Deal or no deal? Physics looks into multi-level marketing

Growth and profitability in a directed business network

The promise of exponential growth by multi-level marketing (MLM) enterprises led to its continued presence (and even proliferation) in the Philippines. The general public is interested in the potential profitability. Government officials are wary of possible pyramid scheming. But how profitable really are MLM businesses, and just exactly how safe it is to join one?

In an attempt to provide a quantitative answer, a team of complex systems researchers from the Instrumentation Physics Laboratory combined analytic formulation, agent-based models, and real MLM data in a paper published in Physica A [1].

MLM architecture: Unilevel vs. binary

When asked what drives people to join MLM's, Erika Fille Legara, the main author, replies: "It's very lucrative and it promises high returns with only little investment. And you're your own boss. In a sense you're self employed."

MLM business enterprises require two things: (1) the products to sell; and (2) a network of downlines, or recruited individuals, to whom the products will be sold. Based on the latter, the MLM can be classified as either binary (each member is allowed only two direct downlines) or unilevel (no limit in direct downlines).

Earnings also come from these two pre-requisites, in the form of profits from the products and commissions for each recruited member. The balance between these two earning mechanisms is what sets MLM's apart from pyramid schemes; 70% of the earnings must come from the products if a MLM enterprise is to be considered "legal".

The more, the merrier?

In spite of the existence of such regulatory measure, gaining profits from recruitment is still the main driver of MLM activity especially in the Philippines.

The popularity of MLM enterprises rests on their claim of "unbridled growth", i.e. exponential growth of downlines resulting into higher profits in terms of products and commissions.

To test if such really is the case, the researchers segmented the MLM into different levels and counted the population of members in these levels. The first level corresponds to the founder, the second level his/her first recruits, the third the new recruits of these direct recruits, and so on. If growth is to be unlimited, there should be a continuous and steady increase in population per level.

Both for unilevel and binary MLM's, Legara notes that "the growth stagnates contrary to their claims of unbridled growth." In fact, the number of members per level peaks at some level midway down the network. While those members on top may in fact continue to have higher profits, the members further down below do not share their happiness, as they find themselves just "buyers" and not really "sellers". This phenomenon is observed true for both simulation and real data.

I quit!

This disparity may lead to quitting, and, possibly, collapse of the network structure.

The difference between unilevel and binary MLM structures is even more highlighted in terms of the resilience of the network and its robustness to random quitting. In general, unilevel structures are more prone to collapse due to random quitting than binary ones.

MLM's with binary network structure give pairing bonuses for every complete pair of downlines a recruiter has made. This provision, which is obviously not found in the unlimited-downline format of unilevel businesses, serves as a "healing mechanism" according to Legara. In terms of robustness to quitters, "more robust iyong binary (binary [MLM] is more robust)."

Leader vs. follower

The findings suggest that anybody interested in forming a new MLM network must choose a binary structure to resist collapse brought about by dissatisfied dropouts.

Forming a MLM business is entirely different from joining one. Asked whether she will join a MLM herself, Legara admits her decision "depends on the kind. If it's based solely on recruitment, then no. As you can see, the growth stagnates."

Membership in MLM is a risk: to see how much one can earn he/she must know where exactly he/she is in the heirarchy, an information MLM companies do not divulge. But of course, doing business is always a risk.


Of course, this research shed light only on quantitative aspects of MLM. There remains moral and ethical issues that need to be answered. These deeper problems will probably make complex systems researchers like Legara and her group busy next.

1. Legara, E.F.T., Juanico, D.E., Monterola, C.P., Palima, M.L. and Saloma, C.A. (2008). Earning potential in multi-level marketing enterprises. Physica A.