Rarely does a business model inspire such passion -- and incur such wrath -- as network marketing.
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Its devotees can't say enough about its virtues as a legitimate business structure while its critics liken it to something that has crawled out a gutter. So what's the real deal with network marketing?
The truth about network marketing is complicated. Network marketing is a marketing structure that compensates people for both their sales and the sales made by people they have brought into the company. It's full of hierarchies and distribution levels that produce multiple levels of compensation within the organization. That's why network marketing is also commonly referred to as "multi-level marketing" or MLM.
How Network Marketing Works
Despite its image, network marketing describes a specific business model that can be used in a legal and ethical way. Maybe a better way to think about network marketing is "micro-franchising". In exchange for an upfront fee (comparable to a franchise fee), individuals can begin the selling the company's products and enter into the organization's tiered compensation structure (not unlike the compensation structure of a large, corporate sales force). As new people are recruited to the company, individuals earn commissions on their own sales as well as the sales of those farther down the ladder.
Benefits of Network Marketing for Entrepreneurs
For many entrepreneurs, network marketing offers an easy access point to a business opportunity that leverages their prior sales experience. Compared to other types of business opportunities, startup costs are very low and it's possible for people with the right personalities to earn high revenues throughout their direct marketing career.
Problems & Pitfalls of Network Marketing
But as you might expect, network marketing has more than its share of challenges and problems. Although the business model can be used for legitimate business purposes, you have to be careful who you connect with because network marketing is rife with charlatans and scam artists. According to the FTC, you should also steer clear of multi-level marketing plans that pay commissions for recruiting new distributors because they're actually illegal pyramid schemes. The bottom line is that you need to apply common sense when you encounter a network marketing opportunity. If something doesn't smell right, move on to other opportunities.