For many, it has become nearly impossible to ignore the current economic situation.  Times are tough, with a vast number of people out of work and underpaid. So, it may come as no surprise that many people have started seeking unconventional ways to maintain a comfortable living.

A rapidly expanding business model called multilevel marketing, also known as network marketing, has garnered much controversy in recent years.

What is MLM?

MLM is a marketing strategy in which sales associates receive compensation, not only for personal sales but also for the sales of team members whom they have recruited. This can sometimes create a downline of distributors and a hierarchy with multiple levels of compensation. Typically, salespeople employ relationship referrals and word-of-mouth marketing to conduct and expand businesses.

MLM was introduced in 1945 by the California Vitamin Company, later known as Nutrilite. Although the strategy has changed throughout the years, with different companies offering unique incentives and compensation plans, the same basic principles can be found in all MLM companies.

Dominique Xardel, a European author and marketing professor, said there are similarities between direct selling and MLM.

According to Xardel, the terms “direct selling” and “network marketing” refer to a distribution system, while the term “multi-level marketing” describes a compensation plan.

The Direct Selling Association, of which about 200 companies are members, defines direct selling as “the sale of a consumer product or service, person-to-person, away from a fixed retail location, marketed through independent sales representatives.”

According to the DSA, an enormous variety of products and services are available for purchase through this business model, although direct selling is frequently associated with items such as cosmetics and wellness products.

Support for MLM

While the basics of MLM are fairly straightforward, the philosophies behind the business model are somewhat more complex. World-renowned author of the Rich Dad Poor Dad series, Robert Kiyosaki, delves into the world of MLM in his book “The Business of the 21st Century.” Kiyosaki is supports the business model, because he believes MLM directly generates wealth.

“Even more important than the quantity of money you make is the quality of money you make,” Kiyosaki wrote.

This is explained by examining a cashflow quadrant, which is comprised of four distinct sources of income.

The “E quadrant,” which represents the employed, is one in which most people reside. This is often considered to be the most accepted way of earning income.

However, according to Kiyosaki, job security is a thing of the past. Therefore, those in the “employed” mindset will never achieve true financial freedom, because they will always work for someone else. In other words, workers only get paid if and when they go to work.

The “S quadrant” represents those who are self-employed and small-business owners. This includes a range of occupations, from freelancers to doctors and attorneys. Kiyosaki references a poll conducted by the Fresno research firm Decipher that found, “Seventy-two percent of all adult Americans would rather work for themselves than for a job, and 67 percent think about quitting their jobs regularly.”

According to Kiyosaki, while this quadrant can be financially rewarding, it frequently binds business owners with extreme time commitments.

The “I quadrant” includes a very small percentage of the population; those who make the majority of their income through investments.

According to Kiyosaki, the “B quadrant”, which represents big-business owners, is the only way to create genuine wealth.

“Wealth is not the same thing as money,” he wrote. “Wealth is not measured by the size of income. Wealth is measured in time.”

By creating a team of workers, a business owner can create assets. Assets generate passive income, the type of income truly wealthy people typically have. Whether or not a big-business owner works on any given day, the owner still generates income, because of team efforts.

According to Kiyosaki, one of the greatest benefits of the MLM business model is the ability it provides for individuals to move into the B quadrant. All associates in legitimate MLM companies, regardless of level or position, are able to hire a team of workers, which provides the potential for enormous financial growth. The passive-income potential of MLM constitutes an immense portion of its popularity.

Some MLM companies offer other incentives as well, including all-expense paid vacations and residual income.

According to Kiyosaki, aside from the financial benefits and time freedom associated with MLM, other proficiencies include personal development, real-world business education, a circle of friends with the same dreams and values, leadership skills, a duplicable business and the power of creating personal networks.

The success of MLM has been written about in other publications, such as Forbes, Fortune, Newsweek, TIME, USA Today and The New York Times, to name a few.

“Today, network marketing is recognized by many experts and accomplished business people as one of the fastest-growing business models in the world,” Kiyosaki wrote.

Criticism of MLM

Critics compare the business model to illegal pyramid, or “Ponzi,” schemes with expensive start-up costs and emphasis on recruitment of lower-tiered salespeople, rather than actual sales. Many MLMs require salespeople to purchase the company’s products, allowing potential exploitation of personal relationships and exaggerated compensation schemes.

MLM has also been criticized for implementing cult-like techniques in order to enhance member enthusiasm and devotion to the company.

The U.S. Federal Trade Commission has said people should “steer clear of multilevel marketing plans that pay commissions for recruiting new distributors. They’re actually illegal pyramid schemes.”

According to writer Scott Allen, the best way to determine if a company is a pyramid scheme is to look at exactly how the money is made.

“The money is all being made off of signing up other people, with little or no real product ever being delivered,” Allen wrote. “But in spite of whatever perceptions people may have, the fact is that Amway, Excel, PrePaid Legal and many others have sold millions upon millions of dollars of products to happy customers, many of whom are not also reps.”