What Is Network Marketing?
Network marketing is a business model that generates sales through independent representatives who build a network of business partners or salespeople to assist with lead generation and closing. Network marketing is also known as multilevel marketing (MLM), cellular marketing, affiliate marketing, consumer-direct marketing, referral marketing, orhome-based business franchising.
Key Takeaways
- Network marketing representatives typically require strong sales skills.
- A single-tier program involves one individual salesperson selling products independently.
- A multi-tier program requires sales representatives to recruit a network of other salespeople.
- Network marketing is also known as multilevel marketing (MLM), cellular marketing, affiliate marketing, consumer-direct marketing, referral marketing, orhome-based business franchising.
Understanding Network Marketing
Network marketing firms seek to leverage the relationships of their salespeople to identify customers and market their products, rather than more traditional advertising and marketing strategies. Salespeople are pressured to aggressively target their friends and family, not only as to buy their products, but also to recruit them as new salespeople.
In a typical network marketing arrangement, each sales representative is encouraged to recruit a networks of salespeople, resulting in multiple tiers of recruits. The creators of a new tier or "upline" earn commission on their sales and on sales made by the people in the tier they created, the "downline".
Each new tier can sprout another tier adding more commission to those in the top and middle tiers. The earnings of salespeople depend on recruitment as well as product sales. Those in the top tier make the most.
Network marketing has been compared to pyramid schemes, particularly with respect to the focus on recruiting new distributors. The Federal Trade Commission has warned that many multi-level marketing firms may be pyramid schemes, but stopped short of saying that the model is inherently fraudulent.
Some MLM schemes may be run as pyramid schemes. A pyramid scheme funnels earnings from all recruited participants on lower levels of an organization to those on higher levels. The Federal Trade Commission (FTC) monitors businesses that operate as multi-level marketing companies.
Examples of Network Marketing
An individual with a lot of energy and good sales skills can create a profitable business with a modest investment in the network marketing space. According to the Federal Trade Commission (FTC), an operation that ensures compensation based on actual sales to real customers tends to be more reputable than multi-tier schemes, in which people make money based on the number of distributors they recruit.
In 2016, the FTC settled a suit with Herbalife, alleging the company deceived consumers into believing they could earn money selling diet, nutritional supplements, and personal care products. Herbalife paid $200 million to compensate consumers and restructured its business.
Skin care provider, Rodan and Fields operated as a billion-dollar business in the MLM space prior to 2024. Due to increased online marketing and shops like Amazon or TikTok Shop, the company moved away from the multilevel direct business model and established a new affiliate program.
How Should an Individual Research a Network Marketing Company?
Anyone considering joining a network marketing operation should independently use or be enthusiastic about the products and familiarize themselves with the company structure. They should also be assured that the position is to earn commissions based on selling products and not recruiting others.
What Are Some of the Oldest Network Marketing Programs?
Some of the oldest network marketing companies still exist in 2024. Avon was founded in 1886, Tupperware was established in 1946, Amway began in 1959.
What Are "Buyback Provisions" In Network Marketing?
“Buyback provisions” allow participants to return unsold products to an MLM for a refund. This Federal Trade Commission mandate benefits sales representatives with too much inventory who cannot earn commissions.
The Bottom Line
The Federal Trade Commission helps to regulate the operations of network marketing organizations. Network marketing may involve multilevel marketing (MLM), cellular marketing, affiliate marketing, consumer-direct marketing, referral marketing, orhome-based business franchising.
