You can come across the concept of network marketing, often referred to as multi-level marketing (MLM), almost everywhere. You hear about it on the Internet or social networks, from your colleagues, classmates, or family members. So what is it about? What is so interesting on this business? Why do so people keep offering you to participate in this money-making system?
Many people have MLM associated with something illegal and deceptive. Indeed, there are fraudulent systems which in some respects resemble MLM. This sometimes leads to misinterpretation of this business, which is otherwise perfectly legal and based on common business practices. Honest network marketing has a lot to offer – great money, flexible working time, independence. However, this is not easy to achieve. Building a successful MLM business takes a lot of work, learning, and patience.
So what is MLM?
Network marketing is a business model in which the dealer is rewarded not only for the sales it makes but also for the sales of other dealers he has brought into the system. Therefore it is called multi-level marketing. Commissions are, in most cases, paid from multiple levels of distributors. In MLM, the commission system is called the compensation plan.
Network marketing is a method of direct sale, where the supplier company creates conditions for individual, independent entrepreneurship. Dealers, who are not employees of the supplier company, can mediate entry of other dealers into the supplier structure. This creates a system of independent distributors who are rewarded for sales of products and services they make themselves and for sales made by other dealers below them in the structure.
Companies that use network marketing to distribute their products tend to have significantly lower spending on conventional advertising because information about their portfolio is spread through a network of dealers. They mostly sell their products to people in their neighborhood, to family members, or colleagues. With the growing the number of dealers also grows brand awareness. Companies are using MLM to often reach audiences that would be otherwise hard to reach using traditional marketing methods.
One of the oldest companies that use network marketing for distribution is the American company Watcher’s, which has been in business since 1932. Since then, hundreds of companies from various fields, who sell their products or services through MLM, have sprung up. According to the Direct Selling Association (DSA), there are around 16 million people in the U.S. involved in direct selling, collectively generating an annual turnover of over USD 32 billion. This method of sale is, however, widespread around the world. Every day, the system welcomes thousands of new independent dealers.
Many people refer to network marketing as a fraud based on a pyramid or Ponzi scheme. There are many half-truths and myths about this kind of business. Such misleading information about MLM is widely found throughout the Internet, usually spread by poorly informed people or those who have failed to succeed in it.
The basic difference between an honest business and a fraudulent system is that through legal network marketing dealers sell real products and real services.
Many MLM systems require that new members provide an initial investment. It might be used to cover the cost of marketing materials, business cards, flyers, etc. Sometimes, the entry into the system is conditional on purchase of a certain quantity of products that the company distributes so that the new dealer becomes better acquainted with the range of products he is going to sell.
Fraudulent programs use this entry fee solely for the payment of commissions to previously registered members in the scheme. Such a system is based only on registration of new distributors and collection of entry fees without any or only minimum real sales. This initial investment is thus not used to purchase vitally necessary materials to support sales or product samples, but to enrich those higher in the multilevel marketing structure.
Collection of unreasonable entry fees has been repeatedly identified as illegal even by U.S. federal authorities. As a result, critics still refer to multi-level marketing as a form of legalized Ponzi scheme.
Honest MLM businesses are not based on mere registration of new distributors but on actual sales of actual products or services.
The primary source of income of every dealers working in a legitimate MLM company comes from commissions for sales to people who are not part of the distribution network. And this is what distinguishes a proper business model from dubious companies seeking new dealers only to collect entry fees.
The supplier company must set its reward system carefully so that its compensation plan does not cross the thin line between legal MLM programs and fraudulent systems in which the vast majority of rewards is paid for bringing new distributors who must purchase certain minimum quantities of its products.
How Does Network Marketing Work?
Doing business in network marketing has many advantages over a conventional job. MLM dealers determine their own objectives and tasks and they don’t have to listen to any boss. They are masters of their time, they can work from home, and they take time off whenever they want. This freedom, of course, comes at a price in the form of greater requirements on self-motivation. However, it is the freedom what attracts so many people to this kind of business.
The essential difference between regular job and network marketing is the money. As an independent businessman working for a company which distributes its products through network marketing, you have no guaranteed, fixed salary. If your business is not doing well or you are just starting out, your income may be very small. On the other hand, the MLM business offers almost unlimited earnings, if you’re successful. And that is something virtually no employment can offer.
