Network Marketing is a subset of direct selling and is also known as “multilevel marketing”, “structure marketing” or “multilevel direct selling”. Network marketing can best be described as a direct selling channel that focuses heavily on its compensation plan
because the distributors (members of the network) may receive compensation in two fundamental ways (Poon, 2003). First, sales people (distributor) may earn compensation from their personal sales of goods and services to the consumers (non-member of the network). Second, they may earn compensation from sales to or purchase from those persons whom they have personally sponsored or recruited into the network (down lines), these down lines continue sponsoring or recruiting to the network sharing the benefits with their sponsors or recruiters (up lines).
Hence, the network marketing organization can be defined as “those organisations that depend heavily or exclusively on personal selling, and that reward sales agents for
(a) Buying products
(b) Selling products
(c) Finding other agents to buy and sell products
Network marketing distributors purchase products at wholesale prices, and may either use
discounted products themselves or retail the products to others for a profit. Suggested mark up usually ranges from 20% to 50%. In addition, distributors receive a monthly commission for their ‘personal volume’, which is the value of every product they personally buy or sell. Further, the distributors receive a net commission on the sales of those they recruit into the network.
The sales developed from network marketing are not developed solely from sales created by retailing, but also developed through recruiting or sponsoring independent distributors. Thus, as distributors continue to recruit or sponsor new distributors to expand their network, the new distributors will contribute new sales to the network and gain commission in return. The multiplying effect on network marketing will expand when these distributors continue their recruiting or sponsoring efforts. This multiplying effect, an important element in the recruiting or sponsoring function, makes the network marketing quite different from other types of direct selling involving paid sales persons.
The sunflower and pyramid are the two common business models in network marketing. In sunflower model (Unilevel model), each distributor can develop as many nodes as possible, whereas in pyramid model (binary model) each distributor enrolls only just two people and they in turn do the same. In the Unilevel model a distributor gets a business share of the total volume in his team and not money on registration. The product purchased is considered as the first registration. In binary model money is made through registration and the main income is from the dropouts (The Week, November 12, 2006).
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