Do you want to start a MLM company? If YES, here is everything you must know about the network marketing business model plus example of successful companies.
One of the key decisions that you are expected to take if you want to start any business is to choose a business model to operate the business on and one of the business models that you can leverage on to build your business is the network marketing business model.
If you are attracted to the network marketing business model, then you should know that there is no limit to the fortune you can make from it as long as you are creative and have good marketing and networking skills.
You will agree that loads of entrepreneurs and freelance marketers are making good money from selling the products of companies or their own product via network marketing or multi-level marketing as it is popularly called.
Operating a business with the network marketing business model can be demanding and risky at the same time, but if you have done your due diligence before venturing into the business; you will likely not run at a loss. First and foremost, you are expected to have an experience in the network marketing industry.
Please note that this business model works perfectly for certain products especially products like food supplements, cosmetics and a host of similar products, and in some cases even services like insurance.
Network Marketing Business Model – Everything You Need to Know
If you are making plans to start a network marketing business or you are already running a network marketing business but your need to know more about the model and some of the leading companies that are already operating this business model, then you will find this article highly useful.
What is Network Marketing?
Network marketing is a business opportunity that is very popular with people looking for a part-time job, and perhaps flexible means of earning additional income. Some of the leading network marketing companies in the United States are Forever Living Products, Fuel Freedom International, Avon Products, Mary Kay Cosmetics and Tupperware et al.
Network marketing which can also be referred to as Multi-level Marketing (MLM) or Pyramid selling or affiliate marketing is a controversial marketing strategy in which the sales force is compensated not only for the sales they are able to generate, but also for the sales of other salespeople (down-line/team members) that they recruit.
In the United States of America and of course in most countries of the world, companies that leverage the network marketing approach have been a frequent subject of criticism and lawsuits.
Generally, the criticisms are focused on their similarity to illegal pyramid schemes, price fixing of their products, high initial costs for registering (the amount needed to purchase marketing kit and first products), emphasis on their recruitment strategies and loads of other technique that seems not to be plain and easy.
Research carried out by The Direct Selling Association (DSA) of which network marketing is under, shows that in 1990, 25 percent of members used network marketing, growing to 77.3. Independent non-salaried participants, referred to as distributors (variously called “associates”, “independent business owners”, “independent agents”, etc.), are authorized to distribute the company’s products or services.
They are awarded their own immediate retail profit from customers plus commission from the company, not downlines, through a multi-level marketing compensation plan, which is based upon the volume of products sold through their own sales efforts as well as that of their downline organization.
If a network marketer signs into your network marketing company, in order for them to earn, they are expected to develop their business or network by either building an active consumer network, who buy direct from the company, or by recruiting a downline of independent distributors who also build a consumer network base, thereby expanding the overall organization.
Clientele for a Network Marketing Company
To a large extent, it depends on the product or services the network marketing company is involved with. For example, a network marketing company that retails makeup and related cosmetics can only appeal to the female folk and a network marketing company that retails aftershave and related products can only appeal to the male folk.
Mode of Operation of Network Marketing Business Model
Network marketing business model is a business model that expects network marketers to sell products directly to end-users by means of relationship referrals and word of mouth marketing, but most importantly they are incentivized to recruit others to join the company as fellow salespeople so that these can become their downline distributors.
Note that the network marketing business model functions because downline participants are encouraged to hold onto the belief that they can achieve large returns, while the statistical improbability of this is pushed to the back burner.
Mode of Payments of Network Marketing Business Model
Even though companies that operate the network marketing business model decide their own specific financial compensation plan, the common feature that is found across all companies that operate this model is that the compensation plans theoretically pay out to participants only from the two potential revenue streams.
The first stream of compensation can be paid out from commission of sales made by the participants directly to their own retail customers.
The second stream of compensation can be paid out from commissions based on the sales made by other distributors below the participant who had recruited those other participants into the network marketing hierarchy; in the organizational hierarchy of network marketing, these participants are referred to as one’s downline distributors.
Profitability of Network Marketing Business Model
Aside from the fact that operators of network marketing stand the chance to keep making profits, it is not so for network marketers especially for newbie’s coming into the network.
This business model is built in such a way that the largest proportion of participants must operate at a net loss (after expenses are deducted) so that the few individuals in the uppermost level of the network marketing hierarchy can get significant earnings — earnings which are then emphasized by the network marketing company to all other participants to encourage their continued participation at a continuing financial loss.
The end result of the network marketing business model is one company selling its products/services through a non-salaried workforce or network marketers working for the company on a strictly commission basis.
While the partners simultaneously constitute the overwhelming majority of the consumers of the network marketing company’s products/services that they, as participants of the network marketing business model, are selling to each other in the hope of one day themselves will be at the top of the hierarchy. This creates great profit for the MLM company’s actual owners and shareholders.
It might interest you to know that loads of companies that operate the network marketing business model do generate billions of dollars in annual revenue and hundreds of millions of dollars in annual profit. The not-too-pleasant side of this business model is that the profits of the network marketing company are generated to the disadvantage of the overwhelming majority of the company’s non-salaried workforce; the network marketers.