The possibility of unlimited profit is based on the principle of the evaluation system of network marketing.
In direct sale, you sell certain goods or services of your supplier. In return, you are rewarded with commissions, which is directly proportional to the volume of goods sold. In MLM, however, you also get commissions from the sales of distributors that you bring to the company and from the sales of distributors they brought to the company. Modern MLM systems pay commissions from many levels of your downline, which is the structure of distributors registered under you. If your distribution network keeps adding new dealers, your income will keep constantly increasing without any limitation.
From this description it follows that network marketing does not involve only the sale itself, but also recruiting new candidates for this kind of business. Integrating new dealers and distributors is an essential part of building a passive income in MLM. Usually, many dealers try to sign up their friends, relatives, and colleagues. However, if you are to create an effective MLM business, after some time you will need to obtain a new source of other MLM contacts, called leads, you can reach with an offer. The majority of successful MLM dealers can continuously generate large amounts of MLM leads whom it can present their business.
MLM Compensation Plan
In MLM, the commission system is called the compensation plan. It is a detailed description of how the commissions generated in the distribution network are paid to all the members in the upline of the dealer who made the sale.
The compensation plan determines the amount of commission, conditions under which it is paid, dates for payment, and various bonuses and benefits. It is a comprehensive document describing the way dealers are rewarded and every new dealer must agree with it.
The compensation plan of any company significantly affects profits and return on investment of each member of their MLM program. When choosing a business opportunity, the most important part is to understand the compensation plan. A network marketing compensation plan can be very complicated, and it is up to each sponsor to properly explain it to his team.
Most dealers operating in MLM, in fact, do not sufficiently understand their own compensation plans. This leads to many misunderstandings and bad selection of MLM company itself. A misunderstood compensation plan may lead to a situation when the dealer fails to achieve its expectations.
There are several basic types of compensation plans. To understand the whole system of commissions, it is necessary to examine several parameters.
The commission the dealer receives for making a direct sale is almost never equal to the total commission which the company offers for its product and which it usually promotes when recruiting new distributors. In fact, the commission is divided into all levels of the network of distributors, and the dealer gets only its share. Its size depends on the configuration of the given compensation plan – whether it is focused more on the sale of products or rather on recruiting new distributors.
It might even happen that the company does not pay the entire amount of the commission. This is especially true for newer companies, where the depth of the distribution network is still too small and the commission may not be paid to all its levels. A considerable part of the commission is also tied to various volume and performance bonuses, which are, naturally, not achieved by all dealers. The amount that is included in the compensation plan but not paid to dealers for these reasons is called breakage.
The fact whether the system targets at front line recruits or at previously registered distributors is essential for the selection of the right MLM program. If you plan to devote more time to selling products, you should look for a company with a compensation plan that sufficiently rewards front-line dealers. On the contrary, if your plan is rather to look for new dealers to involve into the network, a plan with significant rewards for high-positioned distributors is exactly what you want.
When choosing a network marketing company, you should also consider how its compensation plan will be attractive for other potential dealers you will try to bring into the system. Programs with high rewards for front-end dealers will be interesting for people who will sell the products to a lot of people or use it for their own consumption. Ambitious and business-minded individuals will, in turn, be more interested in programs promising high commissions for members with a great network of distributors.
Unilevel Compensation Plan
The simplest compensation plan is called unilevel. In this system, you can register any number of other dealers directly under you, because the width of the level is unlimited. The number of levels from which you get paid varies by company, but is generally limited. For example, if the commission is paid up to the fifth level, you will not receive anything from sales made by registered distributors from that level down.
The more levels in the structure from which you get paid a commission, the smaller the share for each level because every dollar in commissions has to be split into more parts. Programs with a low depth of paying levels are rewarding faster and sooner. If the number of levels from which commission is paid is higher, building up a decent income takes longer but the total profit may become higher.
Network marketing distributors in these systems are trying to bring as many new people to the first level as possible to generate income from them. Because deeper levels may not generate any income at all, they strive to expand their structure mainly in width, which is not limited. As a result, new dealers often do not receive adequate support from their sponsor, who is busy recruiting and supporting large number of people.
