Network marketing is a decades-old marketing model that involves selling legitimate products at fair prices directly to consumers who need them. Instead of distributing products to stores and relying on hired salespeople, companies use a network of distributors, many of whom started off as customers.
For companies, this is a lucrative way to sell their products and expand their reach with minimum marketing cost and no salaried workforce. For distributors, who usually work from home, network marketing is an opportunity to start their own small business with flexible working hours.
There are multiple levels of distribution as well as payouts occurring at each of those levels, which is why this marketing model is often referred to as multi-level marketing (MLM).
How Exactly Does MLM Marketing Work?
In multi-level marketing, companies first recruit a group of salespeople who are passionate about their product. Rather than paying them a salary, companies offer to sell them this product at a discounted price and encourage them to sell it to others for the full market price. Everything they make from those sales goes directly into their pocket. Many of these salespeople or distributors reinvest the money they earn to buy more products, which they go on to sell to even more people, thus increasing their income.
Apart from encouraging them to go out and sell the product, companies also encourage their distributors to recruit new distributors themselves. In turn, they will receive a small percentage from each sale made by their recruits, who are commonly referred to as their “downline”. Network marketing is also known as referral marketing because these recruits are referred to the company by the primary distributors.
It doesn’t stop there as the recruits are also encouraged to recruit a “downline” of their own. Finally, all distributors are also actively encouraged to turn particularly enthusiastic customers into distributors. So, an independent distributor working in network marketing generates an income from a combination of their own sales and the sales made by people they recruited. Meanwhile, the company profits by selling to their ever-growing distributor network and investing little-to-no money in marketing.
Is Network Marketing a Pyramid Scheme?
If you try to draw a scheme of the network marketing model with the company on top, the primary distributors in the second row, and all the other recruits in the rows below, it will indeed look like a pyramid. It is also known as pyramid selling for this reason. However, despite its pyramid-shape organization, multi-level marketing isn’t a pyramid scheme in the legal sense of the term.
There are several differences between multi-layer marketing and a pyramid scheme.
For one, whereas the former is considered legal, the latter isn’t. Multi-layer marketing is usually transparent and built around legitimate products, while all pyramid schemes are essentially scams. Both aim to establish a network of distributors, but whereas network marketing gives each distributor an opportunity to advance and generate an income, pyramid schemes are designed with the sole purpose of allowing the company to scam the distributors and all their recruits out of their hard-earned money.
MLM companies won’t ask distributors to pay sizeable registration fees, memberships, or buy large quantities of the product upfront – but companies hiding behind a pyramid scheme won’t. If a distributor fails to sell their inventory and wants to return some of it, most MLM companies will offer to buy it back for a percentage of what the distributor originally paid. With pyramid schemes, every sale is final.
Pyramid schemes will always value recruits over sales, so if a distributor makes more money by adding new distributors to the network rather than by selling their products or services, they are likely dealing with a pyramid scheme. Because MLM companies make money from sales, they value sales over recruits.
Does Network Marketing Still Work?
Since the 1930s, several companies have managed to use network marketing to their advantage and build brands with global recognition. It all started with the California Perfume Company, which is still going strong under its current name – Avon. Other notable success stories include Tupperware, Mary Kay, Amway, and Pampered Chef. All these companies made a name for themselves long before the internet era, but that doesn’t mean that multi-level marketing doesn’t work anymore.
In fact, with social media, e-commerce platforms, and easy-to-build websites readily available, there are more opportunities than ever for independent distributors to market and sell their products. At the same time, however, there is also more competition than ever.
Because success in multi-level marketing rests more on sales than the “downline” – though having recruits doesn’t hurt – distributors must invest a lot of time and effort, along with a small upfront investment (usually no more than $1,000), to find customers, sell their products, and make a living.
Is Network Marketing the Right Choice for You?
If you’re hoping to get filthy rich from network marketing, the chances of that happening are very slim. As with any other business model, that is reserved only for the lucky few. Similarly, if you see network marketing as an opportunity to earn money without actually working, that’s not going to happen either.
That said, network marketing is nowhere near as time-consuming as a full-time office job and is certainly a lot more convenient. Because you’re working from home, you have a lot more flexibility than you would otherwise. As such, you can organize your working hours to spend more time with your kids or engage in activities that you didn’t have time for before, like going to the gym or taking up a hobby. You can even turn this into a second job to help you save extra money or pay off your debts.