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A business overview of network marketing

Over the years, network marketing has become a controversial topic. Many individuals adamantly feel network marketing is nothing more or less than a scam. Many others strongly believe network marketing is the greatest business opportunity in the world. The reality is that network, or multi-level, marketing can be, and has been, both. The vast difference of feelings (and they are usually deep-seated, emotionally charged) can also apply to other industries.

We’ve all seen scams in the securities industry, in insurance, in real estate, in the automobile industry, in precious metals and diamonds, in franchising, in the savings and loan industry—the list goes on and on. But the frauds don’t make any one industry, as a whole, bad or illegal or a scam. There are many legal and honest businesses operating in all of these industries, including network marketing and MLMs.

Network marketing companies and traditional corporations are really very similar. Both are directed by a chief executive officer, he or she has a support staff consisting of executive managers for operations, information systems, financial analysis and reporting, marketing, sales, and, in many cases, manufacturing.

The primary difference between network marketing and traditional companies is the method of product distribution and the manner the company chooses to compensate its sales organization. Compensation plans determine how and when an individual is paid for work performed.

The traditional sales model

Often companies develop incentive packages to motivate workers to become more productive. Both network marketing and traditional business utilize a wide range of compensation plans. In either environment, to maximize earnings, it is necessary to understand fully the compensation plan. It is also important to remember that earnings are contingent upon productive hard work.

Traditional sales depend on a distribution system to channel products from the manufacturer through numerous levels of jobbers and wholesalers to the retail outlets, where the customer ultimately buys the products for personal consumption. Typically, sales personnel at various levels in the system move large volumes of product to maintain a certain level of income.

The success of the traditional distribution system is largely dependent upon advertising. Advertising creates consumer awareness as to the availability of a company’s products. Purchases are made through traditional sales only if consumers are “product aware” and understand the benefits of using the product. Each year, companies spend millions of dollars on advertising to inform the public about their products and entice them to buy, thereby pulling the products through the system.

The traditional distribution system is managed by sales and marketing executives, product managers, regional sales managers, district sales managers, and unit sales managers who are directly responsible for recruiting sales and marketing personnel, maintaining efficiency in the distribution system, providing customer relations, and ultimately selling the product. This team of managers also controls the sales and advertising budgets.

Many traditional companies employ the entire selling staff, compensating individuals using a base wage. Their earnings are determined by the skills required, their level of experience, and their territory or area responsibility.

Compensation plans vary depending on the employer. Some are structured to implement an hourly wage. Others are based upon a monthly salary. Many include a benefits package. It is not uncommon for managerial and sales representatives lo be given a base salary enhanced with an incentive package of commissions or overrides.

Many companies compensate sales managers and/or sales representatives using a straight commission schedule to assure there is motivation and actual production of sales.

Traditional companies sometimes engage independent contractors to market at various levels in the distribution system, assisting the movement of products to the retail outlets.

Once at the outlets, the products are sold by companies using employees and/or independent sales representatives. Retailers utilize various types of compensation packages from salary to commission.

The network marketing sales model

Network marketing sales require neither retail outlets nor a huge advertising budget to inform the public about the value of the products. Instead, the distribution system is managed by independent contractors.

Distributors purchase the products from the company and move them directly into the hands of the ultimate consumer. Distributors are not employees of the network marketing company. They are self-employed independent contractors. In essence, each distributor becomes the head of his or her own company.

In network marketing, it is the distributor’s responsibility to market the products through word-of-mouth advertising. The power of word-of-mouth advertising is utilized each time any individual recommends a dentist, attorney, doctor, chiropractor, automobile salesperson, real estate agent, stockbroker, insurance agent, restaurant, movie—or whatever—to another person. Usually, there is a certain credibility and integrity factor that goes along with the recommendation. This type of communication anticipates the response, “If Mary is recommending this, it must be a good thing.”

It is this word-of-mouth advertising, combined with: (1) the right to build a selling organization, (2) the utilization of profitable compensation plans, (3) the privilege of being an entrepreneur, and (4) the power of geometric progression that attracts individuals to network marketing and enables them to be successful.

As the network marketing company usually directs little or no advertising to the consumer, the independent distributor is responsible for selling the products to others.

Just like any successful product, those of network marketing companies must be unique, superior, fill a need, and be affordable if there is to be a demand. The product must have value and produce results. These factors make the product easier to sell and generate repeat sales.

Network marketing operates on the philosophy of many people each doing a little. Therefore, if a distributor wants to develop a large steady income, he or she must build a large, stable selling organization. This is accomplished by finding and training other individuals who desire the same opportunity to become network marketing distributors.

The whole process of sponsoring and training is duplicated again and again and again. In network marketing, as well as in traditional organizations, the lower levels become very large. Distributors within network marketing companies capitalize on the geo-metric principle to expand their selling organization and increase product sales.

Compensation for distributors is based upon results. When network marketing distributors are able to sell their products successfully, they earn retail and wholesale profits. As they find other individuals who desire the same network marketing opportunity to become distributors. It is this process, combined with the principles of geometric growth, that provides each distributor with the opportunity to build a successful network marketing business.

In some ways, the network marketing organization represents an inversion of the rule that there is a small top and a large bottom to the organization because each and every distributor at the “bottom” is actually at the top of his or her own organization, which can grow to become as large as any other organization in the company.

  • Tomas Bright
    March 9, 2014 at 6:18 pm

    Great post! I never had any idea that network marketing companies have a chief executive officer..

  • Johnny Medley
    March 26, 2014 at 3:26 pm

    I always liked to think as McDonalds as a perfect business model. Even for Network Marketing!

  • Kim Rawks
    March 30, 2014 at 4:08 am

    There are scams in every business, like you said. I believe most MLM systems are legit. You just have to work really hard to see a profit.

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