Multilevel marketing is similar to franchise opportunities in which franchised dealers pay an initial and monthly franchise fee for the right to sell the products of the company. Their fees cover initial training as well as sales materials, but any products they purchase is paid for by the new business owner. With multilevel marketing, these business owners are encourage to recruit additional business owners and will receive a percentage of their sales as well as their own sales commission.
Companies that emphasize more on recruitment than on product sales are often found to be contrary to guidelines established by the Federal trade Commission and usually end up losing their sales representatives once the market becomes saturated and sales are no longer available to al of the sales representatives. People should be wary of companies that pay part of the fee to join the company to the one that recruited them as legal multilevel marketing plans do not pay for recruitment.
In many cases the number of people in the downline of a recruiter is limited, based on the division of the sales commission. Although it is not unusual to see downlines of seven or more people in one person recruitment map. Other companies may have a two-line downline that requires sales representatives to have two equal length downlines before commissions are paid on any sales, even their own. This practice is also frowned upon by the FTC, but the rules have not yet been established to make this practice illegal.
Many companies also require the sales people to have a certain amount of inventory of the company products on hand to sell, and may even require the distributor to buy a set monthly amount of inventory to continue to qualify for sales commissions. The FTC has established a 70 percent rule that states the distributor cannot be required to purchase more inventory until at least 70 percent of their inventory has sold. While many in government believe that products used or kept for personal use by the distributor should not be counted as part of the 70 percent of inventory sold, many others, including some distributors, claims it should not matter who buys the inventory.
As the downlines grow, the sales commissions become smaller, but those in the top of the rankings usually continue to receive small commissions based on the sales of everyone working under them. It has been argued that the only ones who walk away with real money in multilevel marketing are the ones who were with the company from the beginning, while the ones who joined later lose money.