How MLM Works

These five steps illustrate how MLM companies work when done in a first-class way.

  1. A sales representative (a “distributor” for an MLM company) first becomes effective at selling a product (skin care, nutrition, etc.) or a service (legal services, Internet services, etc.) to a consumer.

how MLM companies work illustrated
How many customers a distributor should get will depend on the Company’s commission plan – typically about 20 customers. My personal recommendation is to get enough customers so that you can effectively get customers at will.  Otherwise you will not be able to train those you recruit to get customers.

It is not efficient to get many more than 20 customers, as MLM companies pay you to “duplicate yourself.” If you train 5 people to get 20 customers, you’re much more effective at getting your valuable product to consumers than if you were just distributing products on your own. Other industries (such as direct sales) will reward you better for getting a lot of customers; but they don’t reward you for training others.

2. Recruit ONE person and train them how to get customers. This person would be called your downline.


3. Once your sales rep can get customers at will, then train them how to recruit another person.


4. Ensure that YOUR sales rep can train HIS new sales rep how to get customers.


5. Then, you recruit ONE other person and repeat steps two through four. Keep doing this until you’ve reached the income you desire. I did this cycle 16 times and have made millions of dollars.

How do commission plans work?

Commission plans, also called compensation plans, are how MLM companies reward a distributor’s production.

Note: All the illustrations below are theoretical. There are many commission plans and each company’s plan is slightly different. The illustrations below serve as an explanation not only of how an MLM company works, but why they are designed the way they are.

Most MLM compensation plans can appear rather complicated at first glance because all companies (MLM or others) try to figure out how to get a sales rep to sell more products. The designer of the commission plan divides the money that is set aside for commissions into different “buckets.”

Bucket #1 is to motivate the sales rep to sell products to consumers. This is called a “retail commission.”


In addition, the MLM companies know that new sales reps probably do not know how to sell the product and thus need to be trained. So they (the MLM company) create “bucket #2” to encourage sales reps to properly train new people. The better the training, the more product gets sold. So bucket #2 is to reward the sponsor (which is the sales rep) for training their new rep. Which is not only logical, but quite clever.


The next commission “bucket” is to reward sales reps for becoming and/or finding leaders. The MLM company very much desires leaders, just as any non MLM company does. Non-MLM companies typically go to executive search firms to locate leaders.  MLM companies use their current sales reps to find leaders. Once found, the company will reward the leader, as well as the sales rep who found or developed the leader – just as a traditional company will pay the executive search firm  for finding leaders.

In most MLM companies, the more leaders you develop, the more “buckets” are made available to you.


One of the biggest challenges in creating an MLM compensation plan is paying out too much in commissions, which causes the company to go bankrupt. On the other hand, if the company doesn’t pay out enough commission, they will have a tough time retaining their sales reps and will not attract or develop true leaders.

The way successful companies are able to accomplish this difficult challenge is to make the compensation plan difficult to achieve… but achievable by those willing to meet SPECIFIC performance standards.

The contrary option is to make the compensation plan easy to achieve by everyone. But then every person would have a lid on their income because the available commissions would be spread (or dissipated) throughout everyone. Companies that use this type of compensation plan typically never grow big enough to get noticed because they are unable to attract leaders or there are not enough commissions to motivate a person to develop the necessary skills to become a leader.

Therefore it’s better to make the commission plan difficult to achieve. But everyone doesn’t have to achieve the top of the commission structure to earn a very good income.  Most compensation plans are structured so that a person can replace their current salary by only achieving 1/2 of the available commissions or “buckets.”

All compensation plans are designed based on the quota or standards philosophy. The word quota means: a production assignment.  The word standard means: a level of achievement. So in its most basic form, all commission plans work like this:

If you do nothing – you get nothing.

If you do a “little bit” – you’ll get a “little bit” only =bucket #1 (from illustrations above).
This creates a little extra income.

If you do a “little bit more” – you’ll get a “little bit more” = buckets #1 and #2.
This creates a good part time income.

If you do “all this” – you’ll get “all this” = buckets #1, 2 and 3.
This replaces a typical job income.

If you’re somehow able to do this “enormous amount” then you have done us (the MLM Company) an incredible service and we’re going to reward you this “enormous amount!”   buckets #1 through #6!
This creates wealth.

Each person who joins an MLM company chooses what level they want to achieve, based not on a mental decision but based on results. There is not a more fair system than one that rewards someone based on results. The most unfair system would be to reward someone based on their resume, their talk, their family connections or their attractiveness.

