The term "multilevel marketing" is defined by the U.S. Federal Trade Commission (FTC) as "one form of direct selling, [which] refers to a business model in which a company distributes products through a network of distributors who earn income from their own retail sales of the product and from retail sales made by the distributors' direct and indirect recruits. Because they earn a commission from the sales their recruits make, each member in the MLM network has an incentive to continue recruiting additional sales representatives into their 'down lines.'" (See CFR Part 437, note 34).
Eight states (and one U.S. territory) define "multilevel marketing" or "multilevel distribution" through statute or regulation. Like the FTC definition, most of these state laws incorporate the company's use of independent agents, contractors, or distributors to sell or distribute its products (Hawaii, Maryland, Massachusetts, Georgia, Montana, Wyoming, and Idaho). Most states with legal definitions of MLM further specify that selling takes place on different levels of distribution (Georgia, Maryland, Massachusetts, Montana, Wyoming, and Louisiana). Some MLM definitions refer to companies whose product prices increase as they move through multiple levels of distribution (Louisiana and Maryland).
There are four common characteristics that appear in these various legal definitions of MLMs:
- the MLM sells its products through distributors, and/or
- the MLM distributes its products through distributors, and /or
- the MLM sells its products at different levels, and/or
- the MLM offers better pricing for those in higher levels.
Certain business practices are commonly associated with MLM companies:
- They almost always rely on inflated pricing, have low customer retention rates, and tout a "ground-floor opportunity".
- They often encourage distributors to purchase large quantities of inventory, resell product, and acquire inventory to boost commissions rather than meet actual demand.