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MLM: What’s the Correct Terminology?

Article by: Linda O'Niones
June 10, 2010

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Have you ever asked yourself, “What’s the deal with all the different terms people use interchangeably to describe this industry of ours—“direct selling,” “multilevel marketing (MLM),” “network marketing”? It becomes even more confusing when you look at the MLM Search Engine Optimization (SEO) terms most researched—“network marketing,” “direct sales,” “MLM marketing,” “MLM network marketing,” “multilevel marketing,” and “direct selling.” Hey, if you think about it, “MLM marketing” literally equates to “multilevel marketing marketing”! Duh! Obviously there’s some confusion out there. So, do all these terms mean the same thing? Are some right and others wrong? What’s the correct terminology, anyway?

These are the questions I asked when I first began working as editor for MLM.com. I found myself in a quandary as I encountered all sorts of variations of the industry’s mother buzz word, “MLM.” I checked various sources trying to get it straight in my head, but to my surprise, they didn’t all agree! So, I decided the way to settle this was to talk to a well respected, MLM professional who had been in the business forever.

I lucked into an opportunity to ask Mark Rawlins, whose career working with MLM and network marketing companies spans more than 30 years. He is the Founder and CEO of InfoTrax Systems, an MLM software solutions and commission consulting company. He is recognized as one of the pioneers and dominant leaders in the MLM industry’s software sector.

You’ve heard the old saying, “A picture is worth a thousand words.” Well, Mark drew me a picture that finally helped me understand how the pieces of the MLM puzzle all fit together. A light bulb turned on in my head. Check it out for yourself and see if the light bulb comes on for you!

To shed more light on the subject, I’ve included some information from Mark’s book, Understanding Multi-Level Commissions and Their Role in a Successful Company.

Direct Selling: According to the Direct Selling Association (DSA), “In direct selling, products or services are marketed to consumers by independent salespeople person-to-person. Depending on the company, the salespeople may be called distributors, representatives, consultants, or various other titles. Products are sold primarily through in-home product demonstrations, parties, and one-on-one selling. (dsa.org) Direct sales companies don’t sell by means of traditional storefronts, direct mailings, telemarketing, or mass media advertising. Rather, they sell by means of independent representatives, often called distributors. Direct sales distributors typically use the term “independent representative” on their business cards to make their status clear.

Multilevel Commissions: Refers to the compensation type within the direct selling industry that rewards distributors not only for selling product but also for recruiting other distributors. Commissions are received on at least two levels of downline activities. (Downline: the organization of a distributor’s recruits on down to the bottom of the tree. Tree: The hierarchy of sponsors and their downlines in an MLM or network marketing organization.)

The two types of direct selling companies that pay multilevel commissions are traditional network marketing companies and party plan companies. Many people call either one of these a “multilevel” company, which is technically correct.

A network marketing company bases a distributor’s earnings on both personal sales and sales generated by the distributor’s organization—the people they recruit. Unlike the single income stream of traditional sales companies, network marketers have a dual income stream: 1) income from personal volume sales commissions, and 2) commissions on group volume sales from their downline.

Single Level Commissions: Refers to the compensation type within the direct selling industry where the entire commission amount goes to a single person. (An example of a single level direct selling company is Fuller Brush)

Party Plan: A type of direct sales company that focuses on in-home product demonstrations—parties—where distributors make retail commissions up front from selling products. They devote much more of their commissions to paying salespeople and less to paying sales management than a traditional MLM or network marketing company does.

Party plan companies started out as direct sales companies that didn’t pay multilevel commissions, so they weren’t originally considered part of the MLM/network marketing industry. Today, party plan companies typically employ a multilevel commission in their commission plans.

A party plan company is quite a different company from the ground up than its traditional MLM/network marketing cousin. Even though the commission plan itself looks much like a traditional commission plan, there are usually rules designed around the party plan dealing with such things as hostess gifts, party order gifts, and so on. Party plan companies typically place more emphasis on salesperson commissions and taking care of the consumer.

Multilevel Marketing (MLM): An MLM/network marketing company is a type of direct sales company that, in addition to paying its distributors to sell products, also encourage them to recruit downline distributors by paying commissions on the sales of these distributors.  In other words, payout is on more than one level. Multilevel marketing (MLM) and network marketing are the same thing.

Unlike traditional business, an independent distributor with an MLM/network marketing company is not a hired employee. The distributor is in charge of his/her own career choices—whether to make a few hundred dollars extra each month, a few thousand, or tens of thousands by building a large organization. He or she can choose to work part-time, and as long as the company requirements are met, the distributor can remain with the company. An MLM/network marketing company’s commission plan is likely to be more complex than that of a retail establishment, or for that matter, a traditional direct sales company.

Network Marketing: Another term for MLM, often preferred because it doesn’t carry the negative connotations that the term “MLM” picked up because of the unsavory practices of a few participants. The network concept comes from the fact that a product is distributed by an army of distributors—a distributor network. These distributors choose which markets to enter or leave, whether to spend their time selling product or building their organizations, and whether to work part-time or full-time.

Conclusion

I can’t help but scratch my head and wonder why all these MLM/network marketing terms have ended up being used interchangeably and incorrectly. Mark Rawlins said the same thing has happened with some other MLM/network marketing terms. Take for example, dynamic compression—a compensation plan element. “Every time I use this term, people think of different things. It’s not well understood. In one company that implemented dynamic compression, the company executives thought it meant one thing, the field thought it meant something else, and the programmers thought it meant something even different from that! It was in effect for over a year before the company executives realized that the programmers hadn’t programmed it as the executives understood it, and the company’s brochure described something entirely different.”

Well, I heard one theory on this. Perhaps in a face-to-face, belly-to-belly industry that communicates predominantly by word of mouth, maybe this is just something that happens. What do you think?

Maybe there’s a message for us in the word-of-mouth game I played when I was a kid called, “Gossip.” Everyone sat in a circle and one person started the game by whispering a phrase to the person next to him. The phrase—as it was understood—was then whispered repeatedly all the way around the circle and then the last person announced out loud what he’d heard whispered to him. The twist to the game, of course, was how far off the last person’s version ended up being from the original phrase.

In any event, maybe these words from an MLM/network marketing expert will add a little more order and clarity to your MLM world! And, just maybe, knowing the correct MLM terminology will help prevent some of those frustrating and sometimes costly miscommunications.

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All Articles, MLM 101—Your MLM Business Plan, MLM Training, Party Plan Companies, Why Engage in Network Marketing?

Linda O'Niones

Linda O’Niones is a Writer/Editor for InfoTrax Systems, the leading provider of innovative MLM commissions and operations...

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