In 1934, Nutrilite, a nutritional supplement and vitamin company, was the first in the world to formally use the chain business mechanism. Its creator was the head of this company, Karl Rehnborg.
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 account managers, sales and service personnel.
The enterprising businessman entrusted these functions to voluntary distributors of Nutrilite products, motivated by the company. He developed a progressive system of commission money for his consumers who agreed to sell vitamins. the amount of funds transferred by him directly depended on the proceeds. The invented system successfully built a powerful implementation network.
The concept of a network in economics
With macroeconomicpoint 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 the implementers.
Such an organization is maximally adaptive to market conditions. The distributor himself purchases the product from the company and receives both direct income from its sale on the market, and indirect income - a percentage of sales by other distributors whom he attracted to the business.
Distributors - Distribution Network Designers
Often the network business in the domestic media is called MLM. The above common abbreviation in English reads Multi Level Marketing, which translates to “multi-level marketing.”
Territorial network organization effectively sells the products of an MLM company in the regions. At the same time, the company itself organizes the infrastructure that sells its products in a completely different way. The key link in this system is the distributor. Entrepreneurs attracted by the company, in their totality and taking into account relationships with consumers, constitute a distribution system.
It is to distributors, guided by a document - a marketing plan, that the company returns up to 70% of the earned funds through a commission redistribution system.
At the same time, MLM companies make more profit than traditional ones. They invest more in product development and quality. Leading MLM companies are engaged in the cultivation of natural ingredients, as well as real investmentssignificant funds in scientific research.
Progressive form of business
Network forms of organization are currently demonstrating dynamic growth both in a growing economy and against a stagnant one. In the first case, most of the profit comes from sales volumes. In the second, there is an increase in the number of distributors to a greater extent due to people who have lost their jobs in other sectors of the economy. Such dynamics is natural and confirmed by many firms operating on the principle of MLM.
Currently, there are more than 5,000 network companies in the global business.
Network business is not a pyramid scheme
It's hard to believe today, but 36 years ago the network business as a whole was under threat. Its leading company, Amway (USA), was sued. 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 1973-1974 from the activities of such organizations organized by fraudsters, followed this process with attention. The mood in the society was fueled by the media paid by the initiators of the process.
However, American Themis should be given its due: Amway's indiscriminate charge was dropped, and this gave the green light to the development of network business around the world. The court showed what determines the status of a network organization that distinguishes it from a financial pyramid. The first haswarehouses in the regions through which commodity flows pass. It has a stable and predictable marketing plan. The characteristics of an MLM company are:
- real government 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 characteristics. The latter were also determined by a US federal court decision in 1979. These signs are considered classic:
- Ponzi scheme does not promote goods;
- significant entry fee;
- payment for attracting a new member to the pyramid;
- the return of funds to the participant invested by him in the pyramid is not stipulated when he exits it.
Structure of an MLM company
A classic network organization is a relatively small parent company that delegates its functions by contracts to individual specialized firms acting as separate objects of an MLM company engaged in:
- planning;
- finance and accounting;
- production;
- working with distributors;
- logistics;
- design.
This structure is not only more adaptive and economical compared to the classical one. It makes it possible to connect objects of network organizations of the optimal level, increases the possibility of concentrating resources in priority areas. Direct-to-market distributors are moreadaptive to its changes than classic "office" managers.
MLM entrepreneurs buy goods in small batches and, in the event of a change in demand, react with an immediate change in the assortment purchased.
Products of network companies
Tariffs of the network organization are twofold. They are considered in terms of wholesale prices and in terms of retail prices. Accordingly, an MLM company simultaneously issues two catalogs: wholesale and retail prices. On average, for different network organizations, the retail price is 25-30% higher than the wholesale price. It is obvious that the first catalog is intended for internal use by the entrepreneurs themselves, it can be used to 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.
Network organization of production assumes that the head office either manages its production units, or transfers the production function to other companies by signing contracts with them. In this case, production can be:
- internal (production is carried out by specialized divisions of the company itself);
- stable (outside production companies work under long-term contracts with an MLM company);
- dynamic (external manufacturing firms enter into 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, territori althe network organization implements various marketing plans with the help of distributors. Let's list them:
- single-level;
- stepped (or classic)
- binary;
- matrix.
Single-level plan involves generating income solely through the sale of products. Sellers receive profit solely due to the difference in wholesale and retail prices. Less than 1% of all network distributors work under this scheme, since it is the most labor intensive and least profitable.
