Difference Between Network Marketing And Multi Level Marketing
Many marketers, especially those just starting out, are unclear about the difference between Network Marketing and Multi Level Marketing. I know I was totally bewildered when I first started. This is even more confusing because often the phrase ‘Network Marketing’ is used as a generic term to describe all forms of marketing including multi level marketing (MLM), direct selling, affiliate marketing and even internet marketing itself.
However I believe it is important to draw a distinction between these different marketing methods.
Primarily this is because many people, including would be marketers, don’t understand what a pyramid scheme is. If you want to avoid being ripped off by one then it’s important that you do recognize these differences.
This lack of clarity is understandable in many ways because there is so much misinformation flying about. However, if you are serious about your online business you do need to be able to tell your direct selling and down-lines from your residual income and compensation plan.
As a marketer, whenever you speak to most people, outside of the marketing world, about what you do, they often give a wry smile and say something like, “oh you’re in to pyramid selling scams.” Usually this is because they don’t know what they’re talking about and actually believe what they’ve read in the papers (never a wise policy if you ask me.) In fact every business (even cooperatives) are essentially pyramid like structures. Most notably the big corporations that dominate our economies.
The truth is, unfortunately, network marketing and MLM is full of people whose primary objective is to rip you off. A much better model, especially if you are just starting out is to learn affiliate marketing. However, there are a few decent networking opportunities out there (not many) and these can be lucrative (but only if you get in really early.)
By equipping yourself with some know-how, at least you will be able to have some chance of avoiding the scams. On the other hand the popular misconception of the ‘pyramid shceme’ totally misses the reality that actually nearly every element of capitalism is, by definition, a pyramid. Check out the hilarious video below.
What Is A Pyramid Scheme?
Typically a pyramid scheme can be identified by the following:
- They promise you a massive return on investment (R.O.I) by simply joining then doing very little and watching the money roll in (If it sounds too good to be true then it almost certainly is.)
- You can’t actually find out what they are selling unless you sign up (for a massive fee usually.)
- When you do find out about the product they are selling it is usually pretty unmarketable. Ridiculous prices for products easily available elsewhere for less are not uncommon (who wants to buy a crate of cranberry juice for $100?). Similarly the products are often about as useful as chocolate fireguards. What do you think the market would be for herbal supplement that makes you vomit after every meal?
- They keep banging on about it being completely legal. This is because Pyramid Schemes are illegal.
- The only way to make any real money is to get other people to fall for the same scam you just have. Remember, in a pyramid scheme, you won’t know much about the business model until after you’ve signed up. There’s no other way to make money because the ‘product’ probably has little or no market appeal.
In essence the only people that can ever make money in a pyramid scheme are the schemes creators and, usually, a select group of early adopters. The business model is based almost entirely on recruiting other people into the scheme.
Another tell-tale sign is that no one who joins under another person has any possibility of making more money than the person above them because they can’t actually make much from selling the product (because it’s crap.) This means that the business model is absolutely not sustainable.
Pyramid schemes are set up to take your money then close just before the first law suit gets filed.
With all the glitz and glamour, hype and uber-spiel the pyramid marketers throw at promoting their scam, it can sometimes be tempting to sign up just to find out what the hell they’re talking about (this is part of the pitch of course.)
So, if you want to avoid them, never join any marketing opportunity that doesn’t fully explain to you what the product is and the compensation plan (more on that later) before you sign up.
What Is Network Marketing?
The primary difference between Network Marketing and Multi Level Marketing is the compensation plan. Network marketing is based upon something called a direct sales compensation plan, whereas multi level marketing compensations plans are much, much more complicated (more on this later.)
Firstly you need to understand what direct selling is. This means that the seller sells the product or service directly to the consumer by sourcing goods and services directly from the manufacturer or provider. This effectively cuts the retailer out of the market. Let me explain.
Let’s say you are a representative or ‘seller’ for a makeup manufacturer. They give you the right to sell their products on their behalf. They save on advertising distribution, training and salary costs. They can therefore offer you a commission for every sale you make.
In such situations the manufacturer or provider will give you free reign to sell their product or service any way you choose (providing it’s legal and doesn’t infringe their reseller terms and conditions.) They are really only interested in the volume of product you can sell.
This is low risk for them because they often cover their costs by compelling you to purchase the product yourself (usually at a small percentage point above cost price) in advance. You then sell at retail price to your customer and the manufacturer often takes another ‘admin’ fee before paying your commission.
Therefore the sales you make are entirely under your control. Like MLM the business is very much your own to manage as you see fit.
This is a pretty well established model which many bricks and mortar businesses use. Avon for example.
Whilst there is a difference between network marketing and multi level marketing both have grown massively since the birth of the internet.
It is the social nature of the internet and the near zero distribution costs of digital products, that has made both MLM and Network marketing viable, full time business models for millions of people. They are particularly attractive to the work from home entrepreneur.
So an internet based network marketing business is one that provides you access to a product or service which you can resell online directly to your customers for a commission.
Your earnings are limited only by the quality of the product or service you are promoting, the potential market for that product or service and your own ability to build trusting relationship with your customers.
