What Is a Network Marketing Business – Is It Legal Or a Scam?
You might have been approached by a friend or a relative offering you to check out a Network marketing company or maybe you were looking online for a part-time business from home and you stumbled upon a network marketing offer. So you have started your research to find out what is a network marketing business and you probably encountered, online and offline, very strong opinionated people recommending you either to join since this is the best thing on earth currently or telling you to run away as fast as you can since network marketing is a scam and illegal.
Is network marketing legal or a scam
Before sharing my analysis and conclusion is network marketing good or bad, let me clear out one misleading roomer – The industry of network marketing is not a scam and it is legal. There are, like in every industry some rotten apples (and maybe more than some in this case). Keep reading to find out how to avoid the bad network marketing pyramid scams. But in general, network marketing is a legit industry. I base this conclusion on the following three reasons:
- This industry is almost 100 years old and most of the leading companies are publicly traded on the NASDAQ. If this industry was not legal, these companies were shut down a long time ago by the FTC.
- The industry was put on a halt in the 70’s for approximately 5 years, when the FTC conducted a thorough investigation of the industry and came up with the conclusion that a network marketing business is legit as long it complies with the following two rules – money is switching hands only for a tangible product or service and you can also buy the product as a regular customer, without being involved in the business opportunity.
- The network marketing business model is being taught in leading universities in the US.
And If you like an attorney review Is network marketing legal or not here what attorney Kevin Thompson has to say about Network Marketing:
So what is a network marketing business or as it also referred as multi level marketing (or MLM in short)?
Network marketing is a subtype of the direct selling industry. In direct selling the manufacturer sales directly to the end consumer, cutting the wholesaler, retailer, and the distributors. That allows for more profit for the manufacturer and massive discounts for the end consumer at the same time. Yet, the manufacturer still needs to employ sales people and invest in marketing and advertising in order to market and sell his products.
A network marketing company takes this model one step further. The network marketing companies do not employ salespeople and do not invest in marketing and advertising. They use a network of independent peoples (often referred as independent business owners) to market their products.
Those people are not employees of the company hence the company doesn’t pay them a salary. But on the other hand, they don’t have to comply with regular working hours and can work when and how much they like to since they are being compensated only when a sale is made.
Hence the term – Network Marketing. This way the products are being promoted and sold by a network of people and not limited numbers of employees which is a great leverage and cost saving for the company.
The second reason it is called ‘Network Marketing’ is related to the other name this industry also has, which is – Multi level marketing or MLM in short.
What is multi level marketing business?
Multi level marketing is just another name for network marketing and describes one of the ways independent distributor are being compensated. In a multi level marketing business the distributor is being compensated not only for the sales he makes himself but also for the sales his organization (the people he brought into the business, trained and support) is making. Think of it as in a sales team in a “regular” company – the team leader is being compensated with a commission for his own sales and for the sales his team is making. Same in multi level marketing, but the difference here is, since everyone can build their own team, you are being compensated from multiple levels of teams hierarchy. How much and how deep is depends on the compensation plan and changes for each company.
How does it work?
Let me explain that with a short story:
You are standing on the line to pay at your favorite grocery store. When it is your turn, the cashier noticed that you are a regular at their store and ask you – “I’ve noticed that you are buying here often. Why aren’t you taking advantage of our free membership card?”
so you ask – “what is that?”.
The cashier smile and say “well, it quite simple – every time you come to buy you pass your free membership card at the cashier and you’ll get points of about %10 of your buy. After accumulating 10000 points you’ll get free, all included, travel to Hawaii.”
“That is awesome!”, you respond and register for your free membership card.
Then the cashier add “if you like our store and appreciate our membership plan why not tell your friends and neighbors about it? If you’ll do this for us, every time they will use their membership card they will get their %10 points but we will also give you another 5%, this way you’ll be able to reach your 10000 faster.”
You have to understand two crucial facts upfront, which makes this industry different from what you probably familiar with as an employee. Failing to understand those, will make you think this is a scam:
- You ARE NOT being compensated for your work and effort.You are getting paid only for your RESULTS. No results (someone actually buying products from the company), no commission. This is the mentality of a self-employed entrepreneur.
- You ARE NOT being compensated for ‘recruiting’ people into the business. You are getting paid only if those people buying products (as customers) or making a sale (as independent distributors).
Direct Selling in Numbers – Did You Know?
In the USA: More than 20 million people were involved in direct selling in the United States in 2015, with estimated retail sales of over $36 billion. (source: DSA).
In the European continent: More than 14 million people were involved in direct selling in the European continent in 2016, with estimated retail sales of over €32 billion. (source: seldia).
Globally: More than 107 million people were involved in direct selling globally in 2016, with estimated retail sales of over $182 billion. (source: WFDSA)
What some famous peoples are saying
Shark Tank Star Kevin Harrington Endorses Network Marketing – “Without a doubt, the most explosive way to be an entrepreneur is in network marketing”
Bill Clinton – “You strengthen our country and our economy”
Robert Kiyosaki: “The best training ground for entrepreneurs” (source: Rich Dad Radio, episode “Level Up”)
Here is a short excerpt from the book “The Business Of The 21st Century” by best selling author Robert Kiyosaki:
“Warren Buffett and Richard Branson couldn’t be more different. Buffett drives a pickup and lives in Omaha; Branson flies his own airline and lives on his own island in the British Virgin Islands. But they have three things in common. They are both billionaires. They are both extremely practical men. And they have both owned network marketing companies. Does that tell you something?
