Network Marketing

Article byNanditha Saravanakumar
Edited byAlfina
Reviewed byDheeraj Vaidya, CFA, FRM

Network Marketing Meaning

Network marketing or multi-level marketing refers to a business model which constitutes a network of people earning directly from sales commission depending on the quantity they sell. It’s a flexible approach that allows people to work online. It evolved as a strategy that adds salespersons to a marketing network.

What is Network Marketing?

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However, most network marketing strategies are pyramid schemes, which try to make money by selling expensive training materials to new hires rather than getting them to sell a product. Hence, people interested in this type of marketing should be aware of network marketing scams and research them before enrolling.

Key Takeaways

  • Network marketing strategy works by adding more people to a business, marketing a product, and generating sales. The people are paid a commission depending on the quantity they sell.
  • Common types include single-tier, two-tier, and multi-tier marketing. Of this, single-tier marketing is considered more authentic. 
  • Some notable network marketing companies are Amway, Tupperware, Avon Products, etc. 
  • The applications of social media in marketing are not new. Similarly, social network marketing is a strategy gaining prominence. The salespersons market the product to their online connections.

Network Marketing Explained 

Network marketing businesses usually begin with a core sales team. These people specialize in sales. Next, the team adds another tier of salespeople enthusiastic about the product or sales prospects. The second tier recruits the third tier, and this goes on. Finally, the salespeople earn commission by the number of items they can sell. 

But what makes this marketing strategy interesting is that the top-tier salespersons who recruit another tier will get a share of others’ commission. For example, consider a company that sells skincare products. The core sales team consists of A, B, and C. They recruit D, E, and F, who hire G, H, and I, respectively. A earns a commission on the sales made by her. She also earns a part of the commission on sales made by D, G, and the others hired by her recruits. 

With the COVID-19 pandemic-induced lockdowns, there has been a rise in such marketing strategies. Since people were confined to their homes, looking to make money, with the internet being a huge relief, social network marketing grew. It encouraged using social media tools like posts and stories/statuses to advertise certain products to the salespersons’ contacts. 

However, this led to an exponential increase in network marketing scams. By recognizing the potential for such gig works, many businesses exploited the people looking for jobs by making them pay upfront for training materials. Their objective is to earn money from people in the name of a business. Thus, the pyramid schemes focus not on customers but on workers who become the bait.

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Types

There are mainly three types of multi-level marketing. Let’s look at each in detail.

  1. Single-tier marketing – This is considered the most authentic type of marketing, where people earn based on direct commission. They are not often required to recruit another tier of people. Affiliate marketing strategies like Pay-Per-Click (PPC), Pay-Per-Lead (PPL), Pay-Per-Acquisition (PPA), etc., are followed in this. 
  2. Two-tier marketing – In this approach, the salespersons earn direct sales commissions. However, they also earn indirect commissions or incentives to recruit other tiers. Earning indirect commission is more often restricted to two tiers of salespeople.
  3. Multi-tier marketing – This method has more than two tiers of salespeople. They can earn direct and indirect commissions up to five to six tiers. Some companies provide top-tier salespersons with incentives as long as their tier of recruits grows. 

Since two-tier and multi-tier marketing provides incentives for recruiting people, it might be considered a pyramid scheme or less genuine.

Example of Network Marketing

The United States Federal Trade Commission (FTC) noted the proliferation of network marketing businesses during the COVID-19 pandemic. With rising concerns about the common public becoming prey to pyramid schemes, the agency, in February 2022, decided to introduce regulations allowing it to track the unlawful gains by such companies and appropriate this money.

Benefits

Decently established network marketing brings together people who are enthusiastic about sales. So rather than just being a salesperson or a representative, they can act as an affiliate. It is a secondary source of income for many people and allows them to work online flexibly. 

From a company’s perspective, it only needs to pay those who contribute to sales instead of having to pay fixed salaries or wages. Thus, it is a gain for businesses. They need not pay additional benefits to the employees, as the salespersons are not actual employees of the business. This reduces the company’s time and effort it puts into the recruitment process.

Another advantage of multi-level marketing is that it supplies quality products in demand – organic, natural, vegan, and sustainable. Most such businesses focus on bio-based products in cosmetics, skincare, health supplements, etc.

Frequently Asked Questions (FAQs)

1. Is network marketing a pyramid scheme?

No. Network marketing is not supposed to be a pyramid scheme. Unfortunately, however, many people are turning to such fraudulent activities. Consequently, more multi-level marketing initiatives are becoming pyramid schemes.

2. How to succeed in network marketing?

Due to the criticisms and misconceptions about fraud in multi-level marketing strategies, it is first important to add authenticity to the business. For this, it is advisable to use different approaches than those followed by pyramid schemes. Businesses can undertake affiliate marketing programs, which are considered more genuine than regular multi-level marketing initiatives.

3. What are network marketing companies?

Network or multi-level marketing companies generally generate sales through tiers of recruits. One tier of recruits will generate a second tier, and this goes on, thereby increasing sales for the business. The recruits will earn a direct commission on sales conducted by them and a second commission from the sales made by their recruits.

4. Is network marketing legal?

Yes. Multi-level marketing is a legal business strategy. But some people misuse this strategy to make unlawful gains by exploiting people.

This article is a guide to Network Marketing and its meaning. Here, we explain its types, benefits, and an example. You can also go through our recommended articles on corporate finance –

Reader Interactions

Comments

  1. Samuel Wiredu says

    I really learned a lot

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