Have you ever been passed up for a promotion because the owner of the company’s son was promoted instead of you? Maybe a girl more attractive than you? Maybe a person worked at the company longer than you? Maybe a person went to a better college than you? The only person that deserves a promotion is the one who produces the most for the company!

If you feel it is unfair that not everyone reaches the highest level of the compensation plan or that only a few reach the “top,” you might want to think about this: in every achievement or accomplishment there are standards that have to be met.

To be part of any sports team there are standards you must meet to be a part of that sport. To continue on and be great at that sport there are additional standards that must be met.

To be a golfer you simply buy some clubs for a few hundred dollars and go play golf – that is the base level “standard” to participate. To be considered a good golfer there are higher standards you must meet, to be a great golfer there are even higher standards. This is true of every sport, every business and every profession and even parenthood! Having a child doesn’t make you a great parent.

In MLM, to participate you buy an inexpensive distributor kit. This is similar to saying that you “play golf.” It takes almost NOTHING to achieve this level – therefore many (millions) can achieve this easy standard.

To be great in MLM (and enjoy the lifestyle that is offered) performance standards have been established in the compensation plan. They are not arbitrary standards; they are specific lines of achievement that ANYONE who wants that level of achievement must meet.

Meeting or exceeding performance standards is the reason someone achieves success in MLM.

In conclusion on the commission plan, when deciding on an MLM company you actually want a difficult-to-achieve compensation structure – but one that is achievable. You will, of course, have to work for it and may even have to increase your skill level to achieve it. But the rewards are worth the work – as long as you’ve chosen a good company. This of course isn’t any different than any other industry – if you pour your heart and soul as an employee into a company that gets downsized or goes out of business, you start over.

It’s the same with MLM.

Recommended next page: Is MLM legal?

Tim Sales

About the Author

Tim Sales

Tim’s experience in building his own downline of 56,000 network marketers helped him develop his signature training series. A public relations ambassador for the network marketing industry, Tim has also dedicated his time to debunking the false information spread about the network marketing industry.

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Great analogies here to describe MLM using “traditional business” terminology so that everyone can understand!

Doug Lee

Another great article. The best thing about MLM is that it rewards those who deserve it. You are promoted by performance, not connections.
-Doug Lee

Kevin Bruns

Yes, it truly is FIRST CLASS. I have already added links to the replica site template that I run for FM group distributors – thank you!

Jennifer Valencia

I like this for the fact that it makes comp plans a little easier to understand. Explains why they are set up the way they are & that helps me even with my company’s comp plan. 🙂

Maggie Williamson

You did a great job of explaining that commissions are paid only in relation to the efforts put forth!! Thanks.

Teresa Mercier

I truthfully value Tim Sales’ insights not only from business standpoint per se. – They are very applicable to personal growth, as well.
The *First Class MLM* presentation has been done in such a clear, simple, concise and…common sense manner. The high volume of common sense, respect for traditional non-MLM business, sincerity and clarity positions the presentation on the TOP of what the following crowd can benefit from:

* new distributor who is still “shaky” about the decision they have made to join and no-one from up-line can explain it to her in a non-complicated way

* any negative prospect who takes a look at MLM business, especially one who has no base to defend his negative outlook

* anybody whose weakness gets him to “ask my spouse”…and the spouse has no idea what she/he is talking about

* customers who are MLM product buyers, love the product already…but still are unclear “how it will work as a business for them”

* any pompous individual who owns a deeply rooted block of mind and simply rejects MLM…because he/she is too pompous to admit they don’t own the knowledge about MLM concept

* even a young kid can get it – The presentation is so uncomplicated for any stage of mind-developing. It can encourage young entrepreneurs-to-be

* anybody and everybody who personally “got it” but has a hard time to use the right wording to make a clear explanation to a prospect/lead

I will read it over and over again, will print and give out copies to the owners of close minds.

Proud of you, Tim! You did it again!
Teresa Mercier

Jacob Camacho

Thank you for answering the question of how much money can I make? I love the explanation that if you do nothing you get nothing. Link went live on my site a few minutes ago.

Patti Roney

As a leader, I love your explanation of the comp plans! Where else can you have this type of income available for the average person? IF we choose to work, we will be paid as leaders! It’s so worth the effort!!!

Gail Walls

A great way to begin to de-mystify the industry. Thanks for this!


