What is Network Marketing?
The advanced technology and introduction of network marketing have completely changed the way of conducting business. The new modes of marketing business help multiple companies to attract potential customers towards their services. In addition to it, network marketing helps in reducing expenses that business industries suffer in traditional modes of marketing. Here we will go through what is network marketing's meaning, and some of its merits and demerits.
What is Network Marketing?
Network marketing refers to a medium of marketing that numerous business owners use to expand their businesses. Manufacturers often use such a tremendous medium to deal with numerous distributors to enhance their business productivity. Other sub-distributors under them lead to a great network of distributors. They operate at different levels of the distribution chain and ensure good sales.
One of the major benefits of network marketing is that manufacturers can use this medium for marketing their services to consumers at multiple levels. It enables them to reach out to potential customers indirectly.
Structure of Network Marketing- How It Works?
To create a robust network marketing structure, manufacturers need numerous distributors, sub-distributors, and also dealers. All these distributors obtain goods and products from manufacturers at wholesale costs. They may use them personally or can sell to other distributors and gain profit. It forms a chain that continues until distributors reach customers. When the distributor or sub-distributor reaches customers or becomes final consumers themselves, network marketing ends.
Apart from it, these distributors get a tremendous opportunity to gain some returns from this network marketing. They can receive some commission from the manufacturers according to the number of products they buy and sell.
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The above picture shows how a manufacturing company plans and decides the number of distributors for selling their goods and products.
Examples of Network Marketing
Generally, manufacturers use a network marketing model in certain business structures that involve multi-level marketing. It is because such business models comprise a large network of distributors as well as sub-distributors. Some common network marketing examples include affiliation between companies like Amway and Tupperware with people who work part-time for them. Additionally, there are a number of women in India becoming distributors to work enthusiastically with manufacturers on network marketing.
Characteristics of Network Marketing
Direct sales: Various companies market and sell their products directly without making any use of the distribution channel. The responsibility is given to non-employed individuals to sell the manufactured products and get a commission every time they make a sale.
Selling philosophy: The network marketing model includes participants to work on the selling philosophy of marketing. The main focus of distributors is to sell as much as they can to gain high commission.
Hierarchy system: Distributors often have sub-distributors under them to earn more profit. It allows them to earn a commission from the manufacturers and profit whenever the sub-distributor makes a sale. Further, sub-distributors can have sub-distributors under them to earn in the same way and hence make a hierarchy system.
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The above picture shows that there can be multiple distributors connected together in network marketing. Further, there can be numerous sub-distributors under one distributor for earning high profit.
Advantages and Disadvantages of Network Marketing
Advantages of Network Marketing
There is no restriction on the network marketing structure’s size which enables several companies to tie-up with numerous people to become distributors. Additionally, distributors can coordinate with other sub-distributors to gain profit.
Companies do not need to depend on advertising their goods to market due to a consistent and robust distribution network that attracts customers directly.
One of the greatest advantages includes reducing the profit margins of retailers that companies consider as an expense. The companies don’t have to take the burden of such costs as these margins get directly passed on to distributors.
There is no need for the company to spend a lot of money on distribution or storage. It’s because distributors handle all such expenses by themselves.
The structure of network marketing enables distributors to earn well from their dealings with manufacturers. They have a great chance to earn commissions as well as their own profits.
Disadvantages of Network Marketing
It becomes difficult for manufacturers to predict production targets. It is because they depend completely on distributors to govern customer demand. It may lead to over-stocking or under-stocking of products.
There is a major role of distributors to facilitate the delivery of goods and services to final consumers. As manufacturers are less concerned regarding this, they may find it tough to control sales or distribution.
FAQs on Network Marketing: Features and Benefits
1. What is network marketing and how does it function?
Network marketing, also known as Multi-Level Marketing (MLM), is a business model that relies on a network of independent distributors to sell products or services directly to consumers. Instead of a traditional sales force, individuals become distributors and earn income in two main ways: through commission on their own sales and by recruiting other distributors and earning a percentage of the sales made by their 'downline' (the network they've built).
2. What are the key features that define a network marketing business model?
The primary features of network marketing that distinguish it from other business models include:
Direct Selling: Products are sold directly to customers, often through personal relationships, bypassing traditional retail stores.
Independent Business Owners (IBOs): Distributors work as independent contractors, not employees, giving them control over their own business operations.
Layered Compensation Plan: Earnings are based on both personal sales commissions and a percentage of the sales generated by the distributors one has recruited.
Low Barrier to Entry: Starting a network marketing business typically requires less capital compared to launching a traditional company.
Emphasis on Training and Recruitment: A significant part of the model involves training new recruits to sell products and build their own networks.
3. What are the main benefits or advantages of participating in network marketing?
Network marketing offers several potential benefits for individuals, such as:
Flexible Work Schedule: As independent owners, distributors can set their own working hours, offering a better work-life balance.
Potential for Residual Income: Successful network builders can earn a continuous, or 'residual', income from the ongoing sales of their downline.
Personal and Professional Development: Participants often develop valuable skills in sales, communication, leadership, and public speaking.
Low Startup Costs: The initial investment to become a distributor is generally much lower than starting a conventional business.
4. What are the potential disadvantages and challenges associated with network marketing?
While it has benefits, network marketing also comes with significant challenges. The main disadvantages include income instability, as earnings are commission-based and not guaranteed. There is often a high rate of rejection from potential customers and recruits, which can be discouraging. Success requires a substantial investment of time and effort, and the market can become saturated if too many distributors are selling the same product in one area. Furthermore, there is a social stigma due to its similarity to illegal pyramid schemes.
5. How does network marketing fundamentally differ from an illegal pyramid scheme?
This is a critical distinction based on the source of income. A legitimate network marketing business focuses on selling actual products or services to end consumers. Distributors' earnings are primarily driven by product sales volume (their own and their downline's). In contrast, an illegal pyramid scheme focuses almost exclusively on recruitment. Its revenue comes from charging high entry fees to new members, with little to no emphasis on selling a genuine, valuable product. In a pyramid scheme, the primary goal is to make money by signing up more people.
6. What essential skills are necessary for a student or individual to succeed in network marketing?
Success in network marketing is not guaranteed and heavily relies on specific skills. Key competencies include:
Interpersonal and Communication Skills: To effectively build relationships with customers and recruit new distributors.
Sales and Persuasion: The ability to present a product's benefits and close sales is fundamental.
Resilience and Persistence: To handle rejection and overcome obstacles without giving up.
Leadership and Mentoring: To train, motivate, and manage a downline effectively.
Self-Discipline: To manage one's own time and stay motivated without direct supervision.
7. Can you provide examples of how features and their corresponding benefits are presented in network marketing?
In network marketing, it's crucial to translate product features into customer benefits. For example:
Feature: A skincare product contains 'hyaluronic acid'.
Benefit: This helps your skin stay hydrated and look youthful by reducing the appearance of fine lines.Feature: A health supplement is 'made with all-natural ingredients'.
Benefit: You can boost your energy and wellness without putting artificial chemicals into your body.Feature: The business opportunity has a 'low startup fee'.
Benefit: You can start your own business and create an income stream with minimal financial risk.
