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What is Network Marketing?

By R. Anacan
Updated Feb 24, 2024
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Network marketing is a business model that is based on a company distributing products and services through a network of independent contractors. Network marketing is also popularly known as multi-level marketing (MLM), affiliate marketing, and tiered marketing. Some of the most well known network marketing companies worldwide are Amway Corporation, Shaklee, Mary Kay, Tupperware and Avon.

To understand how network marketing works, it may be helpful to think of a business model that most consumers are familiar with, franchising. In a franchise, an owner pays a company for the right to do business using that company’s products, services, and name. The parent company agrees to provide the owner with training, development, advertising and marketing support. While the name on the outside of the building is that of the parent company, the actual location is privately owned by an independent business owner.

While networking marketing is not actually a franchising model of business, it does work in a similar fashion. In fact some large MLM companies refer to its business plan informally as “private franchising”. In network marketing, a company distributes its products and services through independent business owners (IBO) who in turn market these products and services to customers of their own.

The key factor that has made network marketing so attractive is that independent business owners not only have the ability to sell products and services to retail customers they are also able to expand their business by setting up others in their own businesses as well. This is commonly known as “sponsoring” in the MLM industry. Sponsoring others allow a business owner to not only profit from what he directly sells, but also allows him to profit from the sales production of those he has sponsored.

Here is an example of how an MLM business works: let’s say that Owner One is an existing IBO who sells $100 US Dollars (USD) worth of goods each month. In addition to any retail profit he earns he also receives a monthly bonus for his sales volume. Owner One decides to expand his business and sponsors Owner Two.

Owner Two develops a business that also sells $100 USD worth of goods each month. Like Owner One, Owner Two receives a bonus for his sales volume on top of any retail profit he has made. By sponsoring Owner Two, Owner One who has generated $100 USD of sales, is also credited for the $100 USD produced by Owner Two. Therefore Owner One’s total business sales volume is considered to be $200 USD.

If Owner Two decided to expand his business and sponsors Owner Three, Owner Two would be credited for any sales volume that Owner Three produces. Lastly, because Owner One sponsored Owner Two, Owner One would also be credited for the sales volume of both Owner Two and Owner Three. It is this ability to generate revenue streams from multiple sources that has made network marketing a popular and profitable business for many.

Because of the structure of a network marketing business, many people mistakenly believe that all MLM companies are illegal pyramid schemes. In actuality legitimate network marketing companies are not pyramids. The belief that MLM companies are illegal pyramid schemes may have popularly taken root in 1975, when the United States Federal Trade Commission (FTC) accused Amway Corporation of being an illegal pyramid. However in 1979 a US Federal Judge determined that the networking marketing plan used by Amway was indeed a legitimate business model. This decision in turn helped to legitimize other MLM companies.

This does not mean however that all companies who purport to be legitimate businesses, are. The entrepreneur who is considering network marketing should consider these factors:

  • The length of time the company has been in business.
  • The up-front investment to start the business. Many reputable companies do not require a large start-up fee.
  • The product return policy of the company. Legitimate companies generally allow for the return of products.
  • The amount of training and development available to IBOs.
WiseGEEK is dedicated to providing accurate and trustworthy information. We carefully select reputable sources and employ a rigorous fact-checking process to maintain the highest standards. To learn more about our commitment to accuracy, read our editorial process.

Discussion Comments

By AmyMcFarland — On May 13, 2013

We are finally coming full circle in the network marketing industry and getting back to the basics of what network marketing truly is.

Great article, by the way, but what I have found is that most persons in this industry still cannot get the basic concept. It is about what I do for my business, not what others can do for me. I network with the mindset that I will help others, which will inevitably help me.

By anon290144 — On Sep 07, 2012

Network Marking has proven over time to be impervious to economic trends, making it one of the most reliable and profitable havens for your business to flourish in.

By anon281872 — On Jul 25, 2012

I couldn't have explained this any better. I tell people all the time there are legitimate network marketing companies out there. You just have to do

your due diligence investigating the companies. The types of companies you want to look for are ones with longevity.

By CammieLusk — On Mar 11, 2012

I am very new to network marketing. My husband and I are involved with Beachbody and have been for almost three years. We started because the products they offer truly changed our lives so we felt compelled to share with others.

We didn't realize that it was a network marketing company for the first six months and we were already drawing an income. I feel very strongly about the products offered.

By Moldova — On Oct 06, 2010

Sunny27- It is sad when companies like this take advantage of others. It is best to go with a company that has a long track record.

I just wanted to say that I recently heard that the Mary Kay business model was actually studied at Harvard, in their business school.

Mary Kay was instrumental in getting women to start their own business and compensated many of these successful women with trips and the famous pink Cadillac.

By Sunny27 — On Oct 06, 2010

Sunshine31- I know that there are many network marketing scams that you have to be careful with. You should always look up the company with the Association of Network Marketing Professionals.

This professional organization has member companies that are screened for their legitimacy. A business model where you only make money recruiting and do not actually sell a product is considered a network marketing pyramid scheme.

While most multilevel marketing companies offer substantially more compensation from the sales of the recruited members, all members actually sell products so this is legitimate.

It is a fraud when there is not real product and the only money earn is through recruiting then is a scam.

By sunshine31 — On Oct 06, 2010

Bhutan-The hardest thing with network marketing is developing network marketing leads. People are usually really excited to start until they realize how difficult the work actually is.

This is like any other business, it is not a job. You really have to have a business plan in order to be truly successful. The turnover rate in network marketing is huge for this reason because people give up and do not want to keep bothering their family members.

A fully developed business plan with network marketing prospecting plans will give you a better chance at success.

By Bhutan — On Oct 06, 2010

Crispety-I just wanted to say that most of the money in network marketing is in the recruitment efforts because the larger and successful your down line is the more money you will make.

This is why many of these companies offer sales incentive trips and even vehicles if you reach a certain level of sales.

This field is not for people that are shy because it is a people business and recruitment is critical for you to make any money. You do get a percentage of your own sales, but this is a paltry sum and it is not enough for someone that wants to earn substantial earnings.

The network marketing training is of the upmost importance.

By Crispety — On Oct 06, 2010

MLM network marketing or multilevel network marketing works when the independent consultant seeks to sell the product to others and recruits personnel to continue to sell the product as well,

This is referred to as a down line because the newly recruited consultants now work under the original consultant and a percentage of their earnings is given to the consultant that originally recruited them.

Once the original consultant has established a large enough team then that consultant moves up the ladder and then continues to earn more and have a larger down line.

Many people make a comfortable living in multilevel network marketing. The best thing to do is to find a product that you believe in and use. It is more convincing to sell something that you truly believe in than it is to sell something simply for the pay check. That is probably the best network marketing tip that I can give.

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