Network marketing, also known as multi-level marketing (MLM), is a business model where a company distributes products and services through a network of independent contractors. Independent business owners can expand their business by sponsoring others and profiting from their sales output. Legitimate MLM companies are not illegal pyramid schemes and potential business owners should consider factors such as the company’s length of time in business, initial investment, product return policy, and training and development available to independent contractors.
Network marketing is a business model based on a company distributing products and services through a network of independent contractors. Network marketing is also popularly known as multi-level marketing (MLM), affiliate marketing and tiered marketing. Some of the best known network marketing companies in the world are Amway Corporation, Shaklee, Mary Kay, Tupperware and Avon.
To understand how network marketing works, it can be helpful to think about a business model that most consumers are familiar with, franchising. In a franchise, an owner pays a company for the right to do business using that company’s products, services, and name. The parent company undertakes to provide the owner with training, development, advertising and marketing support. While the name on the outside of the building is that of the parent company, the actual location is privately owned by an independent contractor.
While network marketing isn’t actually a franchise business model, it works in a similar way. In fact some large MLM companies informally refer to their business plan as a “private franchise”. In network marketing, a business distributes its products and services through independent contractors (IBOs) who in turn market these products and services to their own customers.
The key factor that has made network marketing so attractive is that independent business owners not only have the ability to sell products and services to retail customers but are also able to expand their business by also creating others in their own businesses . This is commonly known as “sponsorship” in the MLM industry. Sponsoring others allows an entrepreneur not only to profit from what he sells directly, but also to profit from the sales output of those he has sponsored.
Here’s an example of how an MLM business works: Let’s say owner one is an existing IBO who sells $100 US Dollars (USD) every month. In addition to any retail profit he earns, he also receives a monthly bonus for his sales volume. Owner one decides to expand their business and sponsors owner two.
Owner Two develops a business that also sells $100 worth of goods every month. Like owner one, owner two receives a bonus for his sales volume on top of any retail profit he has made. By sponsoring Owner Two, Owner One who generated $100 USD in sales, is also credited for $100 USD produced by Owner Two. Therefore, the owner’s total sales volume is considered to be $200 USD.
If owner two decides to expand their business and sponsors owner three, owner two would be credited for any sales volume owner three produced. Finally, since owner one sponsored owner two, owner one would also be credited for the sales volume of owner two and owner three. It is this ability to generate revenue streams from multiple sources that has made network marketing a popular and lucrative business for many.
Due to the structure of a network marketing business, many people mistakenly believe that all MLM companies are illegal pyramid schemes. Actually legitimate network marketing companies are not pyramids. The belief that MLM companies are illegal pyramid schemes may have popularly caught on in 1975 when the US Federal Trade Commission (FTC) charged Amway Corporation with being an illegal pyramid. However, in 1979 a US federal judge ruled that the network marketing plan used by Amway was in fact a legitimate business model. This decision in turn helped legitimize other MLM companies.
However, this does not mean that all companies that claim to be legitimate businesses are. The business owner who is considering network marketing should consider these factors:
The length of time the company has been in business.
The initial investment to start the business. Many reputable companies don’t charge a large startup fee.
The company’s product return policy. Legitimate companies typically allow returns of products.
The amount of training and development available to IBOs.
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