MLM Glossary

Stephen Barrett, M.D.
September 9, 2014

Channel stuffing. Pressuring participants to buy products that they they will have a hard time selling.

Downline. The distributors recruited by a given distributor who receives commissions on their sales and the sales of the distributors they recruit.

FTC Business Opportunity Rule. An FTC rule that requires promoters of certain business opportunities (such as franchises) to disclose sufficient financial data to enable prospective investors to understand the probability of making a profit. MLMs are exempted from this rule.

Inventory loading (also called front-end loading). Stocking up on products to meet sales goals, a practice that is promoted with claims that it will push the new distributor to higher bonus and/or leadership levels quickly. In reality, it increases the risk of significant financial loss if sales do not occur.

Multilevel marketing (MLM). Any marketing program in which participants purchase the right to recruit additional participants, sell products or services, and be compensated for the sales by people they recruit as well as for their own sales.

Network marketing. Term that MLM companies prefer to describe themselves because “multilevel marketing” sounds more like a pyramid scheme.

Naked pyramid scheme. Pyramid scheme that does not involve the sale of products. New participants pay a fee to participate and hope to profit by recruiting others into the system. Chain letters are an example.

Product-based pyramid scheme. Pyramid scheme in which new participants are induced to buy products they supposedly will resell. State laws against pyramiding say that an MLM plan should only pay commissions for retail sales of goods or services, not for recruiting new distributors. However, MLM companies typically structure their payment plan so that recruiting is more profitable.

Pyramid scheme. A plan that promises large profits based primarily on recruiting others to join its program and not based on profits from any genuine investment or sale of goods to the public.

Upline. Distributors who are above a given distributor in the MLM hierarchy and who receive commissions (overrides) from that distributor’s sales.

This article was revised on September 9, 2014.