Ask five people what they think network marketing is, and chances are that you will receive five very different responses.
Some call it a pyramid scheme, whereas others swear by it as a means to financial freedom. Best-selling author Robert Kiyosaki (of Rich Dad, Poor Dad) labels it “the business of the 21st century”.
To figure out why there is such disparity between the different perceptions, we must first understand the definitions, as detailed by the US Direct Selling Association.
The terms explained
- Network marketing — It is sometimes used to describe direct selling, and often used interchangeably to describe the sales model or compensation plan of a direct selling company. To better convey each term, “direct selling” refers to the sales model, while “multi-level / single level marketing” refers to the type of compensation plan.
- Direct selling — Direct selling is the sale of a consumer product or service, person-to-person, away from a fixed retail location. It is marketed through independent sales representatives who are sometimes also referred to as consultants, distributors or other titles.
- Multi-level marketing (MLM) — MLM is a type of compensation plan found in direct selling that pays its representatives based on the individual’s product sales, as well as that of their “downline”. “Downline” refers to a group of people that these representatives bring in to a company to generate sales, bring in new recruits, and so on.
Wait… so what are the differences?
- Direct selling refers to a distribution method.
- MLM refers specifically to a type of compensation plan in direct selling.
- Network marketing is often used to refer to both the sales model and the compensation plan.
An example of a scenario
Anna is an independent representative of Company X. When Anna markets and sells a product to Bob without a store or a middleman, this is direct selling.
Bob decides to join Company X under Anna as her recruit or “downline”. Anna earns money from her own sales, plus through commission from Bob’s sales.
After five years, Bob recruits his neighbour, Chris, as his “downline”. Bob earns money from his own sales, plus through commission from Chris’ sales.
This type of compensation plan is often referred to as multi-level marketing.
Company X’s products and services are marketed through a network of sales representatives i.e. Anna, Bob and Chris. Hence the term network marketing.
Often, the big question is: Is network marketing a pyramid scheme? We’ll explore that in our next post, so be sure to check back soon.