Network Marketing Meaning and How It Works

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Adam Hayes
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Adam Hayes, Ph.D., CFA, is a financial writer with 15+ years Wall Street experience as a derivatives trader. Besides his extensive derivative trading expertise, Adam is an expert in economics and behavioral finance. Adam received his master's in economics from The New School for Social Research and his Ph.D. from the University of Wisconsin-Madison in sociology. He is a CFA charterholder as well as holding FINRA Series 7, 55 & 63 licenses. He currently researches and teaches economic sociology and the social studies of finance at the Hebrew University in Jerusalem.

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Updated January 12, 2024
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Network Marketing

Investopedia / Ellen Lindner

What Is Network Marketing?

Network marketing is a business model that depends on person-to-person sales by independent representatives, often working from home. A network marketing business may require you to build a network of business partners or salespeople to assist with lead generation and closing sales.

There are many reputable network marketing operations, but some have been denounced as pyramid schemes. The latter may focus less on sales to consumers than on recruitment of salespeople who may be required to pay upfront for expensive starter kits.

Key Takeaways

  • Network marketing appeals to people with high energy and strong sales skills, who can build a profitable business with a modest investment.
  • A network marketing business can be a single-tier program, whereby you sell the products, or multi-tier, where you also recruit additional salespeople.
  • Beware of network marketing companies that create many tiers of salespeople or require you to purchase expensive products or training material up-front, Make sure to thoroughly research the company before you join.

How Network Marketing Works

Network marketing is known by a variety of names, including multilevel marketing (MLM), cellular marketing, affiliate marketing, consumer-direct marketing, referral marketing, or home-based business franchising.

Companies that follow the network marketing model often create tiers of salespeople—that is, salespeople are encouraged to recruit their own networks of salespeople. The creators of a new tier (or "upline") earn commission on their own sales and on sales made by the people in the tier they created (the "downline"). In time, a new tier can sprout yet another tier, which contributes more commission to the person in the top tier as well as the middle tier.

Thus, the earnings of salespeople depend on recruitment as well as product sales. Those who got in early and are in a top tier make the most.

The FCC advises that that single-tier network marketing operations tend to be more reputable than multi-tier schemes.

Advantages and Disadvantages of Network Marketing

There is some stigma attached to the networking marketing business, especially those with multiple tiers, which can be characterized as pyramid schemes—that is, the salespeople in the top tier can make impressive amounts of money on commissions from the tiers below them. The people on the lower tiers will earn much less. The company makes money by selling expensive starter kits to new recruits.

The appeal of network marketing is that an individual with a lot of energy and good sales skills can create a profitable business with a modest investment.

A good rule of thumb, according to the Federal Trade Commission (FTC), is that an operation that ensures compensation which is based on actual sales to real customers tends to be more reputable than multi-tier schemes, in which people make money based on the number of distributors they recruit.

Special Considerations

Anyone considering joining a network marketing operation should do their research before making a decision. Consider these questions:

  • Was it pitched as a chance to make money by selling products or by recruiting others?
  • What is the track record of the company's founders?
  • Are you personally enthusiastic about the products?
  • Are people you know enthusiastic about the products?
  • Is the product being promoted effectively?
  • Do you foresee a relatively fast pathway to profits or a long time treading water?

Is Network Marketing a Pyramid Scheme?

While network and multi-level marketing programs have been accused of being pyramid schemes, there are some important differences. While those who are able to recruit more members into the program are often able to enjoy greater residual commissions, network marketing is a legitimate and legal business structure that offers real products and services sold to customers.

Will I Make Money by Joining a Network Marketing Program?

It is certainly possible, although not probable. Some people do enjoy great success at network marketing, largely due to their ability to recruit more members to the network. There are two main revenue sources: selling products, and commissions from sales made by team members downline. The more people there are downline from you, the more money you will accrue - the larger the team you can recruit, the more money you can make.

Most people who join legitimate network marketing programs make little or no money. People may actually lose money. Some may become involved in an illegal pyramid scheme and not realize that they have joined a fraudulent venture, and can lose everything they invest. Do your research and ask around before diving in.

What Are Some Examples of Network Marketing Programs?

Several MLM programs exist such as Tupperware, Avon products, Rodan + Fields, Amway, Herbalife, Mary Kay, among several others.

What Is the Top-Grossing Network Marketing Program?

Amway consistently tops the list. Top-selling brands for Amway are Nutrilite vitamin, mineral and dietary supplements, Artistry skincare and color cosmetics, eSpring water treatment systems and XS energy drinks—all sold exclusively by independent Amway Business Owners. In 2021, it brought in $8.9 billion in revenue.

Article Sources
Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in our editorial policy.

  1. Federal Trade Commission. "Business Guidance Concerning Multi-Level Marketing."

  2. Amway. "Amway Announces 2021 Sales of $8.9 Billion USD."

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