What Is Network Marketing?

Network marketing is a business model that depends on person-to-person sales by independent representatives, often working from home. A network marketing business may require you to build a network of business partners or salespeople to assist with lead generation and closing sales.

There are many reputable network marketing operations, but some have been denounced as pyramid schemes. The latter may focus less on sales to consumers than on recruitment of salespeople who may be required to pay upfront for expensive starter kits.

Key Takeaways

  • Network marketing appeals to people with high energy and strong sales skills, who can build a profitable business with a modest investment.
  • A network marketing business can be a single-tier program, whereby you sell the products or multi-tier where you recruit salespeople.
  • Beware of network marketing companies that create many tiers of salespeople and thoroughly research the company before you join.

How Network Marketing Works

Network marketing is known by a variety of names, including multilevel marketing, cellular marketing, affiliate marketing, consumer-direct marketing, referral marketing, or home-based business franchising.

Companies that follow the network marketing model often create tiers of salespeople—that is, salespeople are encouraged to recruit their own networks of salespeople. The creators of a new tier (or "upline") earn commission on their own sales and on sales made by the people in the tier they created (the "downline"). In time, a new tier can sprout yet another tier, which contributes more commission to the person in the top tier as well as the middle tier.

Thus, the earnings of salespeople depend on recruitment as well as product sales. Those who got in early and are in a top tier make the most.

The FCC advises that that single-tier network marketing operations tend to be more reputable than multi-tier schemes.

The Advantages and Disadvantages of Network Marketing

There is some stigma attached to the networking marketing business, especially those with multiple tiers, which can be characterized as pyramid schemes—that is, the salespeople in the top tier can make impressive amounts of money on commissions from the tiers below them. The people on the lower tiers will earn much less. The company makes money by selling expensive starter kits to new recruits.

The appeal of network marketing is that an individual with a lot of energy and good sales skills can create a profitable business with a modest investment.

A good rule of thumb, according to the Federal Trade Commission (FCC), is that single-tier network marketing operations tend to be more reputable than multi-tier schemes, in which people make money based on the number of distributors they recruit.

Some reputable examples of single-tier network marketing operations include Avon Products, Mary Kay, and Excel Communications.

Special Considerations

Anyone considering joining a network marketing operation should do their research before making a decision. Consider these questions:

  • Was it pitched as a chance to make money by selling products or by recruiting others?
  • What is the track record of the company's founders?
  • Are you personally enthusiastic about the products?
  • Are people you know enthusiastic about the products?
  • Is the product being promoted effectively?
  • Do you foresee a relatively fast pathway to profits or a long time treading water?