Some of the profit is then meaningfully shared with a few individual participants at the top of the network marketing hierarchy.
Reasons Why People Sign Up for the Network Marketing Business Model
Aside from the fact that this business model makes it possible for top liners to earn mega earnings, the freedom people get is one key positive for this business model. People that venture into network marketing business can as a matter of fact start the business from their home and still make headway in the business. This is why there are loads of stay-at-home moms who are active network marketers.
As a matter of fact, the cost of running the business process from start to finish could be restricted to the cost of making phone calls, transportation, internet subscription, PR and in some cases materials such as fliers, posters and digital billboards et al. It is easier to place a projection on the profits you are likely going to make if you are able to successfully sell your products or services via the number of network marketers you have within your network.
Drawbacks of the Network Marketing Business Model
One major drawback of the network marketing business model is that the model depends on the failure of the overwhelming majority of participants. These participants inject money from their own pockets into the system, so that it can become the revenue and profit of the network marketing company, of which the network marketing company shares only a small proportion of it to a few individuals at the very top of the network hierarchy.
Other drawbacks are;
- Because of its similarity to traditional illegal pyramid schemes most people steer clear of this business model, they would rather make use of distribution business model to sell their products or services
- Price fixing of products or services is one factor that scares participants from joining network marketing companies
- There are backroom deals where secret compensation packages are created between the network marketing company and a few individual participants, to the detriment of others
- Expensive initial entry costs (for marketing kit and first products) usually discourage participants
- Emphasis on recruitment of others over actual sales (especially sales to non-participants)
- Exploitation of personal relationships as both sales and recruiting targets
- The network marketing business model is complex and operates on exaggerated compensation schemes
- Participants often complain of false product claims; sometimes it is not what they bargain for that they get when they eventually sign in.
- The companies operating the network marketing business model or leading distributors are known to earn their major money off participant-attended conventions, training events and advertising materials
- Most network marketing companies adopt the cult-like technique where some groups are used to enhance their members’ enthusiasm and devotion.
Marketing Strategy for Network Marketing Business Operators
Generally, the key marketing strategies adopted by operators of network marketing business models is not the sale of products or services of the company. The products or services of the company are largely fringe to the network marketing business model.
The true marketing strategy is on the confidence given to participants concerning potential financial independence that will be achieved through participation in the scheme, luring them with phrases like ‘becoming your own boss” or “the lifestyle you deserve” or “independent distributor”.
Despite the fact that emphasis is always made on the potential of success and the positive life change that “might” or “could” (not “will” or “can”) result; it is otherwise difficult to find disclosure statements (or at the very least, difficult to read and interpret disclosure statements). Network marketing participants are given fine print disclaimers that they as participants should not rely on the earning results of other participants in the highest levels of the network marketing hierarchy.
Are Network Marketers Employees of a Network Marketing Company?
Please note that network marketers are freelancers and they are not employees of the network marketing company. Hence, network marketers do not receive a salary or wage, nor do network marketers receive compensation from the network marketing company for their invested labor and expenses in their network marketing business. Usually, the earnings, if any income is made at all, is derived only from commissions on their personal sales or their share of the commissions on the personal sales of the downlines under their hierarchy.
Do I Need a Professional Certificate to Operate This Business Model?
Even though it is not mandatory for a business person to obtain professional certification before they can successfully operate this business model, but it will be to your advantage to get all the necessary professional certifications, and some of the professional certifications that you should aim towards getting are;
- Certified Network Marketer
- Certified Training for Direct Sales/Network Marketing
- Certified Marketing Management Professional – CMMP®
- AMA Certified Professional Marketer
- MBA in Network Marketing
The Legality of Network Marketing Business Model
Please before you venture in the network marketing business model, you need to check with your country business laws to be sure that network marketing is legal in your country. This is because network marketing is not legal in some countries.
For example, in the United States, The Federal Trade Commission issued a decision, in re-Amway Corp., in 1979 in which it indicated that multi-level marketing was not illegal per se in the United States. Nevertheless, Amway was found guilty of price fixing (by effectively requiring “independent” distributors to sell at the same fixed price) and making exaggerated income claims.
The Federal Trade Commission advises that network marketing organizations with greater incentives for recruitment than product sales are to be viewed skeptically. The Federal Trade Commission also warns that the practice of getting commissions from recruiting new members is outlawed in most states as “pyramiding”.
In the United States, network marketing businesses operate in all 50 states. Businesses may use terms such as “affiliate marketing” or “home-based business franchising”. Many pyramid schemes attempt to present themselves as legitimate network marketing businesses.
Please note that as non-employees, network marketers are not protected by legal rights of employment law provisions. Instead, network marketers are naturally presented by the company operating the network marketing business model as “independent contractors” or “independent business owners”.
Network marketers do not possess a business in the traditional legal sense, and they do not hold any tangible business assets or intangible business goodwill able to be sold or purchased in a sale or acquisition of a business. These are the property of the network marketing company.