The stepwise (classical) method supplements the income from sales with income from attracting others by some distributors. At the same time, in the marketing plan, the involvement of distributor A by distributor B is characterized by the branch AB. Such branches A, as experience shows, can build up to 6. The limitation is caused by the laboriousness of the function of monitoring and maintaining the performance of the above branches.
Obviously, Seller B, like others attracted by Seller A, being financially interested, will also attract new distributors by building their branches. Thus, a network is built, and distributors receive passive income from the branches they generate, ranging from 3 to 21% of the sales amount.
In a binary marketing plan, the distributor initially focuses on building the two branches of their 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 toexecution of a matrix (multi-line) marketing plan.
A network company from a distributor's point of view
The agreement with the network organization, signed by the seller, is the basis for its registration on the company's website. He gets access to the purchase at wholesale prices directly in his personal account on the website of the MLM company's products in the catalog. By selling 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.
The network organization is the forge of entrepreneurial personnel. Often, having come to it without initial capital and experience, a person acquires mentors, receives a proven marketing plan. Most famous MLM entrepreneurs started their careers with minimal investments. Modern classic business has far fewer such examples.
At the same time, reading the reviews of people who failed in network entrepreneurship, one can meet notes of disappointment. Indeed, some of the adherents leave the MLM business without having achieved indicators in it. The reason for this can be both shortcomings in training and a lack of organization and discipline.
MLM Distributor – creator and mentor
The network organization stimulates sellers financially. The better he trains the attracted partners - sellers like him - in doing business and knowing the characteristics of the goods they sell, the more successfully they will trade, and the more he will earn. Salestrained entrepreneur bring a percentage of the profit to the teacher.
Having received the proper experience, his student also continues to attract sellers to the network business, etc., that is, a whole branch of implementation is gradually built up to the 6-8th level of involved sellers. The entrepreneur, her ancestor, in this case receives a significant commission income from the sale. A successful entrepreneur in the network business can have several such branches.
The company also motivates its implementers with training events, assigns titles in accordance with the number of branches created, awards prizes and vacation tours based on the results of implementation.
MLM is a structure managed and built together
Clearly, proper networking is critical to effective business. Each distributor planning his business finds for himself several like-minded people, together with whom he will further purchase goods and attract future partners.
In the effective work of the branches being built, an important role is played by the control and stimulation of their activities by representatives of their senior levels. The latter not only train people attracted by them into the business, but also help them practically at interviews with subsequent candidates. Sometimes, in order to build workable and profitable business schemes, the ancestor of the branch adds a reliable person involved in the business to the branch of his student.
Business attitude, team spirit andresponsibility of distributors of various levels, adequate to the specifics of MLM, trained, ambitious, really capable of giving their time and effort to the business.
A network company from a consumer point of view
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, the speed of delivery and the reasonable price. The quality of the goods is guaranteed by the well-established production of the network company and its trademark. The company works directly with the consumer, so counterfeit products are excluded. The speed of delivery is ensured by an extensive system of warehouses and well-established logistics. The high competitiveness of the price is ensured by the reduction in the costs of the network company due to the abandonment of the traditional staff of managers and investments in advertising.
Networking is also about using the power of e-commerce to interact directly with shoppers. Those can register on her site along with sellers and buy goods for themselves. With this registration, they enjoy the discount for wholesalers.
Pros and cons of MLM
The advantages and disadvantages of MLM business are usually considered in the complex, in the context of the following comparison criteria:
- opportunities to start a business (no significant investment required, on the one hand, and extended over time, gradual growth of the business itself, on the other);
- Internet business mechanisms (the Internet enables the distributor to formulate hisoffer for the widest possible audience, but at the same time, not all potential entrepreneurs are initially predisposed to operate within the network business);
- opportunities to buy 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 network business does not appeal to all people (extroverts like the constant atmosphere of communication, parties; introverts are oppressed by the presence at seminars, trainings).
Conclusions
It is obvious that the network business, having significant advantages, cannot become a dominant in the economy. Having an enviable development dynamics and resistance to crises, it is still not a leader in any of the sectors of the economy, and often does not win in price competition either.
However, the serious attitude of a real entrepreneur, who firmly decided from scratch to gain his worthy capital in an MLM company, minimizes these disadvantages.
Nevertheless, network business is authoritative in the world today. It is invested by one of the richest and luckiest people on the planet - Warren Buffett, as well as billionaires George Soros and Vincent Tan.
Many famous people sincerely believe in the benefits of this industry model for the economy, among them the current US President Donald Trump, Madeleine Albright, Bill Clinton. Obviously, the opinions of these authoritative persons demonstrate the promise of MLM.
