How Does Network Marketing Work?
Wednesday, October 15, 2008 at 1:26PM 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.
What's the problem with "Middle Men"?
One of the benefits of this is that more money can be spent on research, development and manufacturing, which usually results in much higher quality, unique products.
The other main benefit of the Network Marketing business model is the fact that some of the money spent on advertising and the distribution channel (wholesalers, retailers, etc.) can now go to the people who actually promote the products by their word-of-mouth advertising.
These people are referred to as associates, distributors, independent agents, and other terms. They are unsalaried salespeople that basically have their own business, and develop their organization by either building a customer base that buys their company's products directly from the parent company and/or by recruiting a downline of independent distributors who also build their own customer base, thereby increasing the size of the overall organization.
Associates can earn money in the form of commissions based on the efforst of their organization, which includes themselves and everyone in their downlines. These commissions are calculated based on the individual company's compensation plan, which determines how an associate gets paid. There are usually many levels of people getting paid from one person's sales. Also, associates can earn money by retailing products that they buy from the company at wholesale prices.
There is also a term called "multi-level marketing" or "MLM". What's the difference between MLM and network marketing?
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".
And leverage is....
Leverage can mean different things. In this context, it means the ability to earn commission on something that someone else sells.
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"?
If distributors are paid primarily from money received from new recruits, or if they're required to buy more product than they are likely to sell, then the company may be a pyramid. Pyramids are illegal in all states and most countries. Legitimate Network Marketing companies are not only legal, but thrive in every state and in most countries.
Network marketing companies are not pyramids, though some pyramid schemes try to pass themselves off as legitimate MLM businesses. In most legitimate MLM companies, commissions are earned only on sales of the company's products or services. No money can be earned from recruiting alone, as in sign-up fees.
Two Good Resources For Learning 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.