In 1934, Nutrilite, a company selling food supplements and vitamins, was the first in the world to officially use the network business mechanism. Its creator was the head of this company Karl Renborg.
The American came up with the idea of radical savings on the maintenance of retail stores and many traditional categories of personnel. He came up with a company without a huge staff of managers for working with clients, personnel involved in sales and after-sales service.
The entrepreneurial entrepreneur assigned these functions to voluntary distributors of Nutrilite products, motivated by the company. He developed a progressive commission money system for his consumers who agreed to sell vitamins. the amount of funds transferred by him directly depended on revenue. The invented system successfully built a powerful implementation network.
Network concept in economics
From a macroeconomic point of view, a network organization is a business structure that delegates the function of organizing sales from the main office to its distributors (independent sellers). The "headquarters of the company" at the same time only coordinates the activities of implementers.
Such an organization is as adaptive as possible to market conditions. The distributor himself purchases the goods from the company and receives both direct income from his sale on the market, and indirect income - a percentage of sales by other distributors whom he attracted to the business.
Distributors - Sales Network Designers
Often the network business in the domestic media is called MLM. The aforementioned generally accepted abbreviation in English is read as Multi Level Marketing, which translates as "multi-level marketing."
The territorial network organization effectively sells the products of the MLM company in the regions. At the same time, the company itself organizes the infrastructure selling its products in a completely different way. The key link in this system is the distributor. Entrepreneurs involved by the company, in their totality and taking into account relations with consumers, constitute a sales system.
It is to distributors, guided by a document - a marketing plan, that the company through the commission redistribution system returns up to 70% of the money earned.
At the same time, MLM companies earn more profit than traditional ones. They invest more in product development and quality. Leading MLM companies are engaged in the cultivation of natural ingredients, and also really invest heavily in scientific research.
Progressive business form
Network forms of organization are currently demonstrating dynamic growth both in a growing economy and against a stagnant background. In the first case, most of the profit comes from sales volumes. In the second, to a greater extent, there is an increase in the number of distributors at the expense of people who have lost their jobs in other sectors of the economy. Such dynamics is logical and confirmed by many companies operating on the principle of MLM.
Currently, there are more than 5 thousand network companies in world business.
Network business is not a financial pyramid
Today it’s hard to believe, but 36 years ago the network business as a whole was in jeopardy. His leading company Amway (USA) was brought to trial. The lawyers of classic trading corporations fulfilled the order of their bosses, accusing the American Way (the full name of the company) of building a financial pyramid. Residents of the United States, who suffered in the years 1973-1974 from the activities of such organizations organized by fraudsters, followed this process with attention. The mood in society was fueled by the media paid by the initiators of the process.
However, one should pay tribute to the American Themis: with Amway, the indiscriminate charge was dropped, and this gave the green light to the development of the network business all over the world. The court showed what determines the status of a network organization that distinguishes it from a financial pyramid. The first has warehouses in the regions through which goods flows. She has a stable and predictable marketing plan. Characteristic features of an MLM company are:
- real state registration;
- promotion of goods or services;
- monthly consumption of goods;
- mentoring.
And in this it is different from the financial pyramid, which has its own characteristic features. The latter are also determined by a decision of the US federal court in 1979. These signs are considered classic:
- the financial pyramid does not promote the goods;
- significant entry fee;
- payment for attracting a new member to the pyramid;
- It does not stipulate the return of funds to the participant invested by him in the pyramid when he leaves it.
MLM company structure
A classic network organization is a relatively small parent company, which by contract delegates its functions to individual specialized companies acting as separate objects of an MLM company engaged in:
- planning;
- finance and accounting;
- production;
- work with distributors;
- material and technical support;
- by design.
Such a structure is relatively classical not only more adaptive and economical. It makes it possible to connect the objects of network organizations of the optimal level, increases the possibility of concentration of resources in priority areas. Distributors working directly in the market are more adaptive to its changes than the classic "office" managers.
MLM entrepreneurs purchase goods in small quantities and, in the event of a change in demand, react with an immediate change in the assortment purchased.
Products of network companies
Network organization rates are twofold. They are considered in the context of wholesale prices and in the context of retail prices. Accordingly, the MLM company simultaneously produces two catalogs: wholesale and retail prices. On average, for different network organizations, the retail price is higher than the wholesale price by 25-30%. Obviously, the first catalog is intended for internal use by the entrepreneurs themselves, according to it you can plan and make purchases. With the second, the entrepreneur turns to customers, offering them a range of products at a cost that the consumer will have to pay.
The network organization of production assumes that the head office either manages its production divisions or transfers the production function to other companies by signing contracts with them. Moreover, production may be:
- internal (specialized departments of the company itself are engaged in production);
- stable (external production companies work under long-term contracts with an MLM company);
- dynamic (external manufacturing companies conclude short-term contracts - the largest share of this type of production is used in high-tech modern industries that determine scientific and technical progress).
Types of Marketing Plans
Developing, the territorial network organization implements various marketing plans with the help of distributors. We list them:
- single-level;
- stepped (or classic)
- binary;
- matrix.
A single-level plan involves generating income exclusively through the sale of products. Profit sellers receive solely due to the difference in wholesale and retail prices. Under this scheme, less than 1% of all network distributors work, since it is the most labor-intensive and least profitable.
