Network marketing: what kind of business is it and how does it work?

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Probably, most of our readers have had to look for additional income, or even a place of main work, at least once in their lives. Moreover, this happens not only to young specialists who have just graduated from an educational institution. Everyone is now looking for work or part-time work, from schoolchildren to retirees. The reasons are different - some do not have enough money to meet basic daily needs, others want to save up for an expensive car or apartment, young people living with their parents strive to gain at least minimal financial independence.

The search for options usually begins with studying the media and sites that post job advertisements. Experience shows that there are almost no valuable offers there. And we simply don’t pay attention to some, believing that they are not worth it. Network marketing advertisements often fall into this category. The attitude towards this activity in our society is very ambiguous and predominantly negative. Epithets like “scam” and “scam” are not the harshest in relation to MLM (an abbreviation of the English term MultiLevel Marketing, which “in our opinion” means “multi-level marketing”). But is everything really so sad?

We are all adults and we understand that we can draw any conclusions only after studying the issue. And at the same time, many of us sin with unfounded assessments of this or that phenomenon, inspired by other people’s impressions or other people’s experiences (no matter, negative or positive, but alien). It seems that network marketing has fallen victim to precisely this assessment, although many do not even really understand its essence.

The essence of MLM business

MLM stands for multilevel marketing - multi-level, or network, marketing.
This is a direct sales system in which the brand does not wait for the client to become interested in the product and make a purchase, but attracts independent distributors to find consumers. Distributors call people, visit apartments, organize thematic master classes or create groups on social networks. They attract not only customers, but also new sellers of goods. Each of the subordinate consultants, in turn, can organize their own team. This is how the company forms a multi-level network of distributors.

Sellers are not employed by the company, but work as independent entrepreneurs: they register an individual entrepreneur or a legal entity, open an office if necessary, create a website or group on social networks to sell goods, and connect an online cash register. Therefore, they do not have a stable fixed salary, sick leave and vacation pay.

The company provides the distributor only with products, promotional materials, education and training that help to competently offer products to customers. For example, Mary Kay organizes free courses on makeup and skin care.

Is it worth doing network marketing?

The answer to this question depends on your character, which largely determines how much the advantages of working in the MLM business outweigh the disadvantages for you. A flexible schedule sounds tempting, but it's worthless if you're not willing to interact with a lot of new people. The appeal of a future big income fades if you are unhappy with the volatility of network marketing compared to the predictability of your monthly paycheck. It’s worth taking a closer look at network marketing and trying yourself in it if you have:

ability to negotiate and persuade;
charisma;
the ability to be a psychologist - to understand the needs of the interlocutor and correctly offer him a solution, that is, a product;
desire to meet new people;
interest in the products sold.

Today's communication capabilities, social networks and YouTube make it possible not only to sell goods and build a business unit, but even to discover the talent of a beauty blogger, culinary expert or cleaning specialist.

How the MLM business developed

One of the first companies to use door-to-door selling was Watkins Incorporated in 1868 (now JR Watkins). The products were distributed through a network of independent sellers, who went door to door and invited people to try the products. By 1911, Watkins products were sold by 2.5 thousand agents, and by the end of the 20th century their number increased to 80.

In 1886, American businessman David McConnell founded the California Perfume Company. After 53 years, it received a new name - Avon. The company's first distributor was Persis Alby, the wife of a New Hampshire senator. Over the course of 12 years, the woman formed a network of 5 thousand representatives.

International chain brands, including Mary Kay and Oriflame, entered the Russian market in the 1990s. One of the first domestic companies that began working on the MLM principle in 1997 was Russian Line. 4 years later, as a result of rebranding, it received the name Faberlic.

There are now more than 100 network companies in the world. They sell nutritional supplements, cosmetics, household chemicals, and home appliances. In 2018, sales of network products, according to the rating of the specialized magazine Direct Selling News (DSN) for 2020, exceeded $190 billion (11.7 trillion rubles).

Distributor income structure

A network business offers the entrepreneur-seller several sources of income.

Difference between product prices

Products are sold to distributors at a discount: for example, at Avon it reaches 30%, and at Mary Kay it reaches 45%. However, the seller sells the batch at a price not lower than the retail price indicated in the catalog and on the official website of the MLM company. This point is stipulated, for example, in the Faberlic rules.

Percentage of sales of your structure

An independent entrepreneur forms a network of consultants and receives a percentage of their sales. The larger the team, the higher and more stable his earnings. In some network companies, entire hierarchical pyramids are built. Thus, Amway distributors, depending on the number of attracted distributors, personal and group turnover, are classified into levels: “silver”, “gold”, “diamond”, etc.

