Network marketing

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The term network marketing is used in two ways. In popular usage it is a synonym for multi-level marketing and often mistakenly considered the same as a pyramid scheme.

The concept of "network marketing" is often used to describe a marketing paradigm that stresses the interconnectedness of market actors and transactions and can be viewed as the application of systems thinking to marketing. According to network marketing theory other marketing paradigms see the discipline as consisting primarily of dyadic relationships (ie., one buyer and one seller). Network marketing wishes to overcome this limitation by looking at transactions and relationships from the viewpoint of all those involved.

This perspective originated in industrial marketing, also called b-2-b marketing, where multiple contact points are typical. It is not uncommon, for example, to have several decision makers in a company's "buying centre". Likewise, the marketer can be organized into a "selling team". With multiple actors on each side of the transaction, a complex network is created. This paradigm is further complicated by corollary actors like information gatekeepers, influencers, advertisers, and intermediaries. This network can expand over time as more people get involved.

The network marketing approach sees marketing as a system of social networks where the relations between each of the links must be understood, including potential feedback loops, while at the same time, the system must be comprehended as a whole.

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Overview

In a typical network marketing or multi-level marketing arrangement, individuals associate with a parent company as an independent contractor and are compensated based on their sales of products or service (as well as the sales achieved by those they bring into the business).

In a legitimate MLM company, commissions are earned only on sales to the end-user, who is often also a distributor. No money may be earned from recruiting alone ("sign-up fees"). Some companies produce revenues primarily by attracting new participants or selling them marketing services, as opposed to selling actual products. One must analyze the compensation plan to determine whether participants are paid from actual sales to customers and not from new-recruit bonuses or business support sales.

Multi-level marketing has a recognized image problem due to the fact that it is often difficult to distinguish legitimate MLMs from such illegal scams as pyramid or Ponzi schemes. NM/MLM businesses do operate legitimately in all 50 U.S. states and more than 100 other countries, and new businesses may use terms like "affiliate marketing" or "home-based business franchising."

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History

Amway in particular is a frequent target for critics for generating considerable revenues from selling instructional and motivational materials to its participants. The FTC filed a lawsuit against Amway in 1976. Amway's victory paved the way for companies to adopt a multi-level distribution system.

The 1980s saw a major shift as companies began managing the stocking and distribution of products as well as commission payments to their members. This allowed members to focus solely on marketing. Today, most MLM companies act as logistics companies that take orders, ship products and calculate and pay commissions.

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Compensation plans

Companies have devised various 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 organisation.
    • 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. 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.
  • Elevator or Matrix schemes feature a game 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. The Matrix scheme article discusses the legality of this plan. You must do your own research as with any other investment.
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Fraud in MLM

Fraudulent MLM schemes can usually be identified by high entrance fees or requirements to purchase expensive inventories. They often collapse quickly when the merchandise cannot be resold, leaving all but those at the top of the pyramid with sometimes staggering financial losses.

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External links

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