In order to support the growth of the network, some companies use various strategies to motivate dealers to build their business teams. For example, they condition payments of commissions from deeper levels on achieving a certain monthly volume of sales made inside their own distribution network. Or the plan may be set up so that, for instance, the second level pays much higher commission than other levels. The distributor is then motivated to register new dealers under its own direct dealers, which helps them with starting their business.
The unilevel compensation plan is designed primarily for people who do not plan to build a large distribution network. These programs are mostly lacking interesting incentive bonuses and rewards and rather fit passive dealers who often use the product only for their own consumption and connect only family members or close friends.
Binary Compensation Plan
Another type of the network marketing compensation plan is called binary. It is a system in which the distributor can register only two other distributors directly under him. The MLM structure thus creates only two branches. If you bring in another dealer into the system, he must be placed in the downline of another distributor. This means that you bring new people into the team of those who registered after you.
This plan is attractive because each person in the program needs to bring only two new people to get into the reward system. If a new member has a strong upline – the structure of dealers registered before him – his network can grow without additional effort. However, this is also the biggest pitfall of the binary compensation plan. New dealers do not always have enough motivation to build their sales teams and do not bring new members into the system.
An important element of this plan is the necessity of balancing the performance of both branches. The size of the commission is, in fact, proportional to the performance of the weaker branch. If one of the two branches generates a large volume of sales and the other only very small, the total profits of the distributor are significantly reduced. This state often favors the MLM company because it keeps the commissions from the stronger branch (higher breakage). Sometimes, these commissions are at least partly converted into other bonuses which the distributor can achieve in the future.
Most binary systems allow the member to purchase multiple positions, so-called business centers. The first business center is always created after entering the MLM program with a binary compensation plan, when the member starts building its business (into two branches). If it is allowed, the dealer can purchase another center, which he can strategically place in his own downline. This usually takes an additional entrance fee, for which he can get more product samples. Each independent business center then generates its own commissions. Most often, it is permitted to acquire a maximum of three or seven business centers in a binary system, usually located right below each other.
A distributor who begins with three business centers places two of his centers into the two branches of the first center. This gives him four free branches right at the beginning, where he can place new distributors. Later, some MLM programs allow purchasing additional positions and place them somewhere in the downline, which will also support the distributors below whom the new business center is placed. Sometimes, these new positions are created automatically after generating a certain turnover of own sales.
A frequently mentioned advantage of this plan is the fact that, unlike in some other plans, commissions are paid from an infinite number of levels. Sales that occur deep within the distribution network are always counted in the volume of sales of your branches. In practice, however, this does not always generate any real commission because it must be distributed among the entire upline first.
Stairstep Breakaway Compenstaion Plan
The stairstep breakaway compensation plan is the most widely used plan by network marketing companies. The system generates really big money to a certain amount of distributors.
The basic characteristic of the system is the responsibility of each dealer for their own sales volume and the sales volume of their entire distribution network. The shape of the structure and the layout of individual distributors in the network is not so important.
The total sales volume of a distributor includes his own purchases, sales to his customers, and sales made throughout his distribution network.
As the volume of sales in the distribution network grows, the dealer gradually stairstep to higher rank position in the compensation plan and the amount of commission for sales in its downline grows. The amount of commission from each branch is different and is generally proportional to the difference between the rank at which the dealer is located and the rank achieved by distributors located in each branch of the structure.
The higher the rank the distributor reaches, the higher wholesale discounts on the products he sells he receives. This allows him to sell at lower prices and increase the sales.
At the moment any of the distributors registered by the dealer reaches the same or a higher rank position in the compensation plan, that distributor and his entire network breakaway from the dealer’s downline. This part of the network is then called generation breakaway. From these breakaway branches, the dealer usually receives a certain monthly commission. The more generation breakaways in the structure, the greater the residual income the dealer secures for himself.
In order to keep the commission coming from generation breakaways, the dealer must constantly meet the minimum monthly volumes of personal sales or total downline sales. As distributors gradually break away from the dealer’s network to create a generation breakaway, the volume of sales of its remaining network falls.