Bonuses from the company

Since constant turnover is a guarantee of the survival of a network business, incentive systems are popular in companies. The organization can reduce the purchase price for a distributor who demonstrates high performance, or offer gifts: a car, a trip abroad, etc.

Cons of MLM

Fraudsters.

Yes, it’s sad, but the popularity of MLM organizations has provoked the emergence of fraudulent companies that want to get rich from ignorant newcomers.

However, such a failure is easy to avoid by collaborating only with large and well-known companies with a real product.

Product cost.

Leading MLM companies produce truly unique and high-quality products. Sometimes its price may exceed market analogues of lower quality.

Buying a product is not difficult, because partners, as I already said, receive the privilege of a good discount, but the terms of sale become more complicated, due to the fact that our people like to eat fish and not go into the pond.

However, having learned the art of marketing, convincing the buyer of its benefits is not difficult, especially after introducing him to the team, he will be able to buy the product at the same favorable price.

Refusals.

Nobody likes to receive refusals, but in this case it is inevitable, because it is an integral part of the experience.

It is refusals that help you identify your mistakes, work to correct them, and gain irreplaceable experience for successful advancement in the future.

In addition, this is why there are a lot of trainings and webinars that teach the art of selling and working with objections.

Team turnover.

Not everyone stays on the team and persistently develops their business. Many light up, and then go out and leave, which affects other networkers.

That is why it is very important to support those you bring to the team and monitor their successes until they are convinced in practice that such income is worth the effort and time spent.

Not guaranteed income.

If you expect that by becoming a partner of a network company and making a starting purchase you will begin to earn untold wealth, you will get a severe bummer.

Such dreamers leave the network with a negative impression of the entire company, spreading rumors that MLMs are scammers.

You need to be willing to work hard and invest your time, especially at first, in order to expand your team and receive passive income in the future.

MLM vs financial pyramid

MLM companies have been repeatedly compared to financial pyramids, the creation of which is subject to criminal liability in Russia.

In pyramids, unlike network businesses, capital grows due to investments from new participants; these could be membership fees or start packages. Such companies receive income while the number of investors grows. As soon as the influx of newcomers stops, the pyramid stops bringing money and collapses.

Illegal organizations hide behind the production of goods. As a rule, they either sell products at high prices at low costs, or charge large membership fees from distributors.

Herbalife was suspected of fraud twice, but the owners were able to prove that they receive income through the production and sale of goods.

MLM companies (rating)

There are a huge number of MLMs in our country, and it is extremely difficult for buyers of their goods and services to choose the right one. The situation is not cleared up by the fact that a large number of fraudulent organizations hide behind the form of an MLM structure, denigrating this essentially harmless business tactic. A rating of MLM companies, which will display the best of the network enterprises that conduct honest and legal activities, have experience in the field, have proven themselves on the positive side and whose names are well known to many. We will update this rating if some companies emerge and confidently win consumers or disqualify those who have completed their work. MLM companies, the list of which we have presented below, are suitable for learning from personal experience what network marketing is.

How do sellers work?

Traditionally, distributors distribute catalogs, customers select a product and place an order directly from the seller.

Companies prohibit distributors from working at wholesale and retail trade points: in stores, kiosks, markets, and from trays. This is stated in the Oriflame charter, and the same rule applies at Faberlic. For the first and second violations, companies are issued warnings, and after the third time they stop cooperating with the distributor.

Today, MLM business has moved online: most companies have official websites where customers can view the catalog, order and pay for products. For example, a Mary Kay consultant can create a personal page and indicate their specialization, telephone number, delivery area, and post information about their master classes.

Distributors also offer products through groups on social networks, personal websites or online stores, but at prices no lower than in catalogs. To attract buyers and new sellers, networkers place contextual advertising and run YouTube channels where they talk about MLM business on the Internet and the advantages of online products.

But not all companies welcome this. Oriflame allows you to open an online page for accepting orders only on the company's official website. Sales in third-party online stores, auctions such as Ebay, and through free message boards such as Avito are prohibited.

Can mlm business be official?

Network marketing is a business that can and should be legal. As a rule, normal companies promoting their products have all the necessary documents, licenses and certificates. They have legal activities, which are listed on their accounts with tax organizations.

Through such companies, each person can work as a self-employed person or as a private entrepreneur. If you are not sure about choosing a network, it is better to immediately refuse and start looking for another organization.

Specifics of working on the Internet

High-quality audience selection

The distributor does not knock on the door of every acquaintance, persuading him to buy something. A person who joins a public page or goes to an independent partner’s page is already interested in the product.