Network marketing businesses normally use something called a direct sales compensation plan. This means that you get paid commission for every item that you sell to a customer.
The more volume you sell the more you make. The downside to this is that no sales means no income (MLM differs in this respect – see below.)
How To Spot A solid Network Marketing Opportunity.
There are a few things you should consider:
Firstly how long has the company been around. The network marketing industry is, unfortunately, full of scams and rip-off merchants, but these don’t tend to last very long. So if a company has been around for more than 4 years this is a good sign that they have a sustainable business model.
Also check to see if the company is in good financial health. A company that is short on cash is either over extended or struggling to make any sales. Either way their business (or ultimately yours if you are involved with them) is at risk.
How good is the product or service they are selling? Consider if the product is unique, offers good value and if they have exclusive rights to it or not. If it is readily obtainable elsewhere for less or you can buy very similar products from other manufacturer for less, then your chances of making good money with it are low.
Ask yourself what makes this product stand out. This is sometimes called the unique selling position. Also what is the potential market for the product? Selling gold plated fishing reels may deliver huge single commissions but how many are you ever likely to sell?
Avoid fads if possible. Jumping on the next big band wagon can be great for a short time but fads come and go. So it’s unlikely that you’ll be able to build a consistent long term income on such a product.
Is there an affective support and training infrastructure? Any decent network marketing company will offer their distributers access to effective technologies, to help with order processing for example, and good quality training and support.
Finally can you start earning money quickly and what are the size of the commissions? Most network marketing opportunities offer large commissions on high ticket items. Avoid companies that delay payments on sales for long periods. Many offer money back guarantees so it is not unreasonable for them to hold payments for this period after the sale but any longer is unnecessa
3 Factors That Highlight The Difference Between Network Marketing And Multi Level Marketing.
There are three main factors that illustrate the difference between network marketing and multi level marketing.
Firstly the commission on each sale tend to be a lot less in multi level marketing. Usually the product or service being sold will be of lower value. However potential volume of sales may be far greater so overall earnings could be significant.
Secondly the compensation plans are more complex. In fact figuring them out sometimes seems like little more than the fastest way to develop a headache. Check out the post on understanding network marketing compensation plans for more. However what they ultimately mean is that there are a lot more ways to get paid in and MLM than in a pure network marketing business.
However the drawback to this, and something I have learned to my cost, is that if you set up your teams the wrong way you can end up losing a lot of commission. In fact understanding MLM compensations plans (and network marketing plans for that matter) is so vital that I’ve written a more detailed post on compensation plans here.
Thirdly, and perhaps most importantly for many, it takes longer to build your MLM business than it does to start making money in a network marketing business. MLM is largely based upon building teams in your down-line. That is the people who you recruit into the organisation.
Therefore your success is largely dependent upon theirs. They may look to you (as their up-line) for support and advice. This can also be time consuming and take you away from the business of making sales yourself.
But Aren’t All MLM’s Pyramid Schemes?
In short no!
MLM’s do share some of the characteristics of a pyramid scheme, but then again so does every other business on the planet (the janitors don’t earn more than the CEO’s.)
These similarities are:
- There is often a sign-up fee to join the scheme.
- You can earn money by recruiting other distributers of the ‘product.’
But it’s the distinct differences between MLM and Pyramid schemes that often make them solid business opportunities.
The differences are:
- You are told about what the product is and the potential market reach for that product before you join.
You still need to use due diligence. Ask yourself if you would want the product and would you be happy to recommend it to friends or family.
Do some market research. A good MLM opportunity will say what they think the size of the market is for their product but they are trying to encourage you to join. So make up your own mind based upon your own understanding of the market.
- They are honest about the level of work you need to put in to achieve success with their product. Good quality MLM companies will never suggest that you can earn good money without putting in any effort.
- Anyone who joins can potentially earn more money than the person that signs them up. If the product is strong and there is genuine market demand for it, then your earnings are not solely dependent upon recruiting other distributers.
- Your potential earnings are based upon your direct sales AND the sign up referral fees for people you recruit AND a percentage commission of the direct sales made by people you have recruited onto your ‘downline.’ This means there are ‘multiple income streams’ hence the term Multi Level Marketing.
This also means that you can potentially earn an income without making any additional sales yourself simply by virtue of having already recruited others who are making sales. This is often referred to as residual income.
How To Spot A Solid MLM Opportunity.
There are two main factors you should consider.
Firstly the quality and market potential for the product is crucial. Any business which is not based upon a marketable product and only upon recruiting distributers is probably a pyramid scheme. A solid MLM opportunity will be consumer rather than distributer focused. This means that the potential customer base for the product far outstrips the potential size of the sales force. This is a sustainable business model.
Secondly transparency is vital. Any MLM company worth considering will be happy to explain to you exactly what the product is and precisely how you can make money from the business they are inviting you to join before asking you for any money. Thy may not fully describe the compensation plan (these are notoriously complex – see compensation plan article) but should give you a general feel for how you earn commissions.
They will do this because they are confident both in the sustainability of their product and their business model.
So if you can find an MLM company that is offering an excellent product that you would want yourself to a huge potential market; if they are clear about the level of effort they require from you; if they fully explain how you can earn money, then they are definitely worth checking out.