Network marketing, also known as multi-level marketing, is a business model which involves a pyramid structured network of people who sell a company’s products. The participants in this network are usually remunerated on a commission basis.That is, people in this network get a commission every time they perform a specified task, like –
- Make a sale of a product.
- Their recruits make a sale of the product.
In simple words, this model involves a pyramid structure of non-salaried participants who get paid whenever they or a person below them in the pyramid makes a sale.
In this system, consumers are the participants, their family, friends, and acquaintances are their customers, and this cycle goes on.
Characteristics Of Network Marketing
Network marketing organisations 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.
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 organisation to rely less on advertising as personalised 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 a specific task.
Everyone is accountable only to himself. The more he sells, the more he earns.
Benefits To The Participants
Participants are also the consumers of the network. Hence, they also get discounts and other attractive offers to when they join the network.
Examples of Network Marketing
Amway has been in business for around 57 years now, this company is one of the biggest examples of a successful MLM/network marketing company.
Other companies that use the network marketing model include – Tupperware, Nu skin, Juice Plus, etc.
Pyramid Structure vs Network Marketing
A pyramid structure is said to exist when you get paid to get a new recruit and there is no involvement of any product. It’s an ill practice that makes a person earn money by taking advantage of his friends and family. Companies having a pyramid structure model tend to deceive people while making them believe that they’ll earn in future (which they do by deceiving more people). For example, a person will be asked to pay $100 to be a part of the company with a promise that he’ll get 25% of every new recruit’s admission fees who he refers. This is a money-making strategy of the company where the participants are at a loss.
Whereas network marketing involves multiplying efforts by selling of products. This is a win-win situation where the users get what they want and participants earn a commission.
Go On, Tell Us What You Think!
Did we miss something? Or did we not? Come on! Tell us what you think of this article on network marketing in the comments section.
A startup consultant, digital marketer, traveller, and philomath. Aashish has worked with over 20 startups and successfully helped them ideate, raise money, and succeed. When not working, he can be found hiking, camping, and stargazing.
I think you have explained it very well and concise.
Looks quite interesting, but who to relay for the honest opinion in this business….
Super information Sir
thanks for the value-based information
Good understood! Tq!
This is a very informative blog on multi-level marketing. Many people get confused by this term. Very easy to understand. Thanks for posting.
I no read
This site is very useful for me
Hey AASHIH PAHWA,
I appreciate the simple explanation of the Network marketing business model and how it’s not a pyramid scheme.
There are two points that needs to be clear when it comes to the “selling philosophy” of Network Marketing
“Dependency on direct sales helps the organization to rely less on advertising as personalized contact have more convincing power than advertisements.”
“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.”
I. Clarity on the “Selling Philosophy” of the Network Marketing Business Model
1. It’s true that direct sales model of the Networking Marketing involves personalized contact
That’s the whole point of making personal contact.
In order to build relationships with them. It’s the second out of the seven skill-sets of a professional Network Marketer.
Yes, it does require to build relationships with individuals you make contact with.
You yourself said the following,
“In this system, consumers are the participants, their family, friends, and acquaintances are their customers, and this cycle goes on.”
Those are 2 the type of groups that are existing relationships.
You’re missing the third of group of individuals the professional Network Marketer needs to make in order to develop a relationship with them.
Depending on the nature of the relationship, the professional Network Marketer will plot those individuals in either of first two groups of the existing relationships.
To break it down, those set of relationships falls under three categories:
A person would be in any of the 3 markets depending on the nature of the relationship with the professional Network Marketer.
1. Hot Market: Your Family & Friends
2. Warm Market: People you know and they know
3. Cold Market: People you don’t know and they don’t know you.
Primarily, the bulk of the relationships to whom the Professional Network Marketer, see who are open to be a customer are the warm market not the hot market.
It’s just like any other business, you have to invest the majority of your time in customer acquisition except in this model, you just so happen to earn lifetime overrides from your customers and teammates.
You have to invest the majority of your time in customer acquisition.
Does the professional Network Marketer still see if some of the warm mat are open to the opportunity?