Tim, this was a great explanation. Thanks

Mats Strömberg

As of yet I have not seen any M.L.M company being able to explain there compensation plan as simple and easy as you have done it above… therefor I will stick to yours from now on. It also put it in plain text that one do have to work to be able to be compensated. Simply excellent!

Torkel Sanner

Tim, I attended you seminar in Oslo. This, and all of the other articles published on this site, are great for new distributors in my organisation to read, – to really understand what MLM truly is all about! Thank you!!


this is someething that anyone can learn from, and understnad fully. as you say, compensation plans are tough to understand, but the simple concepts here make it perfect for us all.
thanks for this helpful site. i am really grateful, after years of trying to help people understand it myself.



I had the chance to meet Dr. King and his wife Sandy at a few of our events and he is a great guy. I appreciate all you are trying to do to raise peoples perceptions about the industry.


Kim Bolte

Tim, I’ve read so many articles over the years that use industry nomenclature and never offer an explanation. Someone totally new to MLM can read your articles and know exactly what you are saying and if there’s any question there’s the MLM Glossary. You’ve thought of everything.


I love the analogies. This really explains how the compensation works. Thanks.

Dyann Lyon

Tim, You make the compensation seem so uncomplicated and I love how you compare MLM to any other type of business, and even sports. Brilliant!

Dyann Lyon

Tim, You have made the compensation plan so easy to understand. I love how you compare MLM to other types of business, and even compare it to sports. Brilliant!

Karen K

I’ve attended your presentations and heard in detail how this works – but have to say I really love this written version! To the point, great graphics and something that is easily understandable. I’ll be sharing it with my team. Thanks!


Thanks for this visual explanation. It will definitely help me explain our compensation plan and it’s relevance for both brand-new associates and emerging leaders.

Joe Kresser

What an industry. You reap more than you sow. Those that are not being compensated are not reaping. The way you lay this out Tim and the way you have a dictionary of terms built it makes it so easy to follow and understand. Activity is compensated what can be better than that. Joe

Pat Bergstedt

This helps me a lot. I need pictures to really “get” things. Although I have successfully built a team I have trouble explaining it to them. This will help!
Thanks Tim,

Satinder Ajrawat

Another feather in your cap, Tim! You are doing a great service to the industry. You put things in a way that anybody CAN understand. If they don’t WANT to-well that is an unsolvable problem! Thanks for your time and effort to give this industry the credibility it so deserves!

Holly Powell

Tim, thank you so much for putting this website together and your explanation? All I can say is, Wow and thanks!
I’ll definitely be adding link code to my website pointing right back at ya.

Tanya Knight

This is great! Thanks for the support! I am planning to send all of my recruits to this website!

Ruben Salazar

It can´t be explained any better. THANKS a lot TIM

Diane Barnes

Excellent and so very true!

Diane Barnes

Diane Barnes

It’s all about duplication and leverage. Something the Donald Trumps and Bill Gate’s of the world understand.

People need to think outside of the box.

Outstanding article and excellent reasoning.
Diane Barnes

Steve Stearns

Great, a built in diversity plan. ANYONE can win with the right effort.

Albert Watkins

you could not say it any better than pure and honest.

rudy van Oldenbarneveld

Thank you for a truth full explanation about mlm, and how it works, and how it pay’s out.The more work you put in the more you get paid; and no ceiling on your earnings. Brilliant Tim and thank you.

Lisa Schuyler

I love this explanation of how the compensation works and why. It makes so much more sense than the compensation structure available in the traditional business world.

Kon Hofstetter, Sydney

In our company, we have great training material but this is so brilliant, I get all my team to read this article.

Doyce Hughes

Tim, I appreciate the explanation of the different compencation plans. I can’t wait to show my down-line.
Two thumbs up.

Sue AB

I like how you point out that people are paid for results. So many nay-sayers want something for nothing and only look for someone to blame for their lack of results – it is so much easier than looking in the mirror.

Donnie D.

Great article. Simple and to the point. You get paid what your worth!

Retha from South Africa

Tim, I am so excited about this articles that I cannot stop reading. Thanks again for making it so easy for us.

PJ Hollingsworth

Each time I am exposed to an understandable explanation of MLM or Network Marketing I am amazed that everyone does not want to become involved in marketing and selling a product in which s/he believes. MLM makes sense.

Kelly S.

Governmental statistics show the number one reason ANY business fails is lack of customers. Intuitive, I am sure, but in any business, marketing will be a key success factor. Thanks for the info!

