What is network marketing, how does it work and when is it a scam?

Network marketing, also known as multi-level marketing (MLM), is a direct sales strategy in which independent sales representatives sell products or services directly to consumers and recruit new members to their sales team. This business model has gained popularity in recent decades, attracting both supporters and critics, also for its implications, sometimes legal (as well as ethical.)

If you are looking for a job, in fact, you will most likely have come across a network marketing proposal among the various offers and, probably, most of you will have refused because you consider it a scam. Indeed, nowadays, when we hear about this type of business we immediately associate it with something negative or, at least, undefined to most. But not always - in fact, lately very rarely - it represents something outside the norm, risky and fraudulent.

In fact, in the so-called multilevel marketing field, there are mostly very serious companies that have made this sales system the basis of their success, also being very honest with those who work for them: think for example of Vorwerk, the company behind the success of the Folletto vacuum cleaner and the Bimby food processor.

Before refusing a network marketing offer, therefore, it is a good idea to find out about the reputation of the company and the mission that is "hidden" behind it. Let’s try to clarify, discovering how network marketing works and what the difference is with pyramid selling.

What is network marketing?

Let’s start with the meaning and definition.

Network marketing is a business model in which companies sell products or services directly to consumers through a network of independent distributors. These distributors not only earn commissions on their own sales, but also a percentage of the sales generated by new members they recruit into their network, creating a tiered structure.

This system is based on building a network of salespeople and promoting products through word of mouth and personal relationships.

The origins of network marketing date back to the 1920s and 1930s, with companies such as the California Vitamin Company (later Nutrilite) and the California Perfume Company (which became Avon Products) adopting similar strategies. In short, the origin is certainly American. In the 1950s and 1960s, the model gained greater popularity, with companies such as Amway, which helped define its structure and operating practices.

Network marketing is distinguished from the traditional direct sales model by its emphasis on recruiting new distributors. While in the classic direct sales model, sales are made by company representatives, in network marketing, independent distributors are encouraged to recruit other salespeople, creating a network that can expand exponentially. This approach allows companies to reduce advertising and distribution costs, relying on the network to promote and sell their products.

How network marketing works

We can say that network marketing is everywhere: from household appliances to cosmetics, including food products, to name a few. The way it works is the same for all areas, with some negligible differences.

It is based on a pyramid structure, where each distributor can recruit new members, forming a "downline". A distributor’s earnings come from both personal sales and a percentage of the sales made by their downline. This system creates an incentive to continually recruit, as network expansion can lead to increasing earnings.

There are several compensation plans in network marketing, including:

• single-member ladder plan: distributors earn commissions based on their level in the structure, with percentages increasing as they move up the hierarchy;
• binary plan: each distributor has two "legs" or subnetworks; earnings depend on the balance of sales between these two legs;
• matrix plan: limits the number of direct recruits per distributor, forcing expansion in depth rather than breadth.

With network marketing, there are also two other earnings opportunities: on the one hand, there are rewards for achieving certain personal and group results, and on the other hand, there is the possibility of earning a variable percentage on the sales made by other people you have introduced into the system and who are therefore part of your team.

In Italy, there are many retailers who practice this type of trade and have created, over the years, real businesses, some of which have also achieved a certain economic stability.

Network marketing and differences with pyramid selling

As you can see, it is a system that is very similar to pyramid selling, but with two substantial differences: first of all, while network marketing is aimed only at the buyer, pyramid selling in turn aims to procure customers.

Pyramid selling, therefore, is not a type of distribution, but rather a mechanism for reselling a position within the pyramid structure. The goal is to scale the pyramid structure as much as possible, so as to live off the income guaranteed by the people below, who are responsible for recruiting more and more sellers, thus collecting the entry fees.

The United States Federal Trade Commission (FTC) also provides guidelines to help distinguish legitimate multi-level marketing (MLM) businesses from illegal pyramid schemes. According to the FTC, an MLM is legitimate if:

• commissions are based on actual sales of products or services to real consumers: earnings must derive from the sale of goods or services to people outside the distributors’ network;
• there is no obligation to purchase large quantities of products: distributors should not be forced to buying excessive quantities of unsellable products or participating in expensive training programs;
• recruitment is not the main source of income: if the earnings are mainly derived from recruiting new members rather than selling products, the company could be considered a pyramid scheme.

The difference with pyramid selling is exactly this. In the fact that while network marketing involves the sale of a product accompanied by the training of other sellers, in pyramid selling the primary objective is recruiting other people and making them pay to join the network, almost completely obscuring the marketing of the products.

There is therefore very little room for interpretation regarding the legality or otherwise of this operation: companies that act transparently pay close attention to how they move on the market and what methods they use in selling through network marketing.

Is network marketing a scam?

While it is very common to come across scams in pyramid selling, this possibility is rather remote for network marketing. The problem is that companies often promise big earnings to encourage people to work for them by joining the sales team, but in reality they struggle to arrive. In fact, to earn money, you have to sell and not everyone has the skills to do so.

This is why you should be wary of those who, especially during the training course, describe this type of work as the most attractive of professions.

Although the earnings potential may seem high, in fact, the reality is often different. Studies have shown that more than 9 out of 10 people who join MLM companies lose money. This is because the associated costs, such as purchasing products, promotional materials and attending events, can exceed the earnings obtained from sales and recruitment.

Network marketing, a lot, can make you earn a lot but at the same time it also risks being a waste of time. It all depends on your ability to know how to sell a product, as well as your commitment and to the time you will dedicate to this activity since the compensation is strictly linked to the results you achieve.

For this reason, before starting, we recommend that you understand what the profit margins for the sale of the single product actually are, so as to get an idea of how many sales you will need to make to guarantee a stable monthly income. Also check that the agreement does not include some unfair clauses such as those that oblige the worker to sell a certain number of products before receiving the agreed compensation.

Examples of virtuous network marketing

In the network marketing landscape, there are companies that have distinguished themselves for ethical practices, quality products and sustainable business models. These virtuous examples offer valuable insights into understanding how to operate with integrity and success in this sector.

Herbalife

• Herbalife, founded in 1980, is a global company specializing in nutrition and wellness products. Despite legal challenges faced in the past, the company has implemented significant reforms to ensure regulatory compliance and promote ethical business practices. Its ability to adapt and improve its operations makes it an example of resilience in the network marketing industry.

Coral Club

• Coral Club, founded in 1998, is another company that has adopted a virtuous approach to network marketing. Specializing in food supplements and health products, Coral Club operates in over 35 countries and distributes its products in 175 nations. The company stands out for its attention to product quality and for investing in the training of its affiliates through a dedicated academy. This focus on the professional growth of members helps create a competent and motivated sales network.

Millionaire Network

• Another notable example is the Millionaire Network, founded by Virgilio Degiovanni in the 1990s. This distribution network has reached over 30,000 affiliates, offering innovative products such as the Millionaire Card, a multi-service card that gave access to numerous benefits professionals. The pioneering approach and attention to consumer needs have contributed to the success of the Millionaire Network, making it a reference model in the industry.

All these examples demonstrate that, with ethical management, a focus on product quality and an investment in affiliate training, it is possible to build sustainable and successful network marketing models. Companies that adopt these virtuous practices not only thrive in the market, but also contribute to improving the general perception of network marketing as a legitimate and profitable business model.

Original article published on Money.it Italy. Original title: Cos’è il network marketing, come funziona e quando è una truffa