What Is Network Marketing?

Network Marketing is the sales of goods or services through a network of self-employed agents or representatives (is the structure of a business).

Multi-level marketing (MLM) is a business model or system that combines direct marketing (selling goods or services) with franchising in which payouts occur at two or more levels (through a network of distributors).

Multi-level marketing businesses function by recruiting salespeople (also called Distributors, Independent Marketers, Independent Business Owners, IBOs, Franchise Owners, Sales Consultants, Beauty Consultants, Consultants, etc.) to sell a product and offer additional sales commissions based on the sales of people recruited into their downline, an organization of people that includes direct recruits, recruits' recruits, etc.

This arrangement is similar to franchise arrangements where royalties are paid from the sales of individual franchise operations to the franchisor as well as to an area or region manager, but in some MLM programs, there can be seven or more levels of people receiving royalties from one person's sales.

The typical MLM program works through sponsoring or recruitment. If you choose to become a distributor with the MLM company, you'll earn money both through the sales of the MLM's products and through sponsoring/recruiting other distributors (receiving a portion of the income/volume these distributors generate).

The distributors that you sign up with your Multi-level Marketing company are called your downline (sometimes referred to as “team”). The distributor that originally sponsored/recruited you is called your upline. Often he or she will give you some help getting started, including training, resources and tips.

Legitimacy

Multi-level marketing has an image problem due to the fact that it is often difficult to distinguish MLMs from illegal pyramid or Ponzi schemes. MLM businesses operate in the United States in all 50 states and in more than 100 other countries, and new businesses may use terms like "affiliate marketing" or "home-based business franchising". However, many pyramid schemes try to present themselves as legitimate MLM businesses.

In the most legitimate MLM companies, commissions are earned only on sales of the company's products or services. No money may be earned from sponsoring/recruiting alone ("sign-up fees"), though money earned from the sales of members recruited is one attraction of MLM arrangements. If participants are paid primarily from money received from new recruits, or if they are required to buy more product than they are likely to sell, then the company is a pyramid or Ponzi scheme, which is illegal in most countries.

New salespeople (recruits) may be required to pay for their own training and marketing materials, or to buy a significant amount of inventory. A commonly adopted test of legality is that MLMs follow the so-called 70% rule which prevents members "inventory loading" in order to qualify for additional bonuses. The 70% rule requires participants to sell 70% of previously purchased inventory before procuring new orders. There are however, variations in interpretations of this rule. Some attorneys insist that 70% of purchased inventory should be sold to people who are not participants in the business, while many MLM companies allow for self-consumption to be a significant part of the sales of a participant.

Compensation Plans

Companies have devised a variety of MLM compensation plans over the decades:

• Unilevel or Stairstep Breakaway plans are the oldest and most popular. They feature two types of distributors -- managers and non-managers -- and three types of pay.
  • Baseshop overrides are overrides of managers from their subordinate non-managers, collectively called a baseshop. This is the same as any other sales organization.
  • Generational overrides are overrides of managers from the baseshop of managers who were previously their subordinate. Most plans compensate at least three generations of such managers.
  • Executive bonuses are commissions for managers who exceed a sales quota. For example, 2% of the total company sales revenue may go to a bonus pool that is shared monthly pro rata to managers who exceed $10,000 in that month.
• Matrix Plans limit the width of each level in a distributor's group, forcing strong distributors to pile ("spillover") their recruits over people who did not sponsor them.
• Binary plans limit the width of each level to two legs (2 people on your first level). Commissions are based on "cycles," where a distributor is paid a fixed amount whenever both legs achieve a certain number of sales units each. Commissions are paid incrementally when the sales volume in each leg matches. They don't pay based on levels, but instead, on a specified, maximum amount of purchases (over some period or time, often weekly). It pays on that amount regardless of how many levels down you need to look to reach that total.
• Elevator or Matrix schemes feature a board or a list on which each distributor pays in one or more product units to participate. When a certain number of units have been paid in, the structure splits and the earlier participant receives consideration.

If you are considering becoming part of an MLM company, you need to investigate the opportunity thoroughly, just as you would with any other proposed business venture.

Not all Multilevel Marketing plans are created equal, and some may not be MLM at all, but pyramid schemes, which are illegal.

Pyramid Scheme

A pyramid scheme is a non-sustainable business model that involves the exchange of money primarily for enrolling other people into the scheme, usually without any product or service being delivered.

Pyramid schemes are illegal in many countries, including the United States, Great Britain, Australia and New Zealand. These types of schemes have existed for at least a century.