This compensation plan can offer big profits, but it is necessary to work it full-time. The need to constantly meet monthly volumes forces the dealer to constantly look for new distributors. Therefore, succeeding in a network marketing program based a stairstep breakaway compensation plan requires both great salesmanship and the ability to recruit new distributors. Without a steady supply of MLM leadsx, it is usually impossible to continually expand the team of sales people and meet sales volumes. Distributors who break away from the dealer’s network must be replaced with new ones in order to qualify for the payment of commissions.
Matrix Compensation Plan
Another very popular network marketing reward system in called matrix. This compensation plan has a limited width of the structure. Each distributor can register only a limited number of distributors into the first level of his team.
The popularity of the system stems from the possibility of spill-over. If the dealer reaches the maximum amount of distributors in the first level, all others must be placed into deeper levels. Thanks to this, the dealer supports its downline members and keeps them motivated even if they are unable to bring new dealers for some time.
Because the system does not allow dealers to have a large number of directly registered distributors below them, they can devote more time to training and support of their team members. The process of learning and collaboration within the network are thus more efficient than in unilevel or breakaway compensation plans, where you can have a team of dozens of directly registered members. If the width of the structure in the matrix plan is, for example, three, each member looks after and supports only three people, which is the perfect number for establishing close cooperation.
In the matrix compensation plan, the number of levels which generate commissions is also limited. A 3×9 plan, for example, enables you to have three distributors on the first level while commissions are paid up to level nine. This dimension of the matrix plan determines the maximum amount of people you can have in your team. If your MLM structure is full, all other distributors will be placed in positions from which you will get no commission. Some MLM companies offer a matrix compensation plan which allows to re-enter the network and expand your business by another matrix.
The way this plan works is quite easy to explain to a prospect. Dealers often like to emphasize the possibility of spill-over and promise newcomers an easy-to-build network through transfer of new distributors from upline into their own downline. You can also often encounter offers where the sponsor himself creates a distribution network for you. Theoretically, new members would have to do nothing while obtaining a passive income. The reality is, of course, quite different.
No one should rely on the fact that experienced upline dealers will give new dealers free distributors. People entering network marketing should always aim to create a business of their own.
What It Takes to Work in Network Marketing?
The process of building your own business generating an income from network marketing consists of several basic activities – generating leads, recruiting new members, and their training and management.
The first step in expanding you MLM business is gaining contacts to people whom you can offer a job opportunity in the MLM company. A constant source of new MLM leads is necessary for successful development of any MLM business. Dealers acquire these leads in many different ways. At the beginning, they usually try to contact people from their neighborhood, people they know. Unfortunately, this source gets quickly depleted and they must start looking elsewhere.
One of the ways to establish new ties is to keep a blog and be active on social networks. Writing interesting articles about work from home, network marketing, and related fields can get you a loyal circle of visitors interested in alternative earning opportunities. If you can make your visitors sign up for your newsletter, you can send them targeted business offers. By sharing your articles on social networks and participating in professional discussions you can reach an even larger audience.
Also, there are many companies selling MLM leads online. Distributors seeking new leads can purchase these in large quantities. However, not always are these contacts up-to-date or fit for work in MLM business. These companies often sell the same leads to a large number of customers. People on these lists are then constantly bombarded with phone calls and e-mails from MLM dealers trying to win them for their teams. Getting these people on board is then almost impossible.
The moment you have leads, you can start your business by offering opportunities to new people. The way you do it depends on your MLM business and the product you offer. Sometimes, it is sufficient to send an e-mail, sometimes you must make a phone call. Ideally, you arrange a personal meeting where you comprehensively explain the offer, preferably using computer or video presentations.
Many MLM companies hold regular presentations where dealers can invite their prospects to a personal meeting. The company prepares a professional presentation of their MLM business, their products or services, and compensation plan. There is usually some space for discussion, and at the end, visitors can sign up into the program. This method is particularly suitable for novice dealers who do not yet have much experience with presentation of their business. Getting people to come for a personal meeting can thus be much more effective.
