A business model in which a distributor network is needed to build the business. Usually such businesses are also multilevel marketing in nature in that payouts occur at more than one level.
Network marketing is a mode of direct marketing by the manufacturer. It consist of recruiting independent business persons who act as distributors of company’s products. Each distributor can further engage sub distributor who can further engage other distributors and so on. Thus, a network of distributors is formed who operate at various levels . This, network marketing is also called multilevel marketing. Such a network of distributors working at various levels .
Network marketing distributors purchase products at wholesale prices , and may either use discounted products themselves or retail the products to others for a profit. In addition, distributors receive a month 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 in 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. This, 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 the 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 the others types of direct selling involving paid sales persons.
Thus , under network marketing the product reaches the customers from the manufacturers via distributors. No formal marketing infrastructure is required. The distributor’s compensation includes a percentage of sales of Sr engaged by the distributor as well as earnings on direct sales to the customers.
Amway Corporation which sells personal care and healthcare products was among the first ones to use network marketing in USA in 1950s. Network marketing is also used by Discovery Toys and Avon Products. Network Marketing is now gaining momentum in India also. The total turnover of network marketing companies in India was estimated at Rs 301,044 crores in 2005 with an annual growth rate of 25% .The India Direct Selling Association (IDSA) has projected that the network marketing industry will be around Rs 8000 crores by 2010.
Prominent Network Marketing Firms in India
- Amway India
- Hindustan Lever Network
- Oriflame India
- Avon Beauty
- Tupperware India
Advantages of Network Marketing
Network marketing offers the following advantages:
- The distribution network grows continuously.
- It becomes easier to enter new markets through growing networks.
- The distributor gets the product direct from the firm and hence, the material is always genuine.
- Lower overhead costs as no infrastructure is required under network marketing. That is, the distributor gets a chance to do business with the company without any investment or liability.
- The network companies can maintain higher margins on their products.
Limitations of Network Marketing
The limitations of network marketing are as under:
- There is no direct link between the manufacturer and the customers. Thus, customer relationships cannot be developed.
- Sales forecasting is difficult. This often results in under or over stocking of various product items.
- Distributors often become the largest customers and hence take over the control of the company.
- It becomes difficult for the manufacturer to exercise effective control over his sales team.