Sure, but that’s a very small percentage that they would.
So than it’s to lead by products when it comes to the warm market.
The bulk of the commissions would come from individuals who are customers that are not open to be business partners from the warm market.
When it comes to the cold market, the professional Network Marketer leads with the business opportunity.
“People may even trick you to buy the products or to join them.”
That’s true of individuals from traditional businesses too. It has to do with the individual’s character and nothing to do with the business models.
Which is why a personalize contact is crucial
in order to develop and grow a relationship overtime with the warm market.
No way around that to have that trust.
They may or may not want to be a customer or business partner.
They value relationships whether they do or not. So a professional Network Marketer will not drop them.
Whether those individuals want to be an acquaintance or lead to friendship.
After all, they are human beings. 🙂
2. High Selling v. Low Selling
The other half of the philosophy of selling is that, it needs to differentiated between that of a professional Salesmen and a professional Network Marketer.
One of the pillars of Network Marketing is simplicity. That’s the low-end selling.
Network Marketing is simple. I didn’t say it’s easy, but it is simple. Simple enough that the everyday person can duplicate.
A Salesman has a tendency to complicate it because they are trained in the high selling philosophy.
One of their biggest challenge is that they make it complicated to which their business partners will not be able to duplicate the process because it’s not simple.
It has to be simple enough that an every day person can duplicate it. It does not require high skill-sets of a professional salesman.
A professional Network Marketer just needs to learn and cultivate the 7 skill-sets and use the tools that the Network Marketing company provides.
Just seven skills, that’s it.
They don’t need to be experts of the products including anything to do with statistics or explain the compensation plan.
The tools of the company does that for them which includes customer service.
It’s simple enough for an everyday individual to duplicate. It’s not rocket science.
One of the challenges is not don’t make yourself the issue.
I recommend the following books:
1. Go Pro By Eric Worre- Covers thoroughly the 7 skills of the professional Network Marketer.
2. Your First Year in Network Marketing by Mark Yarnell- It also covers the 7 skills of the professional Network Marketer.
However, he covers the common pitfalls that that a professional Network Marketer needs to avoid in order to do well in this business model.
2. The Game of Networking by Rob Sperry- It explain how to personalize contact with individuals.
Again.. I appreciate the breakdown. 🙂
Very simple explanation sir
Goodmorning Sir, Pls Longrich falls under what type of network????
Longrich comes under network marketing but I’d still advise you to not to get into network marketing.
And why is that?
जज साहब को बदनाम कर दिया तुम लोगो ने
In your “Selling philosophy” you destroyed everything you tried to present by just saying, “People may even trick you to buy the products or to join them.” This is only true where the entire business as presented by the parent company is a scam, or a pyramid structure without an effective or relatively useful products. This should be well stated in other not to send the wrong signal to those uninformed risk dodgers!
Nevertheless, it’s a great write-up.
This simplistic description misrepresents key aspects of networking marketing and the risk that a network marketing company (also called; multilevel marketing – MLM) will actually be an illegal pyramid scheme.
Does it require any registration before entering
It depends on the company. In some companies, the products worth your entry fee is given to you, even at a discount.
But for those schemes where only recruiting is advocated, they collect your money with a promise to give you commission if you recruit other people. Avoid such if you can because they’re the examples of pyramid schemes that will run away with your money on the long run.
Aashish, first of all–why no official definitions, let alone ‘pyramid structure’ as hierarchy and ‘pyramid scheme’ as an illegal biz (fraud), where lower/later participants are paying-to-play to upper/earlier ones? Also you forgot about a pyramid in the pyramid–business of instruments aka motivation.
So, after the infamous FTC vs. Amway (1979) the judge unilaterally* decided that as far as (A) 75% of the products was retailed to end clients/non-participants; (B) every participant had at least 10 end clients; and (C) the company was ready to buy back at least some of the good, Amway (and similar-structured) MLMs are not pyramid schemes–and thousand clones appeared!