The final step in building a multilevel marketing business is training newly registered dealers. This part is often overlooked and yet very important for successful growth of the team. Newcomers need to be properly trained to become familiar with the products they are going to sell. Your job is also to show them how to recruit new distributors into the team. You should meet with them regularly or communicate electronically so that your dealers are constantly informed about news and changes that may occur in the company.
At first, new members are often very enthusiastic, but soon they might lose motivation with the first couple of rejections and setbacks. The distributor who brought new members into the system must assign them individual tasks and guide them to set goals. It may take several months before a new distributor becomes completely independent and able to search for new leads, make presentations, and train his own people. A MLM business is based on team work. Previously registered and experienced distributors must pass on their skills to new members. Only then can the network grow, and with it sales volumes and profits.
A set of steps that lead to successful integration of a new member into the team is called network marketing duplication. The point is to provide freshly engaged dealers with all information and experience so that they are able to proceed just like their sponsor does in building his own business. This leads to duplication of a successful procedure and new members are then able to generate leads, register new distributors, and teach them to work independently.
Who Is Network Marketing Suitable for?
Working in MLM is different from regular employment, especially in terms of its unlimited income. Equally, however, there are no lowest limits for your income either. Therefore, it is advisable to leave your job not until your MLM business generates a stable, sufficiently high income. Many people choose MLM as an additional income that will help them to provide for old age when they no longer can go to work.
Network marketing requires a lot of learning and effort and may not be suitable for everyone. People who succeed in it have excellent sales skills and the ability to manage a team of people. Also required is enough motivation, positive thinking, and the ability to go on no matter what. Because network marketing is based on recruiting new people, people with strong charisma and great social skills have a great advantage. Those who choose freelance work from home so they would not meet with other people are likely to fail.
Some MLM distributors do not meet with a lot of people in the real world thanks to their large numbers of followers on social networks or blog. And they also have a great chance to succeed. Many MLM programs are now operating purely online, where new dealers can sign up directly on websites.
How to Choose a Network Marketing Company?
Those interested in MLM can choose from a huge variety of companies offering their products through network marketing. The basic criterion for the selection of a MLM company should be the product or service which the company sells. If you want to sell a product and make money in the long run, it is necessary to trust the product or service completely and never have doubts about its qualities and advantages. It’s good to have the product tested and have some great experience with it.
The most common products offered via MLM are cosmetics, food supplements, wellness products, financial products, energy, travel, or jewelry.
Before entering into any MLM program, it is always important to find out as much information about the company and its products as possible. This is especially true when you are required to provide an initial investment to enter the system. Still, there are fraudulent systems based on illegal schemes. Information about these unfair firms can usually be found on the Internet, in forums, and on specialized websites.
An important point when choosing a MLM company is selection of the right person who offers the business opportunity. Your future sponsor is the one who will have to take care of you, support you in the beginning, and teach you to build your own team. That person must have enough time – it is not advisable to register under distributors who recruit a large number of new people at once. Such sponsors simply cannot have time to manage their team properly.
People presenting their business opportunities usually tend to emphasize the advantages of their MLM system while omitting its negative characteristics. It is necessary to thoroughly understand the compensation plan, how it works, and whether there are any minimum payment limits.
A good MLM program offers excellent support to its distributors. It has a functional website, e-mail, and phone number where you can obtain the necessary information, if needed. Larger companies also have their offices in major cities. A quality MLM company should have trained personnel capable of quickly and properly helping you with anything you need.
Network Marketing – Yes or No?
Network marketing is undoubtedly a very interesting business. With minimal cost, you can build your own distribution network, generating high revenues.
When choosing your MLM company, you should carefully consider all aspects involved and find out whether that particular system does not operate on the edge of the law. It is particularly useful to avoid people who offer you fabulous earnings quickly and without effort, for which they require only “a small initial investment”. Well-established MLM companies have their own physical locations, customer service, and updated websites.
Although multi-level marketing is not exactly for everyone, most people can at least obtain a stable and secure additional income for their future. The best dealers build an above-average income and eventually financial independence. Everybody can find an MLM company that will not require undue financial and time demands. Legitimate MLM companies offer a genuine business opportunity for enterprising people who want to increase their income and reduce dependence on their everyday job.