Discover Network Marketing, its benefits and why it is not synonymous with financial pyramid – WAU
Network Marketing, Network Marketing or Multilevel Marketing, is a direct sales strategy in which independent sellers operate within a network that provides for commissions at different levels of performance. It is a legitimate business model, although its credibility has been undermined by historical fraud.
Probably one of the most controversial areas of Marketing, MMN, as it is also referred to, had its reputation tarnished after the widespread disclosure of major financial frauds promoted by organizations that disguised their illegal activities labeling them as Network Marketing or Multilevel Marketing.
The point is that there are still many discussions about the effectiveness of this type of market strategy, especially due to the supposed “loopholes” that the system presents and that could facilitate the creation of criminal schemes.
The fact, however, is that many legitimate companies have been hugely successful in their operations in the past few decades, and several clarification and protection initiatives have been taken in several countries to prevent scams and fraud.
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In this post we thoroughly explore Network Marketing, its definitions, characteristics, controversies and, especially, the precautions you must take before investing in this type of business. Check out!
What is Network Marketing?
Network Marketing is a strategy direct selling where salespeople are paid for marketing products or services and also for recruiting new members.
This last compensation starts from the understanding that the effort made to get new salespeople must be compensated, since the company will profit more from it.
The essential characteristics of this business model are:
- direct sale: as stated, the pillar of this strategy is in the sale and in the relationship between distributors and customers;
- direct distribution system: manufacturers, distributors or importers move goods directly to the final consumer, eliminating intermediaries such as wholesalers and retailers;
- recommendation and team building: salespeople also act as independent “contractors”, indicating new distributors for the company;
- network remuneration and performance: provides awards for referrals and commissions on sales made by appointed distributors.
Among the factors mentioned, the latter is the one that deserves the most attention. It is precisely this second line of remuneration, in which the seller is free to associate the company with another professional and make a profit from it, that characterizes this system as a “network”. Watch.
How does Network Marketing work in practice?
It should be noted that, except for its commercial operations, a company that adopts Network Marketing acts like any enterprise, that is, its administrative structure has sectors of Management, Marketing, Operations, Product Development, Service, Support, etc.
To stimulate sales and network growth, it is common to formation of qualified teams that are trained through courses, training and internal events. As there are generally not many restrictions when recruiting salespeople, the company needs to offer guidance and support to its representatives.
Although the strategy is valid for any sector, it was with the help of cosmetics companies that it gained popularity in London. North American Avon, currently incorporated into the Natura group, is one of the main examples of the model’s success in the country.
Unlike other suppliers in the segment, Avon encourages its representatives to form sales teams. The leaders of these groups are advised by the company and have a responsibility to recruit new resellers and provide support and guidance for them.
What are the main challenges of Network Marketing?
In general, we can say that Network Marketing presents three weaknesses that are usually highlighted by critics in the area:
- saturation: from a mathematical point of view, it is clear that, at a given moment, the company will no longer be able to recruit new salespeople, which would automatically stop its expansion;
- sustainability: salespeople who are unable to recruit new representatives may feel hurt because they rely solely on their sales;
- business honesty: organizations with questionable speeches and practices are still very common in this market, increasing the mistrust of professionals and investors.
In relation to saturation, as most companies that work with Network Marketing work with recurring products, there is not much fear about a possible freezing of the market, even if the networks of salespeople slow down their pace of expansion.
As for the increase in pay of leaders or recruiters, we must not forget that their commissions are not free, they have other responsibilities in the system, such as monitoring, managing and stimulating their sales team, which may require the organization of meetings, events and even internal incentive campaigns.
The real weakness of Network Marketing, therefore, lies in the companies that use it as a cover to promote illegal schemes. After unfortunate episodes involving companies that supposedly worked with Multilevel Marketing, the area became frequently linked to scams and financial pyramids.
Given this situation, as important as understanding what Network Marketing is, is knowing what it is not.
What is Network Marketing not?
Some characteristics of this type of marketing are similar to other sales systems, therefore, salespeople and companies that are interested in the area need to be attentive to details that, in some cases, may even denounce illegal activities.
Check out what Network Marketing is not.
The Marketing Law concept concerns only the communication strategies whose objective is to directly reach the public of a company. Telemarketing, direct mail and Email Marketing are some examples of this type of action.
As its own concept foresees, in Monolevel Marketing, networks of commissioned salespeople do not exist. All participants operate at the same level and the distributor is remunerated exclusively for sales of products or services.
Network Marketing is presented in many ways by the market – Network Marketing, Multilevel Marketing, Multi Level Marketing, MLM, MMN, MR and NM are the main ones – however, there is something that it is definitely not: a financial pyramid!