Dee (Aotearoa/NZ)

Clear and concise–great articles, Tim!

Rosemary Leach

Thank you for the explanation. This will help so many people understand the compensation and how is really quite simple to grasp.


Great work. Copensation plan of any mlm company is always a tough job to explain. But you did it in such an easy way that not only new people to this business will learn but also who are in alredy doing this business. Thnx.

Gavin Chapman

“In MLM, if you do just a little work, and badly, you WILL feel that your cheque is obscene! If you do a lot, learn to do it well and show other people how to do the very same, your cheque will likely be obscene!” As soon as I ‘got this’ gem as a ‘heads-up’ at an introductory training, it stuck… Go, Tim Sales! Your professional, hype-free approach in this site and all your other material deserves to be shouted from the rooftops and I will do my bit by telling others about this site so as to help FirstClassMLM to rise like cream to the very top of the search engine rankings. That way we help many more people to succeed in MLM.

Larry Wood, Ind.

Fantastic job Tim. You do tremendous work in breaking everything down to simple understandable explanations. This is the only business where you are guaranteed a promotion for production.

Valencia Burton

What another really great tool to be a able to “show” and not have to explain! Thank you so much Tim!

marilyn holm

This article really helped clarify my thinking, so that I will be able to streamline my approach to training my associates. I’m currently training 7 people, and thought I was falling behind in the game. Now I see how to move forward with each individual and help pave the path to their success.
Thank you, Tim.

Oleg Shcherbakov

This article is so good! Many thanks to you, Tim.

Attila Hevesy,Tampa Florida

Obviously it took lots of time & effort to make this so easy & fundamental to comprehend by anyone. THANK YOU!!

Anne DV

Have never heard a clearer explanation of how MLM compensation works. Thanks.

Rolf Hefti

Great no-fluff explanation of how you can earn money in MLM…by working, by being productive…just like in every other business.

Adam Wenzel

Great explanation, really puts it into perspective.

Brian Wakhutu

In the two years I have been in MLM i have not been able to get someone to explain to me the compensation plan the way Tim has explained, Brilliant Compensation did wonders to my business and the First Class Mlm is just the best i have seen get 20 clients first and train five leaders.


I love this brilliant thinking. I love clear, effective presentations. This explanation of compensation plans is well thought out. It is a complicated subject and it must have taken a lot of time to figure out how to cover so many points and really bring out the logic behind the components of the plans. I’ll be glad to send people to this site so they can learn all this here. You’ve saved thousands of us untold hours of having to try to portray all this ourselves somehow. I really appreciate what you do for all of us.

Don Hor

Perfect explaination!!! Keep it up.. One up for MLM friendster. Suggest you come up with a forum so MLM friends all over the world can communicate!!!


hi sir this is very good. i will follow this systems.
thanks a lot


Awesome really clear diagrams great for simple, easy to understand explanations.


Ali balazadeh

Really wonderful, very Simple you explain how MLM works.
I met you on DSEI Festival Dubai

thank you for nice trainings


Tim the diagrams you illustrated are so practical. I can clearly visualize how I would have to go about to succeed in an MLM scenario. I would love to meet you should you ever visit our country.South Africa.

Solomon Oyediran

But i need to the exact product you are talking about to know if it is a legal or an illegal product. Because i dont want to be involved in any illegal thing. Please make this straight with me> Thanks.


How to make money in oder to achieve my goal.




Thank you, Tim, for setting things strict. Have join you in Norway and Dubai – and enjoy your lessons. Keep up you mission – many will follow

Patrick H


Alot of NM/MLMers need to read this information. This is how you build a sustainable downline. It seems like people try to jump #’s 1 and 2, and skip to #3 (training others to recruit). If you don’t have product sales, you’re downline collapses, because people at the bottom don’t make any money and quit. This is why MLM has such a bad reputation.

Kathy Schneider

I’ve passed this along to my entire downline … we do teach the 20 customer method and this article gives the details of why this is so important. Thank you for the simple explanation.

Beverly Snodgrass

Awesome article! Thank you, for vividly explaining just how MLM works, and showing that this really is a First Class business model. I love how you teach that, you get what you put into it. This is not a get rich scheme, but a solid ethical business.

Edwin Bernard

This is in such contrast to the common approach that downplays the hard work necessary to succeed to potential recruits. How refreshing! This will clearly reap dividends when prospects who do not intend to work hard are filtered out and do not join your team. It is a handicap to sponsor associates who have little desire to work hard, and smart.


