How Network Marketing Works
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Network Marketing is a way that companies market their products to the consumer. It is different from most other types of businesses because it doesn’t have any advertising, wholesaling, or retailing costs involved in it. It is done entirely by direct selling and referral, word-of-mouth type of advertising. This eliminates the middle man.
How Is ‘No Middle Men’ a Business Benefit?
When companies use “middle men” they spend money, and lots of it, on things that don’t enhance the product. If they don’t have these costs, they can spend more on research and development. This means that they can produce a higher quality, more unique offering.
Another plus of the Network Marketing business plan is that some of the money that formerly went to the middle man - advertising, wholesalers, and retailers - is now available to compensate the people who actually promote the products by their word-of-mouth advertising.
This person is referred to as an associate, independent agent, or distributor. He or she is a salesperson who has their own business or distributorship. They create income by building up a customer base that buys the products directly from the parent company, or by recruiting other entrepreneurs who in turn build their own customer base, or usually a combination of both. This increases the size of the overall organization.
Distributors earn commissions based on the sales efforts of their organization, which includes their efforts as well as the efforts of their downline. Commissions are paid to distributors according to their company’s compensation plan. There can be multiple levels of people receiving commission from one person’s sales. In addition, distributors can earn profit by retailing products which they purchase from their parent company at wholesale price.
What’s the Difference Between Network Marketing and Multi-level Marketing, or MLM?
Basically, nothing! The two terms network marketing and multi-level marketing refer to 2 different aspects of the same business.
Network marketing is just how it sounds: a network, or group of people, communicate with each other and products are marketed this way.
Leverage is created by paying commissions on multiple levels of associates as compensation for their efforts. This is what is referred to as the term “Multi-Level Marketing”.
What exactly is leverage?
Leverage in this instance refers to being able to earn income on someone else’s efforts.
The leverage concept is nothing new. It’s used by all for-profit businesses that have employees. The company charges money for something that the employee produces, then only pays the employee part of that. The owner of the company then keeps the rest, thereby leveraging the employees hours to create income for himself.
This is kind of the same as network marketing compensation plans, but there is a big difference: In a network marketing plan, the ones that are being leveraged off of are other independent distributors instead of employees. Therefore, there are no employee costs involved and hopefully these people will be more motivated because they also own their own business.
Wait a minute! Is this one of those “Pyramid Schemes”?
A company is a pyramid if the distributor mainly makes money from new signups or they have to buy more products than they can sell or use. Pyramids are illegal everywhere, but network marketing is legal in all states and most countries.
There are illegal pyramid schemes that try to pass themselves off as legitimate network marketing businesses. If a company is legitimate, the distributor can only earn commission from sales of the company’s products or services, and not from recruiting sign-up fees alone.
Want to learn more about the industry of Network Marketing?
The two resources are The 45 Second Presentation That Will Change Your Life by Don Faila, and Brilliant Compensation by Tim Sales. These are both excellent third-party tools that are not only informational, but extremely useful for showing to prospects that are dubious.
