What makes MLM unique compared to other sales methods is that the distributors are compensated not only by the sale of products and services to customers, but also for the sales made by other salespeople whom they recruit. This business model generates true revenue for a distributor by creating a sustainable ecosystem for both themselves and those that they recruit (their downlines).
While the traditional MLM structure has remained the same, the recruitment and sales process has started to turn towards the online space with social media being a key driving force, due to its ability to accelerate word-of-mouth on a global scale. However, the downside is the restrictions enforced by some merchant providers make growing an MLM business online hard.
For an MLM merchant looking to maximise their volume, operating online is essential. As a specialist in processing online payments for high-risk merchants, T1 Payments understands this, and we support many MLM businesses through our High Volume MLM Merchant Accounts.
MLM has proven to be both a growing and lucrative industry. In 2018, the MLM industry made global sales of around $193 billion with the US covering 18% of this, making it the second biggest contributor worldwide.
Wellness products have continued to lead the market forward, making up 35.6% of all sales in the US in 2018. On a state level, Texas, California, and New York have seen the biggest areas of success for MLM.
Despite continuous growth in the industry, unpredictable growth patterns and a history of chargebacks have led to a perception of being high-risk by many merchant providers. MLM businesses seeking to process credit card payments online are often charged with high percentages and transaction fees, in addition to processing volume caps.
T1 Payments understands the challenges faced when trying to run an MLM business, which is why we offer unlimited processing volumes, built-in chargeback mitigation tools and multi-currency global processing as a commitment to empowering those in MLM. A High Volume MLM Merchant Account with T1 Payments means conducting business without the risk of losing sales opportunities or the ability to obtain new customers.
While the federal government has played an active role in regulating MLM activity, most of the regulation has come at a state level. Due to the unique nature of how this industry operates, there are some existing sales regulations which do not apply and others which have been introduced specifically for it. The intended purpose of these regulations is to enforce a focus on the sale of the product, as opposed to distributors trying to maximise their downlines.
While almost all states have sales referral laws, a few states have attempted to apply the laws to MLM. One of the biggest examples, was the State of Iowa in 1985, which attempted to apply its sales referral law to a company called American Professional Marketing. The court rejected the prosecution. Such laws currently do not apply to Multi-Level Marketing because the distributors receive their compensation as “independent contractor distributors” and not as consumers referring other consumers.
One of the most important restrictions in MLM is the buyback requirement. State jurisdictions in Georgia, Louisiana, Massachusetts, Maryland, Puerto Rico, and Wyoming require MLM companies to repurchase inventory that is returned by their distributors.
This requirement grants distributors the right to terminate their participation for any reason, at any time. The company is then required to repurchase inventory and sales materials from the distributor, at a price no less than 90% of the distributor’s original purchase price in addition to any refund fees paid by the distributor.
Federal regulators have used a 70% rule to determine the legality of an MLM business. The rule is that at least 70% of the total inventory bought by an MLM distributor must be sold or personally used before reordering. However, the 70% rule is not a statute, but instead a concept that can be evaluated by the courts on a case-by-case basis.