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.

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.

What gives multi-level marketing its 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 the majority of situations in which IRS Form 1099 is used...to document "nonemployee compensation.")

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) is 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 remuneration from the efforts of those he recruited (and those recruited by his recruits, carried out to a specified level).