The step-by-step (classical) method supplements the income from sales with income from attracting some distributors to others. Moreover, in the marketing plan, the involvement of distributor A by distributor B is characterized by branch AB. Such branches A, as experience shows, can be built up to 6. The restriction is caused by the laboriousness of the function of monitoring and maintaining the operability of the aforementioned branches.
Obviously, seller B, like others attracted by seller A, being financially interested, will also attract new distributors, building its branches. Thus, the network is built, and distributors receive passive income from the branches generated by them, ranging from 3 to 21% of the sales amount.
With a binary marketing plan, the distributor initially focuses on building two branches of his business. At the same time, his mentor methodically helps him build one of them. This option is optimal for beginners.
Having mastered the binary plan, the entrepreneur proceeds to the implementation of the matrix (multi-branch) marketing plan.
Network company from the point of view of the distributor
The contract with the network organization, signed by the seller, is the basis for its registration on the company's website. He gains access to the purchase at wholesale prices directly in his personal account directory for the MLM company’s catalog products. When he realizes the purchased goods, he receives retail income at the expense of the retail margin, and also, if he attracted other sellers to the MLM business, then the commission type of income, the latter is often called passive.
Network organization is a forge of entrepreneurship personnel. Often, having come into it without initial capital and experience, a person gains mentors and receives a proven marketing plan. Most well-known MLM entrepreneurs began their careers with minimal investment. Modern classic business has far fewer such examples.
However, reading the reviews of people who failed in the network business, you can find notes of disappointment. Indeed, part of the followers leaves the MLM business without having achieved performance in it. The reason for this can be both shortcomings in training, and a lack of organization and discipline.
MLM Distributor - Creator and Mentor
Network organization encourages sellers financially. The better he educates the involved partners - the same sellers as he - in conducting business and knowing the characteristics of the goods they sell, the more successfully they will trade, and the more they will earn. Sales of a trained entrepreneur bring a percentage of the profit to the teacher.
Having gained the proper experience, his student also continues to attract sellers to the network business, etc., i.e., a whole branch of sales is gradually being built up to the 6-8 level of the involved sellers. The entrepreneur, its ancestor, in this case receives a significant commission income from sales. A successful entrepreneur in the network business may have several of these branches.
The company also motivates its implementers with training events, assigns titles in accordance with the number of branches created, according to the results of the implementation it awards prizes and leisure tours.
MLM - a structure managed and built together
Obviously, proper business networking is critical to effective business. Each distributor planning his own business finds for himself several like-minded people, together with whom he will continue to purchase goods and attract future partners.
In the effective operation of the branches being built, an important role is played by the control and stimulation of their activities by representatives of their senior links. The latter not only train the people they attracted to the business, but also help them practically in interviews with subsequent candidates. Sometimes, in order to build workable and profitable business schemes, the founder of the branch joins a reliable person involved in the business into the branch of his student.
Important business spirit, team spirit and responsibility of distributors of various levels, adequate to the specifics of MLM, trained, ambitious, really able to devote their time and energy to business.
Network company from the point of view of the consumer
The consumer and the network organization interact according to the laws of supply and demand. As you know, the buyer is stimulated by the quality of the goods, delivery speed and reasonable price. The quality of the goods is guaranteed by the debugged production of the network company and its trademark. The company works with the consumer directly, so fake products are excluded. Delivery speed is provided by an extensive warehouse system and well-functioning logistics. High price competitiveness is ensured by reducing the costs of the network company due to the rejection of the traditional staff of managers, investment in advertising.
Network organization is also the use of online trading opportunities to interact with customers directly. Those can register on her site along with sellers and buy goods for themselves. With this registration, they enjoy a discount for wholesalers.
Pros and Cons of MLM
The advantages and disadvantages of MLM business are usually considered in a complex, in the context of the following comparison criteria:
- opportunities to start a business (significant investments are not required, on the one hand, and extended over time, gradual growth of the business itself, on the other);
- Internet mechanisms for doing business (the Internet allows the distributor to formulate his proposal for the widest possible audience, but at the same time, not all potential entrepreneurs are initially predisposed to act within the framework of a network business);
- the possibility of purchasing goods (goods are really solid and high-quality, but often their price is higher than the prices of competing goods from classic companies);
- the atmosphere of conducting a network business is not appealing to all people (extroverts like the constant atmosphere of communication, hanging out; introverts are depressed by the presence at seminars and trainings).
conclusions
Obviously, the network business, having significant advantages, cannot become a dominant factor in the economy. Having an enviable development dynamics and resistance to crises, he is still not a leader in any of the sectors of the economy, and often does not win in price competition.
However, the serious attitude of a true entrepreneur, determined to start gaining his worthy capital from an MLM company from scratch, minimizes these disadvantages.
Nevertheless, the network business today is authoritative in the world. He is invested by one of the richest and most successful people on the planet - Warren Buffet, as well as billionaires George Soros and Vincent Tan.
Many famous people sincerely believe in the benefit of this model of the industry for the economy, among them the current President of the United States Donald Trump, Madeleine Albright, Bill Clinton. Obviously, the opinions of these authority figures demonstrate the promise of MLM.