Explaining network marketing structure concept. Explaining network marketing structure concept.

Is Network Marketing Always a Scam? Understanding its Structure and Potential

Network marketing as the term suggests is a type of marketing that uses the building of a network to convert sales of goods/services. It is basically a process involving a large number of people in a network maintaining the sales and marketing processes.

I have noticed a lot of people questioning that sometimes network marketing is confused with pyramid schemes. Hence they are very skeptical about the whole idea. I think this topic needs to be discussed in detail. So, in this article, I’ll try to clarify your concepts of network marketing.

According to very easy terminology, it’s the process in which there are a lot of distributors who market and sell products and services. Now this is done in the following manner; the network of people works towards lead generation, recruiting, marketing, building, selling, and management. So, when the distributors sell products they make money by a commission they earn on selling.

The big difference here is the fact that these distributors need not be company employees specifically. They can also be independent distributors/contractors. The whole idea is the same as any other marketing process where new potential clients are searched for. This involves increasing the customer base in your network simultaneously and adding new partners to sell more.

In the background, constant training and motivation are continued by the management.

Let me explain to you a further concept of Multi-level marketing. This involves hiring distributors at multiple levels. I’ll specify it in simple words. It means each level hires distributors under them, and the more they hire the more money they earn. It is working in a manner that the top tier hires people under them in 3-4 tiers.

The top of the first tier makes the most money because they earn commission from all the tiers beneath them. This kind of distributor network is known as multiple-level marketing. But if we look deeply we will see that there can be certain reasons and ways why making money in multi-level marketing is sometimes difficult.

For the first level of distributors, there is a possibility that you will need to buy the company’s products, train the distributors below you, maintain some inventory and all these costs will add up until you can make substantial sales.

Now other than these obvious expenses, there are also ancillary expenses like computers, internet or phone training, and others which add up and eventually affect the overall profit that you will make.

And lastly, the aspect that not everyone is meant for selling, or selling a particular product/service.

It requires a lot of motivation and enthusiasm to obtain that, plus there can not be incentives for all such tasks always.

The Icy Whiz team talked to Michael Schmied, Co-Founder and Senior Financial Analyst of Kredite Schweiz, about the differences between legitimate network marketing opportunities and pyramid schemes. Here is what he said:

Michael Schmied
Michael Schmied

“Differentiating between legitimate network marketing opportunities and pyramid schemes is crucial for making informed and safe business decisions. As a financial analyst, I approach this distinction by examining several key factors:

  1. Product or Service Offerings: Legitimate network marketing companies have actual products or services to sell. These products should have intrinsic value and be competitively priced in the market. Pyramid schemes, on the other hand, often have no genuine product or service or they may offer products that are used merely as a front to mask the recruitment-driven structure.
  2. Revenue Source: A legitimate network marketing company primarily earns revenue from selling products or services to consumers, not just to people within the network. If a company’s revenue is mostly derived from recruiting new members rather than sales to external customers, it’s a red flag indicating a potential pyramid scheme.
  3. Recruitment Focus: While network marketing does involve the recruitment of new members, it should not be the sole focus. Pyramid schemes typically emphasize the importance of recruitment for earning money. If the compensation plan appears to reward recruitment more substantially than product sales, it might be indicative of a pyramid scheme.
  4. Buy-in Costs: Pyramid schemes often require a high initial investment or regular purchase of products to stay active in the scheme, which can lead to stockpiling and financial loss. Legitimate network marketing companies usually have a low cost of entry with no requirement to purchase products regularly.
  5. Transparency and Honesty: Legitimate businesses will be transparent about their business model, income potential, and the risks involved. They will provide clear, understandable contracts and terms of engagement. A lack of transparency, overpromised returns, and evasion when answering questions about the business model are characteristic of pyramid schemes.

In my experience working with clients at Kredite Schweiz, I advise thorough research and consultation with legal or financial experts before joining any network marketing scheme.

Understanding these factors helps in distinguishing legitimate opportunities from deceptive schemes, thereby protecting one’s investments and aligning with legal and ethical business practices.”

So Let’s Move to the Advantages of Network Marketing

The size of the network and in turn, the company are not restrictive. This is because a lot of employees are not full-time employed or are pursuing this just as a part-time activity. And there can be a person, who is even part of two different companies.

  • Advertising and the huge money spent on it is saved because of the extensive network of people.
  • There is in-network marketing, so there is extensive mouth publicity which is stronger than most other forms of marketing, and there is also direct engagement.
  • Since there are a lot of distributors across different tiers, there is a distribution of profit margins. This not only ensures profit maximization across all levels but also the reduction of a financial burden on the parent company.
  • The storage and delivery expenditure is also decreased, because there isn’t any one individual who has to maintain a huge inventory or carry out all logistics. It gets distributed across all the distributors.

However, Some Risks Are Also Involved

Well, there is surely a risk involved with network marketing since there are a lot of factors and variables linked to it as I mentioned above.

There is money involved in starting and setting up the company, the purchase and storing of inventory bears, and other different costs along with recruitment. To actually get your money back you will have to sell a lot of products and earn a lot of profit, but the selling has to be continuous and prolonged to keep the profits flowing in.

Only then you will be able to recover from the first investment. The continuous inflowing income will allow you space and money to cover other expenses and carry on the business in the long run.

Yes, there is a lot of misbelief among people about multi-level marketing being a sort of pyramid scheme, but there is a difference between the two.

Pyramid schemes are actually such conversions where you are becoming a distributor by paying a huge amount upfront and getting the product irrespective of the fact that you can sell it or not.

We interviewed Jonathan Feniak, J.D, General Counsel for LLC Attorney, on distinguishing legitimate network marketing from pyramid schemes. Here is what he had to say:

Jonathan Feniak
Jonathan Feniak

“Our practice specializes in legal counsel for SMBs and entrepreneurs, so a few notes on discerning real network-based marketing programs from pyramid schemes, from that vantage.

If it sounds too good to be true financially, it probably is. Be especially mindful of compensation conversations and their shape. Pyramid schemes are notorious for having rather convoluted, trickle-down compensation structures.

They’re also known for making you front-load buying merchandise and branded program courses or certificates initially and out of pocket, with heavy promises you’ll make your money back plus some. 

Also, be wary of anyone who heavily incentivizes sign-up or recruitment fee bonuses. Pyramid schemes come down to heavy recruitment.

That’s what they’re built on. If you’re seeing evidence that a lot of comp comes from recruitment bonuses, and not on actual professional growth and development, you might want to hit pause. 

Look into a clear corporate structure and history. It’s harder than ever for organizations to hide a seedy reputation thanks to things like online reviews and social media

 Do your due diligence. Something might be funky if you’re not finding clear organization history and contact information, or are having difficulties just understanding the org’s general structure, operations, or status.

This same information from reputable companies is readily available and publicly accessible. 

You can always contact a lawyer who specializes in corporate law or governance if you want an expert’s opinion. Or if you’re simply finding too much evidence and can’t shake that something’s off.”

So, What’s the Next Step?

Although there has been a lot of discussion of what and how network marketing works, and we have seen the advantages and disadvantages, it is still advised only to step in after doing your thorough research and information digging.

There can be a chance that what appears to be network marketing is actually just a pyramid scheme when we zoom in, and you might end up losing a lot of your hard-earned money. So, I suggest you always stay aware and invest smartly.

Guest Author: Saket Kumar

Last Updated on May 12, 2024 by Pragya


Anushree Khandelwal

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