Cristal clear
Even the dummies can understand. To be an excellent driver, one needs to know the different parts of the car and know how they interconnect. To be a great Doctor, it’s the same for human body parts. Same for the great shooter, they teach you in the Army how to put your gun apart and put it together again.
So, to master any system, you need to know its different parts, how the add up and how they work together.
That is what Tim has done for us with MLM (system to spare parts, back to system).
Thank you Tim
Your mentee


thats for sure, brother

Adesemowo Adetunji

I see this as a great article and i want to comment that MLM in few years to come will be a way most companies will be selling their products and servicies. Good job. thumbs up. THANKS


it is very use full article that tells us that how we work with a good company and also have tell us it is not a matter of chance but a matter or work hard. in an MLM company earning depends on us

Teddy Letsou

Thanks for the terrific article. A lot of people, including some in the industry, don’t understand that the business model of MLM is a simple one. Hard work and commitment are still needed to be successful as nothing in life is free. Great to see that you also allow those who don’t understands) a forum to express their opinion as well. Great article.

Kevin Russell


Great article, It is about time. How can send skeptics to learn and educate themselves about MLM or Networkmarketing? Peace and Grace

Kevin Russell

Dave Thompson, Nashville, TN


Every network marketer in the industry needs to be utilizing this site for training! I love it and I appreciate what you are doing for the indutry and for those of us who work in it!

Matt B

Hello There,

I would just like to say that I found this information very informative. I choose not to be involved in MLM companies for various reasons but I think if one were to get involved this is the place to start. Keep Well

Matt B.

Naeem Mehboob

I would just say that using this system and information, we can earn a lot and most important thing in this system we can also develop personal relations on a huge scale.

Michelle, London

Having spent some time trying to understand the MLM system having only recently come across the passive income concept, this site is great. Thank you, Tim, for a jargon-free, honest and comprehensive resource. A real find!

Mohammed Tipu Sultan

Mr, Tim
excelant presentation !!!!!!!


Great explanation. Last month, my check was for $125. Next month is should be $145.

pawan dabas (saara india)

i have again joined mlm after 9 years and ur advise will help me a lot.. i m sure ..thank you sir

pawan dabas (saara india)

its very useful


the mlm is important part of fastest income money souarces.


Now i know, i understand how the MLM works..

daniel burton

Larry Wood, Ind. (January 2nd, 2008 at 8:09 am)
“Fantastic job Tim. You do tremendous work in breaking everything down to simple understandable explanations. This is the only business where you are guaranteed a promotion for production.”

I wouldn’t say you are guaranteed a promotion for production. I would say you are guaranteed a promotion for promotion. You are a marketer. You promote. And I’m not sure there is such a thing as passive income. You heard Tim. You work nothing, you get nothing.

Thanks Tim for putting this into perspective. It was exactly what I was looking for.


Its an awesome presentation. This article has helped me a lot to understand mlm. thanks for helping….

abu shada

wow. Excellent job


thanx so much for letting me understanding why other people are not making money,and i now understand clearly which plan to choose when joining the company.


a very simple and professional way of looking on how mlm works. very inspiring! i hope that i knew this way back i started my mlm business. thank you tim, hope you inspire more people. god bless.


very good


This reminds me of Amway. It is a great opportunity for those who are truly ambitious and looking for rewarding opportunities.

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[…] Understanding MLM Companies | How Multi Level Marketing Works … – These five steps illustrate how MLM companies work when done in a first-class way. 1. A sales … Each time I am exposed to an understandable explanation of MLM or Network Marketing I am amazed that everyone does not want to become involved in marketing and selling a product in … […]


There is you provide great explanation with excellent pictures about multilevel marketing.


MLM is clearly becoming an alternative for people to earn extra income!


Great article, it explains clearly how MLM should work in theory. First get 20 customers that will buy your prodyct, then recruit 5 leaders. Sadly, in the real world MLM companies dont work like that. They make so much emphasis on recruiting instead of getting a solid base of customers, that I decided not joining them. Positioning the product was so irrelevant to them that I felt that they were creating illegal pyramids


This really make me who I am today and I will continue to progress through this multi level marketing and make stress free life

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Thanks for sharing your thoughts on mlm companies.


Fantastic website. Plenty of useful info here. I’m sending it to several pals ans additionally sharing in delicious.
And obviously, thanks for your sweat!

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