Citigroup, Jockey, L’Oréal, Mars, Remington, and Unilever: Guess what they all have in common? They’ve all put a toe in the network marketing water—in some cases, right up to their hips” (source: The business of the 21st century, p. 37)
- No need for huge investments. Very low-cost opportunity to start a business, usually not more than few $100’s, compared to other opportunities like ‘traditional’ business or franchising that cost $100,000’s to start with.
- You can start part time from home without the need to quit your current job.
- No need to deal with logistic, legal, billing, etc. All you need to deal with is sales and marketing.
- A complete training, mentoring and support program. You get the benefit of a proven system like in franchising but in a fraction of the cost.
- Leverage your time and effort. You can invest 1 hour of your time in making 1-2 sales with a 0 commission. But you can also choose to invest that time in training other 10 peoples, teaching them to make a sale and then earn from the sales they make due to your training and support.
- You don’t need any formal education or degree in order to start a business.
- You can choose who to work with.
- No one can fire you 🙂
- You get paid only for results (sales) not for your effort.
- You are going to be “tagged” and banned by some of your friends that have prejudged opinion about this industry.
Who is it for
If you want to become an entrepreneur and start your own business but, don’t have the money and time to start a ‘regular’ business. Or if you are not willing to risk it all on a brick and mortar business (after all ? of them do not survive the first 5 years).
If you want the support of a mentor guiding you how to start a business and want to benefit from a proven training system.
Please note, that it is not for you if you are not willing to put some sweat equity and have some patience. And if you are looking to make some big money you have to be willing to train and support others to be successful.
How to choose a company
It is a common saying that your first network marketing company chooses you. But it doesn;t has to be that way. When choosing the right network marketing opportunity for yourself I recommend checking and validating the following 6 criteria while you are doing your due diligence:
- Pasion – Choose a company that you have a true passion for the industry they are in and can sincerely recommend their products/services. There will be times of up’s and downs, and if you are not passionate about the products you will probably quit.
- Viable product and industry – Make sure that you are not tempted by some products that look cool currently but are kind of ‘current fashion’ buzz products and not sure they will be viable few years from now. You don’t want to spend your time and effort for a short live business.
- At least 2 years preferably 5 and more – ? of the newly established companies (in every industry) won’t survive their first 2 years and most of them won’t survive their first 5 years. So it is preferable to choose a company who stand the test of time and has a proven record of financial success.
- Formal Leadership & your direct upline (sponsor) – It is vital to choose a company that her leaders (CEO, CFO, etc.) are experienced and have success records as managers in other business. It is preferable to choose a company that the leadership is experienced in managing a network marketing company. You also want to make sure that you get along with the one that will sponsor you into the company (aka your upline) since he/she will be your mentor and your first line for support.
- Training – Do a thorough check what kind of training is offered. After all, this is one of the main reasons to join a network marketing company. Check how much training, in what levels and who is conducting the training. And if you are not happy, look for another company.
- Compensation plan – it is not by accident that this criterion is the last one and not the first in the list. Most people will check the compensation plan first. It could be a very generous compensation plan, but if the company managers are rookies, the company is very young without a financial back to support her, and your supposed to be upline is not your type, you’ll probably won’t get to benefit from it.
The top three Common argues against network marketing as a business opportunity
- The ones at the top (or joined at the beginning) make all the money – This is a common misleading conception. On a legit network marketing company, you are getting paid according to your results (your personal sales and you team sales). Meaning that if you do not produce, you are not paid. In most of the companies, you need to be “active” in order to receive commissions. Meaning, it is not enough your team members are making sales, but you need to make personal sales as well. Third, in most companies, you will be getting paid on a finite number of levels of your group. Hence, it is more than common that someone on the “top” will make less money from someone beneath him.
- The products are overpriced – For every kind of products (regardless of network marketing) you will find a scale of prices ranging from the cheapest low-cost products to the highest premium products. The people who make this argument, expect the network marketing products to be the cheapest low cost on the scale, while the network marketing products are usually located in the mid-range to the high premium products on the scale.
- You need to hustle your friends and family – Indeed in almost every training that I’ve encountered in my last 10 years in the industry, I’ve been asked to make a list of friends and family members and approach them with the products and/or the business. But, since it is YOUR business and you are your own boss, you can decide if you like to do so or not. I strongly recommend NOT TO force your friends and family join your business or buy your products. Unless you want to be banned from wedding and funerals… What I do recommend is share with them your new business as you’ll share any new exciting thing happening in your life. That’s it, without any mild pressure or hidden hints to join.
If you have read the complete post so far, you are probably already guessing my final verdict. In case you just skipped to the end to find out the bottom line, well, I strongly support the network marketing industry. I suggest to anyone who wants to get into a business of their own for full time or part time business from home, FIRST to join a network marketing company. If not for the business, join for the training and the option to make mistakes on a small scale before you risk all your saving on a brick and mortar business.
Please note I’ve said I strongly support the network marketing industry but I definitely do not support every network marketing company. Some of them are just scams which you should avoid. Check the first paragraph of this post to find out how to recognize those. Some of them, although they are legit and good, may not suit your personality, needs, and goals. Check the last paragraph of this post to find out how you should choose.
If you are a network marketer and want to share your experience, or if you have more questions or concerns which you like me to attend, please share those in the comments below.
This is a very interersting article. I would say that your support of MLM is something I did not expect.
I read the whole piece of content and was amazed with arguments in favor of network marketing.
Before that I thought that MLM companies are scams in most cases. But you made me change my mind.
It seems that there are some exceptions.
Maybe many people, including myself, use to think about such business opportunity as a scam because of the “selly” ways most of them use, coupled with not a good quality products.
Being knowledgeble in this field can you name a few good examples of network marketing companies?