What is Network Marketing?
Network marketing is a type of marketing strategy that companies use to market their products. It employs independent sales associates rather than employees to do the marketing. Independent associates are paid commissions on the sales they make and they are able to recruit other independent associates (downline) into their organization, receiving a partial commission for the sales made by them.
Network marketers effectively own their own business but have the luxury of not dealing with supply chain, shipping, manufacturing, payroll, etc. The network marketing company deals with all of the aforementioned business functions. A network marketer's primary focus is building an organization of people who market and sell the company's products.
Is it a Ponzi Scheme?
Network Marketing has had its fair share of criticism. Many have claimed that it's really a pyramid or Ponzi scheme in disguise. If you aren't familiar with a Ponzi scheme, it's an illegal business practice that is focused on recruiting people that pay a certain amount to join with little to no product. Once they join, they are told to recruit other people that pay to join and that money gets redistributed to the people who joined before them. It's a scheme that benefits the people who started early on.
The major difference between a Ponzi scheme and a legitimate network marketing business model is actual sales of a legitimate product or service. In network marketing, if there is a fee to join, it's typically for basic business resources like a website, marketing material, forms, training, etc. Most companies also have a minimum product purchase requirement if you want to gain access to higher commission levels. Money is made only when real products are being marketed and sold.
The comparisons of a Ponzi scheme and a legitimate network marketing company is becoming more antiquated as network marketing has proven itself as an effective and legitimate business model. Network marketing has had a bumpy ride to becoming an accepted business model, but in it's estimated 90+ years of existence it has legitimized itself and isn't going away anytime soon.
How Does it Work?
How Do You Make Money?
In network marketing, you make money through selling your network marketing company's products. But the real benefit of building a network marketing business is the ability to build an organization of independent associates that also sell products. By building an organization, you benefit from the sales your organization makes.
Every network marketing company has a slightly different compensation plan, but most operate under a roll-up compensation plan where the "upline" (the person above someone in the associate organization structure) gets a certain percentage of the sales made by the people below them. This feature of network marketing makes it very attractive for many people because the ability to grow a large distribution network of associates can pay large dividends and create something called residual income through reoccurring purchases.
Network marketing is known for its ability to create residual income. Residual income is money that comes in regardless if you're working or not. It's typically money earned for doing work one time or purchasing an asset that pays you a reoccurring income. For example, owning a house that you rent out can be a form of residual income. Owning stocks and receiving a dividend for each stock you own is also another form of residual income. Music artists creating music that gets streamed for years down the line receive residual income.
Network marketing companies produce residual income because they typically sell products that are inherently repeat purchases like nutritional supplements, skincare, financial services, cleaning supplies, and so on. Repeat purchases coupled with a large network of distributors selling products can produce significant income and create lasting residual income.
What Are The Pros & Cons?
- Simple to get started
- Low overhead
- Residual income
- No need to deal with back end logistics (inventory, payroll, shipping, customer service, etc)
- Corporate support
- Exponential growth potential
- High rejection rate
- High attrition rate (People quit)
- It takes time to grow a sustainable income
- Network marketing stigma
Estimated Startup Cost
Starting a network marketing business is fairly cheap. The only cost associated with starting is typically a starter product package that comes with some business tools. The starter product package allows you to get familiar with your network marketing company's products and a way to sample products to prospective customers and associates. More often than not, network marketing companies require a monthly auto order of products to stay qualified to earn commissions on personal sales and downline sales.
Starter Product Package
Key Activities as a Network Marketer
Most of your time in network marketing is spent acquiring new customers and finding new distributors (independent associates). Typically, this has been done through immediate friends, family, and something called "prospecting." This is when you intentionally meet new people, establish a relationship, and introduce them to the products or business opportunity as an individual distributor.
n more recent years, online marketing has taken off in finding new customers and associates. This means using a combination of organic online marketing tactics through social media outlets and paid advertising through social media and search engines. The rest of your time as a network marketer is spent presenting your products and business opportunity and training your new associates to do the same.
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