What Is Network Marketing

What is Network Marketing? This is such a growing area that we decided to call attention to it. Before determining if this is right for you it is important to understand what it is.

In its most basic form Relationship or Network Marketing (NM) are marketing plans that companies use to grow their business. This model relies heavily on word-of-mouth advertising instead of print and media campaigns. Companies contract with everyday people; typically known as distributors, to market and sell their products to people they know and meet. The distributor is paid if they sell the product – otherwise the company has no obligation to pay for non-performance. This allows companies to pay higher commissions to those that actually produce and limits the liability of non-producing employees.

They are also paid if they sponsor and train others distributors to sell the product; typically this second level compensation is known as an override or bonus. The sponsoring distributor bonuses are a fraction of the amount they would have made had personally made the sale. Long term it is better to earn a fraction over hundreds of sales rather than 100% of personal sales. Obviously the motivated distributor sees the opportunity and works hard to recruit 10-20 others that will actively recruit, sell and train others.

This system might seem complicated but it actually aligns with most traditional sales organizations. For example, consider the last car you bought. Your sales person earned a commission for helping sell you the car. His manager was paid an override for hiring, training, managing and motivating your sales person. The dealership's General Manager was paid a portion for developing the sales team. The owner was paid for committing their time and capital to start the dealership. These fractional commissions continue on the manufacturer's side from the District Manager all the way up the ladder until it reaches the manufactures senior leadership team. This is what is commonly known as “pay for performance”.

Note: Take a moment and read our article on the greatest benefit of Network Marketing. When asking what is network marketing, don't confuse a good Network Marketing Plan with a Pyramid Scheme.

So when you think of it in that light, answering the question "What is Network Marketing" isn’t complicated at all. It is a system that facilitates the sale of products and compensates those that do so for their performance.

The one difference in the NM system is the distributor typically pays a fee for training and distribution rights – much like a real estate agent pays for training courses that teach them how to pass the test for their for their license to sell real estate. You will also note that the managers in a real estate office are compensated similarly to managers in the auto dealership.

Most of the NM opportunities we've looked at have distribution fees from $39 to $995. This is where some of the brightest minds really bog down because they can’t get around the idea that someone is paying to earn the right to sell the companies products. However, when asked, these same people seem to understand why McDonalds charges hundreds of thousand of dollars in franchise rights just to earn the right to spend a million dollars buying land and building the store – all of this with no guarantee that they’ll ever get a real return on their investment. So for our purposes it is probably best to think of the distributorship as a franchise without long-term geographical or physical restrictions. Take a moment and read our Article on Traditional Business Startup Cost.

In summary, to answer the question of what is Network Marketing - it is a pay for performance compensation system plan much like that of Real Estate Firms and Auto Dealerships.