Many online entrepreneurs use CRM systems (customer relationship management systems). They help filter the audience of sites and identify those who do not buy products or buy only certain categories.

Wide coverage

A distributor may not be limited to the audience of his country, but promote himself on foreign platforms, for example, on foreign social networks, if the company’s rules do not prohibit this.

Payment transparency

The ability to place and pay for an order through the website reduces risks for the buyer: according to the norms of 54-FZ, the seller is obliged to provide him with a receipt after purchase.

Process automation

Internet technologies make it possible to automate product promotion and search for new clients and partners. You can set up regular mailings in instant messengers, schedule publications of materials about products so that they are published around the clock, and record video trainings to save time on training new partners.

But some companies prohibit the use of bots and spam mailings, so it is better to check the rules of the network organization.

Special programs allow you to automate the work of a warehouse, including the receipt and shipment of goods, or document flow.

Why is MLM business popular?

According to The World Federation of Direct Selling Associations (WFDSA), more than 118 million people around the world are involved in the MLM business.

Distributors choose network sales for several reasons:

This kind of business is easy to start. No specific knowledge or work experience required.
The minimum starting capital is enough. For example, Faberlic offers new consultants to place their first product order for 1,499 rubles, and Mary Kay for 3.5 thousand rubles.

Free schedule. Of the 118.4 million online sales members, 10.5 work full-time, 30 hours or more per week, according to WFDSA. Almost 43 million spend less than 30 hours; the rest work occasionally.
There is a school of entrepreneurship. Companies promoting network business train distributors in sales and communication with customers, conduct seminars and trainings. The newcomer is assigned to a mentor who helps solve problems.

Pros and cons of multi-level marketing

Network marketing, as a field of sales without intermediaries, gives people who want to become entrepreneurs the opportunity to build their own independent business with minimal initial costs. But, as in any business, network marketing has a second side to the coin.

Pros4	Minuses
Working for yourself – no boss or office intrigue, free schedule.	To achieve success, you have to work hard. Stories about a distributor vacationing in Thailand while funds arrive in his bank account are only possible when the seller has created a developed and stable business unit.
Small investment to start a business. Usually you need to purchase a starter package - company products for a small amount. There are no costs for office rent, equipment, employee salaries and other expenses that traditional entrepreneurs bear.	For many, becoming a salesperson is difficult not so much financially as psychologically.
Profit depends on the seller himself. There are no restrictions in the form of staffing, like office workers. Depending on the company, a distributor can earn from 3% to 45% of the price of goods sold.	At the first stage there is little income.
Everyone who is ready to work has equal chances. Anyone can try themselves in the network business. There is no employer who makes conclusions about professional suitability based on a resume and the status of previous companies. Neither gender nor number of children matters. To get started, you don’t need any special knowledge or diplomas. Sellers receive the necessary training within the company.	Due to inexperienced distributors who do not know how to find an approach to potential buyers, society has formed an opinion about sellers as unprofessionals.
Senior distributors are interested in helping to start their business and support it in the future.	Partners depend on each other, especially in terms of image. Unscrupulous behavior of one can cast a shadow on others.
Unlike the popular business of selling cheap goods from China, when working with well-known companies, you do not have to worry about the quality of the products.	Inattention can lead to deception by scammers who, under the guise of a manufacturing company, collect money and disappear. Therefore, you should be more careful: choose proven companies with a long history. Almost always, an unscrupulous company can be identified by reviews on the Internet.
Since the advent of the Internet era, it has become easier for sellers to find customers using social networks and forums. There is no need to look for buyers in person - you can work remotely.	During the development of network marketing, many people have already tried themselves in this field and acquired regular customers. To find new clients who do not have their own distributor, you will have to make significant efforts.
Experience in network marketing develops useful skills in communication and negotiation. These skills will be useful in future professional activities, even if the seller does not achieve what he wants in the MLM business.	Novice salespeople, whose expectations are not met in the first months of work, often give up prematurely, without having time to gain experience.

The fear of starting a new business is justified. To overcome it, assess your risks:

By working with a well-known manufacturer, you can only lose time and the cost of the starter package (which, however, you use for your needs). However, if you are determined to work half-heartedly out of fear, you should not expect success.
To understand what to expect, start your business by studying your marketing plan. Especially if it includes possible fines.
Consumer research shows that aspiring entrepreneurs' fears of negative attitudes toward off-premise shopping are unfounded. The Russian Direct Selling Association notes an increase in positive attitudes towards this method of promoting goods. In 2020, this figure rose to 74%.