Nowadays, these Rules are neither supervised, nor enforced, transforming all MLMs into closed market* schemes:
In a closed room (no retail income)–for simplicity–ten participants sequentially (after a ‘marketing plan’) pay $100 each, totaling 10X$100=$1000. Now in the same order they try to take MORE than ‘invested’…. Welcome to fair MLM world, where Top 5% participants ALWAYS get over 80% of the total income. It’s like a lottery with ‘winners’ and ‘loosers’ strictly predefined.
While in the real life there’s no ‘infinity’ of participants or anything, FTC stated many times that even quality goods have nothing to do with the deemed legality IF the motive for buying it is merely participation–in order to get qualified for ‘bonuses’.
I would recommend also reading papers by Jon M. Taylor or Robert FitzPatrick and others)
Aashish I love the difference you stated between Pyramid Scheme and Network marketing, and the other benefits you stated. According to me, you can add one of the major benefit which is Time Multiplication in Network Marketing. After business, its the only profession where we can do Time compounding.
Prakash, the point is even the FTC officially stated the line is too fine to tell MLM from pyramid schemes.
However, a clever man can see that without real retailing to non-participants (ultimate users) it has nothing to do with Direct Selling or sales; just a business ON befuddled wannabe businessmen.
And how successful is rebranded MLM, if even in the best companies there’re always over 80% of ‘lazy losers’ and the MLM retailing still hasn’t exceed 0.04% worldwide?
Except for organizers and a couple of their motivators, there’re no successful MLM businesspersons, because gambling is not a reliable source of income.
Like Jack said about the closed room, it’s about a geometric progressions in zero-sum game, where a few ‘winners’ at the top sponge on a plenty of consumable ‘losers’.
For instance: Let’s assume a vendor sells bicycles for $40. Now he offers to buy a ticket just for $10 and bring three friends who would buy tickets too.
Technically, you could buy a bicycle for $10 as promised and the offer seems fair. Yet when you consider the ratio of those who may buy the tickets but couldn’t find any prospects, you will see that very soon there will be a lot of ‘losers’ who lost $10, not to mention wasted time and efforts. Therefore, making false promises is just not worth it.
The same goes about ‘MLM’.
“Like Jack said about the closed room, it’s about a geometric progressions in zero-sum game, where a few ‘winners’ at the top sponge on a plenty of consumable ‘losers’.”
So why not find out what it is that the “winners” are doing different than does who are not doing well?
Most look at the percentage of those who don’t do well and for some odd reason don’t find out what the “winners” are doing differently.
You will always have two types of people: those who are doing well and those who are not in everything a person is involved.
Sports, traditional business, musicians, authors, politics, etc.
It’s obvious that a person would take the initiative—be proactive enough to find out the difference.
So why is Network Marketing any different?
That’s one of the common concerns that’s already being answered.
I recommend to watch Tim Sales YouTube Videos because he answers that question and other common questions:
He explains why most are not doing well and
1. “The Pipeline Explained”
I also recommend getting the book:
2. Your First Year In Network Marketing By Mark Yarnell.
He covers the common pitfalls why most don’t do well.
3. MLM Success Rate… Can YOU Beat the Odds? (Part 1)
4. MLM Success Rate… Can YOU Beat the Odds? (Part 2)
5. Network Marketing Success… Who earns millions? Who earns zero? Why?
6. Is MLM a Pyramid – Because It’s Shaped Like a Pyramid?
7. s MLM Legal?
Hope the videos clear the misconceptions about the Network Marketing business model.
Yea.. there is an actual definition for a pyramid scheme and it’s clear enough to make a distinction.
Thank you so much mlm.
Is it gud to join in any (mlm which is in gud position )
Yes, it is the best opportunity for even a below person as well richest of rich. The only platform that has helped people live a life of their dreams. Otherwise people forget dreams wen pass out from schools colleges and in fact universities as they look for safety. This is best business..respond if you would like to work. I work with India’s network marketing company.
Great content. Thanks for the education.
Thank you ?
nice explanation.. it will be good for job seekers
Good and basic clearing explanation