Network marketing is a business model where a company hires individuals, called distributors or consultants, to sell their products. They earn a profit from sales or by recruiting new members to join the network.
Companies usually provide their distributors with sales training and bonuses if they manage to reach certain sales. Since it’s a job that can be done from home, it’s a popular way to make money online – there are over 6.8 million distributors in the US alone.
To understand this business model in more detail, let’s look at how network marketing works and what different types of network marketing there are. We’ll also give you pointers on how to tell whether a network program is legitimate or a scam.
Types of network marketing
Generally, network marketing can be divided into two types:
1. Single-tier network marketing
In this type of network, marketing distributors earn commissions only through sales. There’s no need for them to recruit new distributors.
To join this type of network program, distributors need to sign up and purchase products from the business at a discount. Then, they make money by selling the products at retail prices.
According to the Federal Trade Commission (FCC), single-tier network marketing programs are more reputable than multi-tier schemes because distributors focus on selling, not recruiting. The distributor is treated more like a small business than a mere sales rep.
2. Multi-level marketing (MLM)
With MLM companies, distributors earn money by both selling and by getting more individuals to join the business.
Each successful hire means a commission for the distributor. Distributors also receive a small percentage from each sale made by the people they recruit to the MLM scheme.
Later on, if those new hires invite more people to join, they too will contribute more commission to the people further up the line.
A distributor is free to promote their products in any way possible, from sharing their thoughts on their social media platforms to paying for ad space on LinkedIn.
Criticism: Is multi-level network marketing legitimate or a pyramid scheme?
There are some differences between MLMs and sketchy pyramid schemes.
An MLM organization is a legitimate business that sells real products or services to consumers. The income of MLM members is based on the volume of sales they and their recruits make.
In contrast, a pyramid scheme is an illegal business that focuses on inviting as many individuals as possible. To join, it will charge you a high startup cost, and the product they offer usually has no value or can even be non-existent.
If a distributor is offered more money by recruiting new members than selling the MLM products, it’s possible that the business is a scam.
Characteristics of network marketing businesses
Look for these characteristics when searching for a good network marketing program:
- Direct sales. Companies employing network marketing strategies don’t sell their goods to stores, but directly to their distributors.
- No fixed salary. Participants only make money from the sales they make. And in real multi-level marketing programs, only up to five levels of distributors can earn commissions on a single sale.
- Staying power. Search for a reputable company that has sustained growth for years and has an impressive list of accomplishments and reviews.
- Buy-back policy. Firms must repurchase the remaining stocks of distributors who leave the program.
- Provide value and benefit. Reliable companies offer valuable products and services. They also give special bonuses to their members, like discounts or other attractive offers.
- Proven system. Lawful network marketing companies provide a sophisticated marketing plan or other guidance for the distributors.
What is the difference between network marketing and affiliate marketing?
In affiliate marketing programs, individuals or affiliates promote a company’s product online. A referral link is included, and the affiliates will earn a referral fee each time someone purchases through the said link.
Joining an affiliate program is relatively easy. It doesn’t charge any sign-up fee, and you don’t have to make any direct sales. Your task is to be the bridge between customers and companies.
On the other hand, network marketing is part of the direct selling method. Distributors need to deliver the products to the customers, and they need to pay for a startup cost to join the program.