What is 'Network Marketing'

Network marketing is a business model that depends upon a network of distributors for growth, such as in multilevel marketing. It is a direct selling method that features independent agents that make up a distribution network for goods and services. Some network marketing systems are based on tiers that denote how many levels deep a sales and distribution network goes. In two-tier or multi-tier examples, the people that make up the top tier of a distribution network are also encouraged to build and manage their own networks of salespeople. Each network creator (or "upline") then earns a commission on their sales revenue, as well as on the sales revenue of the network they have created, otherwise known as "downline." There are many examples of reputable network marketing operations, though some have been criticized of being pyramid schemes and have been banned in some countries as a conduit for consumer fraud.

Breaking Down 'Network Marketing'

Network marketing is considered by many to be a form of direct selling (the person-to-person sale of goods or services). It utilizes a few different strategies to generate commission payments, such as recruiting, lead generation and management. Network marketing may be referred to by a variety of names, including "multilevel marketing," "cellular marketing," "affiliate marketing," "consumer direct marketing (CDM)," "referral marketing," "pyramid selling," or  "home-based business franchising."

Network Marketing Tiers

When evaluating network marketing companies it makes sense to consider how many tiers there are, as that can dictate how affiliated individuals earn money.

  • Single-tier: Participants are paid based on the direct sales they send to a merchant or traffic driven to an affiliate's website (also known as lead generation and may be measured in pay-per-lead or pay-per-click).
  • Two-tier: Participants are paid based on the direct traffic or sales they refer to a merchant or its site, as well as the direct traffic or sales generated by the affiliates who joined the affiliate program via their recommendation.
  • Multi-tier: Work the same way as two-tier but may extend to several more tiers, each kicking back a portion of their commission to the original participant.

Network Marketing Tips

There is some stigma attached to networking marketing, especially with regard to multi-tier and multilevel structures, which attract pyramid schemes. Still, the appeal of network marketing is that an individual with little skill but a lot of energy can create a profitable business for themselves with little monetary investment. A good rule of thumb, according to the Federal Trade Commission, is that single-tier network marketing operations tend to be more reputable, but multi-tier schemes in which people make money based on the number of distributors they recruit — rather than self-generated sales — can be problematic. Some reputable examples of single-tier network marketing operations are Avon, Mary Kay and Excel Communications.

When evaluation a network marketing operation, consider these questions:

  • Was it pitched as a chance to make money by selling products or by recruiting others? Ideally, downline affiliates should be recruited as customers first.
  • Who is at the top of a network (the upline)? Are they willing to divulge how much they are paid? What is the track record of the company's founders?
  • Are you and your upline enthusiastic about their products? Would you be willing to buy them? Do you know anyone who would? Can you sell them?
  • Can you quickly make a profit from selling their products? Can you see a relatively fast pathway to profits or will it be a long time treading water?
  • How is the product being promoted? Does it seem unique and well marketed? Do you have the right to advertise it as you see fit?
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