years continue to be renewed. The commission on these amounts is added to the current year’s earnings and can create substancial annual earnings. Actors and authors earn residual income as long as their films continue to be shown and their books read. It is possible in this way that a small number of highly successful records, films or books can provide a lifetime’s income for the creator.

Multiplex’ income MLM takes advantage of what has been termed ‘multiplex’ income. This is a form of residual income, as it provides current earning based on past efforts. In addition, however, income is provided in respect of the efforts of others. This is no differnt from the way many major corporations earn their income froma large network of independent distributors or franchises, except that in MLM the necessary advertising budget is only a frac tion of that spent in other types of business.

If multiplex income sounds like some kind of unfair exploitation, bear in mind that every distributor in the organization has the same opportunity. Even though other people’s efforts can benefit you, remember also that those others are only there because of your past efforts in sponsoring them (or sponsoring the person who sponsored them, and so on)

Quite simply, MLM is one of the many ways of selling goods and services. There is (or should be) no mystique about the method. It is a sucessful and straightforward marketing concept which can be applied to virtually any consumer product or service. It is as legitimate and ethical a business as any othe, if not more so, as you will see further on in these chapters.

It is a very big business, and getting bigger all the time. The basic principles of MLM which make it so differnt from conventional methods of product distribution are:
How the sales force is constructed;
how the profits are shared;
how the products are sold.

Let’s look at a ‘normal’ business; the paint industry, for example. The manufacturer needs to sell his production in the largest quantities possible, to maximize profit. he needs to employ sales people to obtain orders form large wholesalers. On top of the cost of production of the paint will be added salary costs, distribution costs, advertising costs, other overheads and some profit element.

There are now perhaps twenty wholesalers who need to sell as much of the paint as possible to retail outlets. The wholesaler now has to add the cost of each can of paint the cost of his staff his premises, advertising and other essentials, plus some profit, and supplies perhaps a hundred retailers with paint.

Each retailer adds his mark-up to the product to cover staff, administration, premises, collection, delivery and profit, and hopes to have, say, five hundred customers. Each trader has had to invest a large amount of money in premises, equipment and stock, and probably the greatest motivator for each of them is negative fear of bankruptcy or something similar.

It requires only very simple mathematics to calclate that the paint manufacturer now relies upon a network of two thousand distributors supplying fifty thousand retail customers. The manufacturer and each distributor take a percentage of the retail price for themselves, and if they can find more traders or consuers to supply to they can increase profitability. The larger each distributor’s order from his supplier, the larger discount he can negotiate.

A multi-level distribution network looks essentially the same. This fact is crucial to understanding that MLm is a straightforward marketing concept. The structure of an MLM network is no different in principle from any other system of distributing goods.

So where does MLM differ from conventional business.

Reference: Multi-Level Marketing: Peter Clothier: 2nd Edition