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?
RELATED TERMS
  1. Networking

    Networking is a process that fosters the exchange of information ...
  2. Economic Network

    An economic network is a combination of individuals, groups or ...
  3. Pyramid Scheme

    A pyramid scheme is an illegal investment scam based on a hierarchical ...
  4. Network Effect

    The network effect is a phenomenon whereby a good or service ...
  5. Affiliate Marketing

    Affiliate marketing is an advertising model where a firm pays ...
  6. Raiden Network

    Raiden Network will speed up the transfer processing on the Ethereum ...
Related Articles
  1. Investing

    4 Networking Stocks that You Must Own (AKAM, CSCO)

    Understand how networking stocks fit into the technology sector. Learn about four leading networking companies that investors should own in 2015.
  2. Small Business

    Small Business Owners: Take Advantage of Networking

    What do we really get out of going to networking events? A lot, actually—if you follow up.
  3. Personal Finance

    What is a Pyramid Scheme?

    What exactly is a pyramid scheme? Read on.
  4. Small Business

    Multilevel Marketing Isn't Always A Scam, But It Often Is

    Nerium and Amway are popular direct sales companies that recruit new buyers and sellers to make a profit. Sadly, many direct sales firms are scams.
  5. Financial Advisor

    A Networking Cheat Sheet for Advisors

    Effective networking is essential for financial advisors looking to grow their practice. Here are some tips on how to make the process easier.
  6. Personal Finance

    4 Career Networking Tips That Work

    Find out the who, the how and the why of using networking to move up in your career.
  7. Personal Finance

    7 Ways To Build A Professional Network In School

    Having a network of people in the same profession as you can improve your career prospects. Here's how to build a professional network while you are still in school.
  8. Managing Wealth

    10 Tips for Strategic Networking

    Learn the rules of networking so you can operate like a pro. After all, maintaining a strong network is essential in today's job environment.
  9. Investing

    WWE Grows Revenue, Network Subscriber Numbers

    World Wrestling Entertainment (NYSE: WWE) posted a decent first quarter, with overall revenue increasing 10% year over year to 188.4 million from $171.1 million. However, the company did see ...
  10. Small Business

    7 Ways To Expand Your Home-Based Business

    These tips can help you take your small business to the next level.
RELATED FAQS
  1. What Is the Difference between Tier 1 Capital and Tier 2 Capital?

    Tier 1 capital is a bank's core capital, whereas tier 2 capital is a bank's supplementary capital. Read Answer >>
  2. How does LinkedIn (LNKD) make money?

    Selling advertising, premium subscriptions and recruiting tools boosts revenue for the publicly owned job listing and professional ... Read Answer >>
Hot Definitions
  1. Portfolio

    A portfolio is a grouping of financial assets such as stocks, bonds and cash equivalents, also their mutual, exchange-traded ...
  2. Gross Profit

    Gross profit is the profit a company makes after deducting the costs of making and selling its products, or the costs of ...
  3. Diversification

    Diversification is the strategy of investing in a variety of securities in order to lower the risk involved with putting ...
  4. Intrinsic Value

    Intrinsic value is the perceived or calculated value of a company, including tangible and intangible factors, and may differ ...
  5. Current Assets

    Current assets is a balance sheet item that represents the value of all assets that can reasonably expected to be converted ...
  6. Volatility

    Volatility measures how much the price of a security, derivative, or index fluctuates.
Trading Center