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In a typical
multi-level marketing or network marketing arrangement,
individuals associate with a parent company as an
independent contractor and are compensated based on
their sales of products or service, as well as the sales
achieved by those they bring into the business.
In a legitimate MLM company, commissions are earned only
on sales of the company's products. No money may be
earned from recruiting alone ("sign-up fees").
Some less legitimate companies produce revenues
primarily by attracting new participants or selling them
marketing services, as opposed to selling actual
products. One must analyze the compensation plan to
determine whether participants are paid from actual
sales to customers and not from new-recruit bonuses or
business support sales.
Multi-level marketing has a recognized image problem due
to the fact that it is often difficult to distinguish
legitimate MLMs from illegal scams such as pyramid or
Ponzi schemes. MLM businesses do operate legitimately in
all 50 U.S. states and more than 100 other countries,
and new businesses may use terms like "affiliate
marketing" or "home-based business
franchising". However, many pyramid schemes try to
present themselves as legitimate MLM businesses.
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