Multi-level marketing, also known as pyramid selling, is a controversial form of business. The disadvantages of this system can be considerable compared to direct selling.
Various types of products can be sold through multi-level marketing. In addition to financial services, insurance and software, other possibilities include cosmetics, medicinal herbs or detergents.
This form of selling works according to a pyramid structure: the entrepreneurs (agents) are responsible for the merchandise and corresponding advertising material and distribute it on their own behalf. The system becomes advantageous only when they manage to acquire their own sellers – i.e. sub-sellers – who are seduced by this method. The agent collects commission on merchandise sold by sub-sellers. The more sub-sellers there are, the greater the profits.
But even legal forms of multi-level marketing often end in financial disaster. Most of the time, a large number of sellers not managing to sell the goods they have paid for end up competing on a saturated market.
In this respect, due note should be taken of the Federal Law on Unfair Competition, which aims to prevent any commercial conduct which is misleading or in breach of the rules of good faith (Federal Law on Unfair Competition (in German only)).