About Network Marketing

Few industries are as maligned and misunderstood as the multilevel marketing industry (MLM), commonly referred to as "network marketing." Visions of secret societies, "pyramid schemes," even "cults" dominate most people's impressions of this industry; few think of honest businesses moving high-quality products with money-back guarantees.

And, though some of the industry's poor reputation is deserved, it boasts many professional companies that produce and/or sell top-of-the-line products - in many cases not available anywhere else.

Amway

The most well-known network marketing company is Amway, based in Adda, Mich. One of the oldest and best established companies in the industry, Amway's checkered past is one reason for the general public's negative perception of the industry. The company was a trailblazer in the industry and its multi-million battle with the FTC in the 1970s demonstrated to the government and the public that it indeed ran a legitimate business. Amway today is a multibillion-dollar multinational company, divisions of which are publicly traded.

More than 600 network marketing companies are estimated to be operating today in the United States, ranging from well-known names many don't normally associate with MLM - such as Mary Kay Cosmetics and Tupperware - to others that have generated much recent publicity - such as IPO darling Excell Communications and 1996 Inc. 500 champion Equinox.

The rapid rate at which companies organized under this business model are able to grow has served notice to the broader business community, which is in some cases is trying now to emulate elements of this marketing structure. Estimates are that close to six million people in the United States were distributors in network marketing organizations by 1996.

Aim International

Though AIM International isn't completely comfortable with the tactics some companies in this industry choose to grow their businesses (AIM has always had a product-focused - not business-focused - approach), there is no denying that this is the most efficient way to market certain types of products. For several reasons, health and nutritional products are among the fastest-growing segment of the network marketing industry, and conservative estimates indicate that 30 percent of all products in this $17 billion industry are now sold through network marketing.

Wholesale Buying Club

Think of network marketing as the Costco concept. In essence, network marketing companies create a wholesale buying club among their members. Most people that become members pay an annual fee (about $25) for the right to purchase products at wholesale. Others they know then can buy products from a member at retail (a mark-up of about 25 percent), or choose to sign up to become a member, thus qualifying to purchase at wholesale themselves. Most people who are Costco members are big fans of the warehouse concept, and usually tell their friends who aren't members "You've got to join."

Network marketing, in principle, is similar. People aren't typically involved to "get rich quick," but because the value of the products have proven so high. In the case of health and nutrition-related products, they can often have a dramatic impact on consumers' health, which causes an emotional customer attachment and loyalty.

The concept is simple. For companies choosing this business model, they eliminate much of the cost associated with traditional businesses - most importantly, traditional marketing expenses. Rather than hire a sales team, companies operating in this industry devote moneys usually earmarked for advertising to a commission structure that enables and encourages "independent" agents of the company to recruit product customers and others interested in also building a business.

Distributors

These individual distributors - with extensive corporate support from the company they represent - train those recruited to their "downline" on how to sell products and build their own business. This structure is, in many ways, similar to how insurance companies operate - selling company products through independent agents of that company who are, in truth, self-employed. These distributors are able to build profitable, and sometimes large, business organizations without the costs associated with starting a regular business. They earn commissions not only on their own sales, but on the sales of those in their business downline. These commissions, coupled with leadership bonuses and overrides, can be as high as 36 percent (as they are at the top commission level in AIM).

Another benefit: the income is residual, meaning money continues to be earned even from work not currently being performed. For the companies structured this way, it can be a successful way to build a business. For example, Excell Communications of Dallas, Texas, now publicly traded on the NYSE, has become one of the nation's largest long-distance service reseller in less than 10 years. Anticipating sales of more than $1 billion by 1998, the company spends almost nothing on marketing - word-of-mouth is how it captures business. Compare this with AT&T, which in 1995 spent more than $1 billion in advertising. Examples such as this are what have major corporations intrigued about this delivery model.

Home Based Business

Home-based business is a dynamic and rapidly growing trend across the United States and Canada. Fueled, in large measure, by dramatic innovations and cost-efficiencies in communications technologies - from cellular phones to laptop computers running powerful software to low-price fax machines to the Internet - one-person offices are springing up across the county, doing the same professional-looking work as those located in downtown high-rises.

More than 50 million people today are running home-based businesses full- or part-time in the United States, and growth estimates peg their increase at 10 percent annually. While these run the gamut from consultants to programmers, many home-based business owners manage network marketing organizations.

Myth and misinformation continue to plague this industry. But most reputable, successful companies have several distinct things going for them: They have high quality products that come with a money-back guarantee; they have exceptional customer service and support; they offer members the opportunity to do as much or as little with the "business opportunity" as they choose (and most of the six million distributors choose not to become business-builders); they are forthright about the company, its history, its products and the fact that it indeed is a network marketing opportunity; and their main source of income is product sales, not training, support and marketing materials for their independent distributors.

Goodyear Tires and MCI long distance have been sold through Amway representatives for years. And some established companies, including Rexall Sundown, have formed new divisions established under a network marketing model. There are business advantages to an MLM structure: principally, it is the fastest, most direct and most efficient way to deliver some products to consumers.

As more professionals venture into network marketing, as companies do a better job of training their distributors to represent them, and as more people begin to purchase products and services from their friends and neighbors, this industry's perception will begin to better match reality.


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