Network marketing

Network marketing is a general term for a type of marketing that is usually performed by an individual instead of a company. It refers to the use of interpersonal or social networks to market products and services for business purposes as opposed to the more traditional and common practices of wide-range advertising.

The term is technically a type of marketing that can be used as part of an overall marketing strategy which may or may not encompass multiple tactics. For example, the most common marketing tactic in a network marketing strategy is word of mouth.

Many companies which utilize a network marketing strategy facilitate it with a multi-level marketing (MLM) compensation structure. For this reason, the two terms are often confused with one another and used interchangeably.

Network marketing vs. multi-level marketing

As there are myriad cases in which the term "network marketing" is used interchangeably with "multi-level marketing" the true meaning of the two terms becomes misunderstood. In many cases a multi-level marketing structure is used in combination with a network marketing strategy, so it is possible to refer to one particular company as using network marketing as well as multi-level marketing; however this is not always the case.

It is important to make the distinction that the term "network marketing" describes a particular marketing strategy, while "multi-level marketing" is a specific characteristic that is a large part of, and speaks to an overall business model. While the two are often seen implemented within the same company business plan, they need not be and in many cases one is used without the other.

It is possible confusion arises from the hierarchical structure created in a multi-level system: because of its nature, the system itself results in the formulation of a tree network within the scope of the company. The term "network marketing" however is not in reference to the structure of the company; it is a description of the nature of the strategy used to market the company products. In other words, the "network" adjective is not referring to any company-related attributes; it refers to how the marketing itself takes place: through the social networks of individuals. Put yet another way, network marketing is not marketing which necessarily creates a network within a company, it is marketing that is performed through the social networks of independent people.

Multi-level marketing

Main article: Multi-level marketing

A typical MLM binary tree structure. The blue individual will receive compensation from the sales of the downline red members.

What gives multi-level marketing it's name is the unique compensation structure. In such a company independent sales representatives (individuals who market company products) are contracted by the company in what is more or less a subcontractor position (however the company usually has no general contract with any client). Because of such a relationship, the sales reps are not employees of the company, they are independent from it. (An example of this in the United States would be in any situation in which IRS Form 1099 is used.)

What makes a structure qualify for the term "multi-level marketing" is the specification in the contract between the company and the representatives that the representatives will receive compensation (also called commission) for their own personally generated sales of company products as well as for sales of other promoters they introduced to the company. This ability to receive constant remuneration from the efforts of others creates an incentive for the representatives to personally recruit teams of other sales representatives (who will ideally do the same), thus creating a downline of distributors and a hierarchy consisting multiple levels.

The requirements for earning the ability to receive such compensation can differ widely between companies and are specified in each company's compensation plan document. These specifics of requirements needed to receive different kinds of compensation and exactly what the compensation amounts are are essentially what determines the type of multi-level structure the company utilizes. In other words, there are many different ways to set up the structure and specify how individuals are compensated from downlines, but the principle stays the same: an individual can receive renumeration from the efforts of those he recruited (and those recruited by his recruits, carried out to a specified level).

Network marketing

File:El chart.png

Illustration of a social network

A company can utilize multiple marketing strategies as part of its overall business plan. Considering its objectives, a firm might implement different strategies at different times (meaning different times of the year and/or at different periods throughout the company's life cycle. The strategies chosen might also be influenced by myriad other factors including the company's particular economic sector, customer base, and as well various internal factors.

Considering this, a network marketing strategy can be an efficient and effective method for many different companies and business types and therefore might be implemented with varying degrees of focus and intensity.

Examples

In its infancy, Paypal offered a $10 credit to a current customer for each new customer he referred. The referral who signed up and became a new member received a $10 credit as well. The company currently offers referral credits for new merchants as well as new general users. Many other companies offer similar referral incentives. AT&T Wireless Services, Comcast, Vonage, and Wachovia are just a few examples of the many firms that offer such remuneration. The "Refer-a-Friend Program" incarnation of network marketing strategy has gained enough popularity to garner the phrase as a company name and associated website, with the company itself providing assistance to small businesses in the setup up of their own such programs. Similarities to such a promotion can be seen in affiliate marketing setups between companies.

Cognigen Networks (now called BayHill Capital) originally paid simple commission and bonuses based on individual sales efforts of its marketers. The "affiliate marketing program" has since been renamed Commission River Corporation and currently operates as a wholly owned subsidiary of BayHill with a multi-level compensation structure.

T. Harv Eker's Peak Potentials Training pays a commission on a referral sale of nearly any product. The company has even set up a referral program (called the Ranger Program) which offers members (known as Rangers) special benefits and access to certain products at discounted prices as well as tools to help promote the Millionaire Mind Intensive seminar (the flagship of the Peak Potentials Training series) and track all sales in a personalized account. The program itself mentions and implies how the ultimate aim is for others one knows to "share in the same life changing experience that [the ranger] did" (i.e. by marketing the information to those in their social network). No compensation is offered for the sales efforts of anyone other than the individual Ranger himself. There is no multi-level structure and no incentive for marketers to recruit others to market as they do.

See also

• Marketing
• Word of mouth
• Social network