What is network marketing?
Network marketing is an opportunity where members can sell the products or offer services of a company to their own clients for a profit. These products or services are not available on the open market, in stores or through traditional businesses. It relies heavily on individual relationships between the network marketer and their clientele rather than the typical online or offline sales channels.
There is also a multi-level marketing (MLM) component to most network marketing opportunities. This means that network marketers can introduce new members to the opportunity and earn commissions from the sales of their members. Therefore the marketer is earning in two ways – profits of their own sales and commissions from the sales of their members/network.
When is it a pyramid scheme and Ponzi scheme?
Talk about network marketing or multi-level marketing (MLM) and the words ‘scam’ or ‘pyramid scheme’ are bound to crop up at some point. There is a global reluctance about the sustainability of network marketing amongst established entrepreneurs. But is network marketing a legitimate business model or is it just a scam?
The question is best posed when looking at the individual network marketing opportunity. There are many such opportunities that loosely use the term ‘network marketing’ but are actually pyramid schemes. Of course, the odd scam will also attempt to hide behind ‘network marketing’ as it does with many legitimate opportunities.
When an opportunity relies solely on earning commissions through the introduction of new members and from their sign up or monthly fees, then it is in all likelihood a pyramid scheme. Those marketers at the top of the scheme will naturally earn more while those at the bottom end will barely generate a profit, if at all. The system is dependent on new members joining the scheme on a constant basis.
With a pyramid scheme, commissions are still earned even if members do not buy or use the product/service on offer. When it is marketed as an investment with no product or service to offer, and with returns on the initial capital investment then it technically falls into the category of a Ponzi scheme. The returns are usually well above the rates offered by reputable financial service providers.
And then there are those ‘opportunities’ where members part with their money and never receive anything in return. Usually the founders of these ‘opportunities’ disappear. This is a scam.
Pros and Cons of Network Marketing
As with any business model, there are pros and cons to network marketing. Some of the key advantages of these opportunities are as follows:
- Simple ‘out-of-the-box’ business model.
- Low capital outlay to get started.
- Network support and training on sales and recruiting.
- Does not require operating expenses such as office rental or big marketing budgets.
Other advantages such as brand recognition depends on the product, service or opportunity in question. Some are well known to the consumer market while others are less so. However, network marketing does have several disadvantages as well that need to be considered:
- Products and services are often highly priced.
- Inadequate mainstream marketing.
- Negative publicity about network marketing.
- Poor representation by members who are not well versed with opportunity and product.
Some network marketing opportunities have a very low profitability rate for its member base. In certain instances, less than 10% of members will ever make any profit and even fewer will generate an income that is sufficient for their needs. However, this does depend on individual effort.
Network marketing should never be marketed as a ‘get-rich-quick’ opportunity as is often the case. As with any business model, it requires significant effort, some degree of capital investment and a working knowledge of sales and marketing to make it a success.