What Is Network Marketing?

What is network marketing?

Network marketing is the practice of leveraging personal relationships to sell products or services. Many entrepreneurs employ network marketing techniques to grow their businesses, which can include:

• Pitching products face-to-face to family and friends.
• Reaching out via email, phone call, or direct message to social media and LinkedIn contacts.
• Joining networking groups and local business groups, like the Chamber of Commerce, to establish new personal relationships.

Pros and cons of network marketing businesses

The network marketing business model can be a low-cost, accessible way to achieve financial independence. Distributors don't need a unique product idea or a pile of startup cash. They can simply take an existing product line -- say, Avon beauty products -- and run with it.

Sales is the primary function of a network marketing business, so the model favors outgoing, assertive personalities. Those who have a large circle of influence will have an advantage, too.

Network marketing is more challenging for introverts and those with smaller networks. Anyone who feels uncomfortable pitching will struggle to generate commissions.

There are other risks, as well. Some network marketing businesses require new distributors to buy products upfront. There may also be ongoing order requirements. Those who are unable to resell the product may lose money on the endeavor. Worse, if the company exaggerates the income opportunity, distributors may put up far more money than they should.

Unethical MLM businesses can also be poorly disguised pyramid schemes. Pyramid schemes push recruiting over product sales. Often, the income opportunity from selling products alone is minimal. But these companies will pay distributors commissions on sales made by the people recruited beneath them. This structure funnels earnings upward in the organization -- which creates huge revenue streams for the people at the top.

The people at the bottom will struggle to add their own recruits as the market becomes saturated. The business eventually collapses, with only a small percentage of distributors coming out ahead in the process.

Pyramid schemes are illegal in the U.S.

How to evaluate a network marketing business

There are many network marketing businesses out there. To separate the good opportunities from the bad ones, entrepreneurs should evaluate the company, its products, and its business model. Conversations with existing distributors can also shed light on the daily responsibilities and income potential.

Questions to ask include:

• How good is the product? Distributors eventually run out of friends and family to pitch, so repeat sales are essential for ongoing income. If the product is disappointing, repeat sales will be difficult.
• What is the company's reputation? It's a red flag if reviews from customers and former distributors are largely negative, and its public relations team does not keep consumers engaged.
• What is the company's history and financial status? Younger companies with no track record are riskier than older public companies like Herbalife and Avon.
• Does the company provide training? Even natural salespeople can benefit from learning soft skills like communication, leadership, and basic product and sales training. The depth of the training provided also reflects how invested the company is in distributors' success.
• What's in the distributor contract? The contract may restrict the distributor's other business activities. That can be a dealbreaker for those who plan to sell multiple products from different companies.
• What is the compensation plan? The compensation plan should define the profits available on sales and any incentives for recruiting. It's not a good sign if recruiting appears to be far more lucrative than product sales.
• What does it cost to get started? There are legitimate network marketing opportunities that are free or almost free to join. High startup costs are a cause for concern.