Network Marketing, MLM, multi-level marketing. Whatever you call it it’s the same thing, but exactly what is Network Marketing and is it a viable business model?

I’ll be kind and give you a short answer and a long answer, take your pick.

What is network marketing ? – the short answer:

Network marketing is a particular type of business model which involves normal people like you and me (well, almost normal in my case…) selling a company’s products to friends, relatives and other contacts whilst at the same time encouraging those same people to take up the same mantle and sell the same products to their friends, relatives etc

This is building the network and your sales commissions are based on everyting sold within your network. Seems simple enough. If you’ve got the energy, let’s delve into this in a bit more detail.

What is network marketing ? – the long answer:

Let’s start with the standard business model. Big companies decide what products to make, produce the goods, package them up, sell and distribute them and somewhere in the middle spend huge sums of money advertising and promoting in the hope that eventually the revenue from sales will dwarf the expense of selling them in the first place.

In a typical business, anywhere between 10% – 50% of the sales turnover will be reinvested in advertising, promoting and marketing products in order to generate sales to ultimately earn profit for the company. The companies with the greatest scope for advertising are those with brands and products which command a significant premium in the marketplace. Of course, there is a Catch-22 here because to create a brand/ product which can command a premium in the first place, the company will inevitably have to spend marketing budgets well ahead of any potential revenue.

Despite the presence of highly paid agencies, PR executives, advertising gurus and in-house marketing expertise, monumental gaffes abound in the industry, outcomes where massive committed advertising budgets were frittered away as products were committed to the commercial crematorium.

Just for a laugh, remember these?

Coca-Cola’s much vaunted “mineral water” Desani had to be withdrawn not only when it was revealed that the source of the water was a tap somewhere in Peckham but finally when bromate levels were discovered to be over twice the legal limit. That was 2004 and Coca Cola are still smarting from the fallout.

Who could forget the Ratners howler. Gerald Ratner was asked at a conference how his jewelry was so cheap. He replied “because it’s total crap!” Not satisfied with this, he then went on to refer to Ratners’ earrings as “cheaper than an M&S prawn sandwich but probably wouldn’t last as long.” Fantastic! Ratners share price tumbled by £400m, Ratner was booted out and the company renamed Signet Group.

Reportedly, Coors Brewery launched a beer in Spain with the strapline “Let it loose” which was unfortunately translated as “gives you diarrheoa”.

The list goes on and on but distracts me from the main point which is this: suppose these companies could find a way of paying out for the potentially huge marketing costs only once the product is sold.

Sorry about that long preamble but now we get to the answer to:

“what is network marketing?”

There is a different model that network marketing companies choose to follow. Instead of spending those vast marketing budgets ahead of sales, they use word-of-mouth (well, quite a sophisticated version anyway) and pay the common man a commission on everything that his/her word of mouth has managed to generate in sales.

You know, one person tells three people who each tell another three etc. (remember that if you put a grain of rice on the first square on a chess board, put two grains on the next, four on the next, eight on the next and so on, by the time you get to the final square on the board the number of grains of rice will by up to 9,223,372,036,854,780,000.)

Instead of spending 50% of their turnover on advertising, they pay out a fixed percentage of turnover to those people that spread the word. It’s a great technique that has a number of benefits to them:

1. Only pays out once the product is sold

2. Products endorsed by real people to friends, family etc is a very potent way of advertising a product

3. The grain of rice principle above shows the potential power and extent of such a method

Of course it’s not all plain sailing for these companies. After all you have to know how to mobilise armies of normal people and keep them mobilised.

Only a relatively small number of people have the self motivation and discipline to stick to and succeed at anything, whether it’s losing weight, keeping fit or making money.

However, the successful network marketing companies have developed these techniques and, using the grain of rice principle, even if the majority of people pull out along the way, they will still reap huge turnovers from those that are left.

So that hopefully helps you to understand “what is network marketing?”. The most important thing for you now is to decide if it is a suitable business model for you to pursue.  I will write more on this subject in a future blog.

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