by Multi-level marketing (MLM), also called network marketing or pyramid selling, is a controversial marketing strategy for the sale of products or services where the revenue of the MLM company is derived from a non-salaried workforce selling the company’s products or services, while the earnings of the participants are derived from a pyramid-shaped or binary compensation commission system. An MLM strategy may be an illegal pyramid scheme.
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.
In multi-level marketing, the compensation plan usually pays out to participants from two potential revenue streams. The first is based on a sales commission from directly selling the product or service; the second is paid out from commissions based upon the wholesale purchases made by other sellers whom the participant has recruited to also sell product. In the organizational hierarchy of MLM companies, recruited participants (as well as those whom the recruit recruits) are referred to as one’s downline distributors.
MLM salespeople are, therefore, expected to sell products directly to end-user retail consumers by means of relationship referrals and word of mouth marketing, but more importantly they are incentivized to recruit others to join the company’s distribution chain as fellow salespeople so that these can become downline distributors. According to a report that studied the business models of 350 MLM companies in the United States, published on the Federal Trade Commission’s website, at least 99% of people who join MLM companies lose money. Nonetheless, MLM companies function because downline participants are encouraged to hold onto the belief that they can achieve large returns, while the statistical improbability of this is de-emphasized. MLM companies have been made illegal or otherwise strictly regulated in some jurisdictions as merely variations of the traditional pyramid scheme.
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.
Advantages of Network Marketing
- Due to a reliable and robust distribution network that engages customers directly, companies do not need to rely on advertising to market their goods.
- There are absolutely no limits on the size of the network marketing structure. This happens because companies can tie-up with innumerable people to become distributors. Further, distributors can further c0-ordinate with other sub-distributors to expand the company’s sales.
- The structure of distributors also reduces the profit margins of retailers that companies consider as an expense. These margins get passed on to distributors and the companies do not have to bear their burden.
- Finally, this structure allows distributors to earn an unlimited income from their dealings with the company. They can earn an income from their own profits as well as commissions.
- Another advantage is that companies do not need to spend a lot of money on storage and distribution. This is because distributors end up bearing these expenses themselves.
Disadvantages of Network Marketing
- In this form of business, it is basically the distributors who facilitate delivery of goods to final customers. Manufacturers have a limited role in this regard. As a result, they may find it difficult to control distribution and sales.
- Since manufacturers depend on distributors to determine consumer demand, it can be difficult to predict production targets. They may end up under or over-stocking their products.
