3rd July 2024
A network of distributors is essential to the growth of a business in network marketing, also known as multilevel marketing (MLM). Most network marketing programs also ask participants to recruit other sales representatives. The recruits constitute a rep’s “down line,” and their sales generate income for those above them in the program. Things can get sticky when a network marketing network compensates participants primarily for recruiting others rather than for selling the company’s products or services.
A network marketing system in which most of the revenue comes from recruitment may be considered an illegal pyramid scheme. Emerging trends in marketing have completely changed the way business is conducted. These new modes of marketing help companies attract a large number of customers. They even reduce expenses that companies incur in traditional modes of marketing. One such revolutionary trend is network marketing.
History
The origin of multi-level marketing is often disputed; but multi-level marketing style businesses existed in the 1920s, 1930s California Vitamin Company, (later named Nutrilite) or California Perfume Company (renamed as “Avon Products“).Independent non-salaried participants, referred to as distributors (variously called “associates”, “independent business owners”, “independent agents”, etc.), are authorized to distribute the company’s products or services. They are awarded their own immediate retail profit from customers plus commission from the company, not down lines, through a multi-level marketing compensation plan, which is based upon the volume of products sold through their own sales efforts as well as that of their down line organization.
Independent distributors develop their organizations by either building an active consumer network, who buy direct from the company, or by recruiting a down line of independent distributors who also build a consumer network base, thereby expanding the overall organization. The combined number of recruits from these cycles is the sales force which is referred to as the salespersons “down line”. This “down line” is the pyramid in Network Company’s multiple level structure of compensation.
Companies involved in Network Marketing:
You should conduct your own research before making any financial investments in network marketing programs, as they are typically not subject to business opportunity regulations and are not categorized as franchises under state and federal franchise laws.
The foundation of the network marketing business model is the person-to-person sales made by independent salespeople, many of whom operate from home. Building a network of business associates or salespeople to help with lead generation and closing deals could be necessary for a network marketing company. While there are plenty of legitimate network marketing companies, some have come under fire for being pyramid schemes. The latter might place more of an emphasis on hiring salespeople who might more expensive starter kits require upfront payment than actual customer sales.
Many terms are used to refer to network marketing, such as multilevel marketing, cellular marketing, affiliate marketing, consumer-direct marketing, referral marketing, or franchising for home-based businesses. In essence, network marketing is a kind of advertising that producers employ to increase sales. When a manufacturer needs to push out their products through multiple distributors, they use them. These distributors may occasionally have sub-distributors. This results in a “network” of distributors that work at different stages of the supply chain. This extensive network of distributors is used by manufacturers to offer their goods to consumers at different levels. This allows them to indirectly reach out to even more clients.
Network marketing is a marketing strategy for the sale of products or services where the revenue of the network company is derived from a non-salaried workforce selling the company’s products/services, while the earnings of the participants are derived from a pyramid-shaped or binary compensation commission system. Although each network company dictates its own specific financial compensation plan for the pay-out of any earnings to their respective participants, the common feature that is found across all network company’s is that the compensation plans theoretically pay out to participants only from two potential revenue streams. The first is paid out from commissions of sales made by the participants directly to their own retail customers. The second is paid out from commissions based upon the wholesale purchases made by other distributors below the participant who have recruited those other participants into the network company; in the organizational hierarchy of network company’s, these participants are referred to as one’s down line distributors.
Network company salespeople are, therefore, expected to sell products directly to end-user retail consumers by means of relationship referrals and word of mouth marketing, but most importantly they are incentivized to recruit others to join the company’s distribution chain as fellow salespeople so that these can become down line distributors. According to a report that studied the business models of 350 network company’s, published on the Federal Trade Commission’s website, at least 99% of people who join network companies lose money. Nonetheless, network company’s function because down line participants are encouraged to hold onto the belief that they can achieve large returns, while the statistical improbability of this is de-emphasised. Network companies have been made illegal or otherwise strictly regulated in some jurisdictions as merely variations of the traditional pyramid scheme.
Characteristics of Network Marketing
Direct Sales
Network marketing organizations market and sell their product directly and don’t make use of any well-defined channel of distribution. The responsibility to sell the products is transferred to the non-employed individuals (the participants) who get the commission every time they make a sale.
Independent Business Owners (IBO)
The participants are called IBO as they work as if they are promoting their own business.
Selling Philosophy
This model involves participants to use the selling philosophy of marketing. The main focus is on recruiting and selling as much as you can to earn more commission. No relationships are built. People may even trick you to buy the products or to join them.
System of Hierarchy
Suppose a person ‘A’ has a person ‘B’ under him. Now A will get the commission whenever he makes a sale and also a part of B’s commission when B makes a sale. Now, to earn more money, B will also try to recruit a person C under him and so on. This makes the system a big hierarchy.
Less or No Advertising
Dependency on direct sales helps the organization to rely less on advertising as personalized contact have more convincing power than advertisements.
No Fixed Salaries
This is a commission-based network where participants (not employees) are paid commissions to perform the specific task.
Accountability
Everyone is accountable only to himself. The more he sells, the more he earns
Things to be mindful of before investing in Network Marketing
- It is a Passive source of Income.
- Legitimacy of the Company
- Ethical Practices
- Realistic Expectations
