Unravelling the dynamics of tiered status incentives in multilevel marketing : insights from user invitation networks

Abstract

This paper investigates the dynamic effects of tiered status incentives in multilevel marketing (MLM) systems, using detailed proprietary data from a leading Chinese online cosmetics company. MLM uniquely integrates social networks with hierarchical incentives to accelerate user growth and engagement, setting itself apart from conventional loyalty programs by combining social and transactional incentives within its structured network. Despite MLM’s widespread adoption and substantial market presence, empirical research remains scarce largely due to limited data availability. Our partner company implements a multi-faceted incentive system tailored to users based on their tier status. The incentive structure encompasses utility benefits from purchase and consumption, commissions from invitations, and profits from sales. Utilizing a robust dataset encompassing approximately 1.3 million users and 12 million transaction records, our study systematically examines how transactional and invitational behaviors vary as users approach upgrade thresholds. We find notable behavioral adjustments, with consumers significantly increasing their purchase intensity, particularly opting for higher-priced products, to achieve status advancements. Concurrently, distributors markedly intensify their recruitment efforts, rapidly expanding their networks in alignment with incentive thresholds. Furthermore, we identify nuanced behavioral patterns related to users' hierarchical positions: customers demonstrate an inverted U-shaped engagement pattern, indicating peak activity at intermediate levels, whereas distributors exhibit a U-shaped transaction pattern and an inverted U-shaped invitational pattern. Through rigorous econometric methodologies, including propensity score matching and synthetic difference-in-differences analyses, we explore and confirm substitution effects among consumption utility, invitation commission, and sales profit incentives. These incentives are strategically manipulated by the platform to optimize overall user engagement. Moreover, we empirically validate a significant U-shaped relationship between users' invitation tree levels and their engagement intensity, thereby supporting and extending existing theoretical frameworks, particularly the goal-gradient theory. This research contributes to the literature by offering empirical clarity on how tiered status incentives effectively shape user behavior within MLM networks, underscoring the distinct impacts of incentives on customers versus distributors, and providing critical insights into incentive-driven hierarchical structures. Additionally, our analysis of the temporal dimension reveals the significant influence of approaching upgrade thresholds on immediate user decisions, highlighting users’ strategic behaviors aimed at maximizing short-term gains. These findings carry significant implications for how MLM platforms can refine their tiered incentive systems to sustain long-term user commitment. Managerially, our findings emphasize the importance of strategically designing hierarchical incentives that effectively balance immediate user activation and sustained engagement, ultimately optimizing user acquisition and retention, which will enhance the broader health of the multilevel marketing ecosystem.