What is network marketing?

Network Marketing

Network marketing is a company-based business model that distributes products and services through a network of independent contractors.  Network marketing is also known as multi-level marketing (MLM), affiliate marketing, and hierarchical marketing.  Some of the world's most famous network marketing companies are Amway Corporation, Shaklee, Mary Kay, Tupperware and Avon.

 To understand how network marketing works, it may be helpful to consider a business model that most consumers are familiar with franchises.  In a franchise, the owner pays the company the right to do business using the company's products, services and names.  The parent company agrees to provide the owner with training, development, advertising and marketing support.  The name on the outside of the building is the name of the parent company, but the actual location is privately owned by an independent business owner.

Network marketing isn't really a franchise business model, but it works in a similar way.  In fact, some large MLM companies informally call their business plans "private franchises."  In network marketing, companies distribute products and services through independent business owners (IBOs), who sell these products and services to their own customers.

The main factor that made network marketing so attractive is that independent business owners can not only sell products and services to retail customers, but also expand their business by setting other business owners in their business.  This is commonly known as a "sponsor" in the MLM industry.  By sponsoring others, the business owner can not only profit from what he sells directly, but also from the sales and production of what he sponsors.

 Here's an example of how an MLM business works:  Owner 1 is an existing IBO that sells $ 100 worth of merchandise each month.  In addition to the retail profits he earns, he also receives a monthly bonus on sales volume.  Owner 1 decides to expand the business and sponsors Owner 2.

Due to the structure of the network marketing business, many people mistakenly believe that all MLM companies are illegal pyramid schemes.  In reality, a legitimate network marketing company is not a pyramid.  The belief that MLM companies are an illegal pyramid scheme may have taken root widely in 1975 when the Federal Trade Commission (FTC) accused Amway of being an illegal pyramid.  However, in 1979, a Federal Judge decided that the networking marketing plan Amway used was actually a legitimate business model.  This decision helped justify other MLM companies.