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The network marketing business model explained

There is a lot of misunderstanding when it comes to the network marketing business model. However I believe that most people are so scared by the stigma of network marketing that they don’t even look at the business model properly. In future posts we’re going to look at some of the other issues but first I want to get clear about the overall ways things work.

The difference between selling via retailers and direct to consumer

In the traditional business model a company will manufacture products, send them to a distributor who supplies them to a retailer who finally sells them to the consumer. In network marketing (or direct selling) the manufacturer simply sells directly to the consumer. You can see this model at work in another form with the computer company Dell that manufactures laptops and sells them directly to consumers via their website.

Selling straight to the consumer cuts out the middle men in the supply chain and this saves the company a ton of money. People usually don’t appreciate that even just the retailers’ mark up is usually about 50% of the products’ final sale price. They need to charge this to pay for sales staff, premises etc.

How a company markets its products

In order to sell directly to the consumer the company can either spend their money on traditional advertising like TV, radio, newspapers etc (which can also be very expensive) or adopt a network marketing model. In a network marketing model the company finds independent distributors and pays a commission to them based on how much product they sell. This means the money normally spend on the supply chain and marketing can now go to the independent distributors.

The independent distributors are usually also consumers of the products (after all why would you promote something that you didn’t believe in enough to use yourself?). The distributors are people who believe in the product enough to want to promote it to other people. They earn a commission for their sales and marketing efforts.

Building a traditional sales team versus a network marketing sales team

In a traditional business the company usually recruits sales staff to sell its products. It relies on marketing to get people interested and has its sales team waiting to answer phones or at a retail location. These salespeople are sometimes paid on commission but will probably have a fixed salary as well plus the company is paying for the premises that the sales team work from.

In network marketing the company are always looking for more people who believe in the product and want to become independent distributors themselves. So distributors are given tools to find other like-minded people who might also want to become distributors as well. When a distributor sponsors a new distributor they also get a commission on the sales of that new distributor which varies based on the compensation plan of the company.

Both the traditional business and the network marketing business are building a sales team. They’re just going about it in different ways based on what they believe is the most effective for their company.

Some benefits of the network marketing model

Because sponsoring distributors are also paid commission based on the sales of the new distributor this encourages the sponsoring distributor to train the new distributor so their business is a success as well. In this way network marketing creates a network of like-minded people who are continuously helping other members of their team to create a more successful business. So rather than view a new distributor as competition (like traditional sales people based solely on commission) it is just like adding a new salesperson to your team that you can leverage.

Hence if the network marketing model and compensation plan are structured correctly it creates a team of people all working to promote the company’s products together. Of course different companies have different models so this is not a general rule with every company you see.

Problems with the network marketing model

A common problem with network marketing that was far more prevalent in the past is the variety of different models and structures used. Many looked fancy on paper but when push came to shove they fell over. However with new compensation structures and the maturity of the network marketing model things are very different these days.

Obviously you will have to do your own due diligence with the network marketing company you are looking to join to ensure their compensation plan is fair and does not create a spirit of competition between distributors. Plus there are also get rich quick schemes disguised as network marketing which start out with a bang and end with a bankruptcy or owners fleeing the country.

This means you have to be careful which company you’re choosing to work with. Make sure they have a proven track record as it’s often the “latest and greatest opportunity” where you can “get in on the ground floor” where the problems occur.

The moral of the story when choosing network marketing

Network marketing is an industry and within that industry there are good and bad examples of the model. Just like in real estate you can get good and bad deals and in business you can get good or bad businesses. I’m not saying anything labelled network marketing is automatically good but I find it to be a very smart and effective model when used correctly by an ethical company.

Just do your due diligence and make sure you’re working with a company you can trust.

MLM Compagny example: HERE