The main difference between the two concepts is the focus of their activities. While legitimate Multilevel Marketing companies have as their main source of revenue the sale of their products, financial pyramids act through the massive recruitment of new members.
In some cases, the products and services offered do not even exist!
Thus, as there is no sales flow adequately supplying the chain, the salespeople’s performance is restricted to recruiting new members who, in turn, must pay an advance amount to join the group.
Victims are also exploited with training, events and product quotas sold domestically.
As you can see, mathematically the scheme is clearly unsustainable, but generally its dismantling takes place long before any indication of saturation.
As the sellers at the bottom of the pyramid are unable to recover their investments and the scammers at the top celebrate big profits on everyone involved, the distrust of the entire market increases.
How to protect yourself from scams and scams?
In London, the biggest financial fraud involving a company that camouflaged its operations in this way was led by Telexfree, an organization that operated under the facade of a VoIP telephony provider (via the Internet).
Through a Ponzi scheme, similar to the financial pyramid, the company managed to move almost one billion reais in London alone and is estimated to have hurt another two million people in several countries.
Faced with such problems, representatives of companies and governments from several countries, including London, began to discuss rules to regulate the performance of companies and prevent the creation of frauds of this nature.
In the United States, for example, the famous 70% rule was stipulated that every Multilevel Marketing company must have at least 70% of its revenue from the sale of its products or services.
In London, although Network Marketing is linked to the direct sales market, there is still no specific legislation to support this type of commerce. A bill is already in progress, but there is no provision for its approval.
However, ABEVD (London Association of Direct Sales Companies) recognizes the activity and also provides a code of conduct for Multilevel Marketing operations.
Thus, ABEDV registration is the main credibility indicator for companies that operate in this business model in the country.
According to the association, a true Multilevel Marketing company must have the following characteristics:
- be formalized and collect taxes;
- be associated with ABEVD and WFDSA (World Federation of Direct Selling Associations);
- actually sell products or services;
- invest in training and people management;
- the earnings of all network participants must be proportionate to their effort;
- the business model must provide for its continuity;
- distributors must be protected by guarantees of return and withdrawal.
How to create a Network Marketing business?
The development of a Network Marketing business requires a lot of commitment from the entrepreneur. It may take several years for your brand to gain authority in the market and the fight to overcome the stigma left by fraud will be constant.
However, we can illustrate this process in a few basic steps. Look at that!
Product choice or development
The main factor for the success of a legitimate Multilevel Marketing company is its product. If the solution you offer doesn’t sell enough, your sales system just doesn’t work.
This, therefore, is the main stage of your Marketing Plan. Study your audience and the market in depth and bet on products or services that have a recurring demand.
Creating an attractive commission system
Once the product has been defined, it will be necessary to idealize its sales structure, which in this case boils down to the salesperson’s performance levels and their due responsibilities, as well as the commissions generated, awards, goals and the entire organization of the sales flow.
Note, however, that this is the most sensitive step in the process. Therefore, ensure that your sales system is in accordance with the standards provided by ABEDV.
Salespeople recruitment and people management
A Network Marketing company needs to create strategies and campaigns for its end customers and, especially, for its potential sales partners. Will be need create means for new professionals to join the enterprise.
In addition, people management also needs to be worked very well in this type of business. Independent salespeople can raise a number of objections to the promised results and most of them will certainly need training. Endomarketing strategies, therefore, need to be foreseen in your planning.
Advertising, training and education actions
Even though word of mouth is the great differential of this type of Marketing, it is essential that your salespeople are supported by advertising materials and also receive the appropriate education and training to obtain good results.
In addition, in view of the possible controversies surrounding this business model, educational campaigns are necessary. Relationship and content actions, such as Inbound Marketing, can be very efficient in this regard.
What are the benefits of Network Marketing?
Given all the points presented, we can say that Network Marketing presents very interesting benefits, among which we can highlight:
- simplification of the value chain: although the manufacturer or distributor still needs to be concerned with product production and logistics, the value chain is simplified as fewer companies are needed to bring the goods to customers;
- loyalty: direct selling provides for the construction of links between sellers and consumers, stimulating new sales and ensuring a sustainable revenue pace;
- scalability: the business has great potential for growth and productivity without the need for large investments in expansion;
- rapid growth: once consolidated in the market, the company can assume an exponential growth rate due to the very nature of its sales system.
Finally, it is important to highlight that any type of commercial activity is subject to scams and fraud, but this should in no way characterize a market as a whole.
Network Marketing is one of the most promising business models today, but its success and credibility depend on legitimate, transparent and effective management.
This article is over, but we still have other great reading options for you to keep learning! So, take advantage and learn now what Community Marketing is and discover the power of connections for your brand!