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How does Network Marketing work?

In a multi level marketing (MLM) arrangement, a parent company is associated with individuals as independent contractors. Their compensation is paid according to their own sales as well as the sales target achieved by others brought into the business. The latter payment is known as an over rider commission and compensation. It acts as motivation for bringing in more and more individuals to create a large network of distributors to reach to new set of customers again and again and target new consumers exponentially.

Theoretically, if five likeminded individuals join the network marketing business with one independent distributor, the down line may appear like the below screenshot:
 
This follows the rule of Metcalfe which is shown in below screenshot. According to Metcalfe’s law, the value of a telecommunications network is proportional to the number of distributors raise to power level (l) of the system (nl), where n = number of distributors and l=level at which the distributors are operating. (First formulated by Robert Metcalfe2 with regard to Ethernet and then this was followed by others in such applications).
 
If this rule is applied, every time one group of 5 sponsors manage to sponsor 25 distributors since each sponsor is sponsoring 5 distributors. This process continues at each level making it 3125 at the fifth level. This gives the ample opportunity to the sponsor to get enormous overriding commission by adding to their residual income.

Besides this number game, each distributor in the network owns his business and continues to remain the head of his business. He distributes products and builds a network of distributors by selling the business opportunity. He is not just selling the product.

In network marketing, each one is assisting others and is leveraging their time. Each one in the process gets paid or compensated for achieving their financial goal. One’s success is dependent upon oneself. There is no boss around. Each one is the boss oneself. It makes him/her a small business owner.

It is a powerful and efficient method where product and services are channelized to consumers from the manufacturers. But it requires lot of patience and hard work, and at least initial first few years of focused efforts before it starts giving desirable results. As we know that word of mouth spread of information is the most powerful kind of advertising, network marketing uses this tool to advertise its product and services.

Network marketing is based on word of mouth advertising, the most powerful kind of advertising.
 

Who participates in Network Marketing?

The network marketing techniques and skills can be used by anyone who wishes to successfully explore opportunities for a new house or business.

Any common person, an average person irrespective of their gender, age, their financial and employment status, can get involved in this home based business of network marketing and build wealth. Common people like you and me, who may not have enough money, but are, motivated to work hard to earn residual money and have sales and communication skill can participate in network marketing.

The participant in network marketing can be neighbour, friend, relative or a co worker through reference of each other, which is a common method of network marketing. The main reason for the large scale participation is that these are the people with whom we often share our day today experiences and information regarding various product and services. This sharing may influence their future purchase or use-behaviour. These may participate in the network marketing activity by being self employed independent distributors. They are also known as net-worker, down line distributor, up line distributor or simply an end user.

The participants who have the required knowledge about the company’s vision, their product and services, and customers needs are likely to be more successful.

You can also check Strategies for Successful network marketing and How to make Network Marketing Successful?.