Have you been considering earning some extra money in your spare time? In the first of our two-part look, Jeffrey Strain explains the intricacies of network marketing so you can decide if this type of venture is right for you.



Your image of network marketing (also known as multi-level marketing or direct sales marketing) has probably been greatly influenced by who explained the system to you. Network marketing companies include such well known corporations as Amway, Mary Kay Cosmetics, Avon and Tupperware, along with thousands of other smaller companies. These companies have successfully recruited millions of people to become independent distributors for them by explaining the huge amount of wealth which can be earned by working within a network marketing system. Those who have been successful claim network marketing is the best thing since sliced bread, while detractors often say it' nothing more than a "sell to your friends and family" scheme. The truth, as with most things, lies somewhere in between.

Do your homework
The first and most important issue to make clear is that legitimate network marketing companies are not illegal pyramid schemes. Part of network marketing's image problem, however, comes from the fact that most illegal pyramid schemes today promote themselves as network marketing ventures. Since it's often difficult for someone who has never researched network marketing to tell the difference between the two, it's essential that you do your homework before committing any money to a network marketing venture.

The easiest way to tell the difference between an illegal pyramid scheme claiming to be a network marketing company and a reputable network marketing company is to find out where the company makes the majority of its profits. Illegal pyramid schemes grow by demanding large entry fees or expensive initial product purchases from new members which make up their main source of revenue. Reputable network marketing companies, on the other hand, derive the majority of their revenue from products or services being sold to the public by their independent distributors. If a company claims to be a network marketing entity, yet demands a huge fee before you can begin selling their product, or requires you to invest a large amount of money for "inventory" before you begin selling, you should take an extra careful look to make sure the company is legitimate.

Network marketing's appeal is obvious to anyone who has ever heard a network marketing company's sales pitch. Not only do independent distributors get a commission for the products which they sell, they also receive commissions on the products which other distributors sell whom they have recruited. These extra commissions can often come from a number of different independent distributor layers (called the distributor's "down-line") and it's easy to see even by those who aren't strong in math the potential wealth which can be made if a large down-line is created.

Network marketing companies are able to offer commissions on products sold by down-line distributors because their operating cost structures differ greatly from normal retail companies. For example, network marketing companies don't need to spend as much on advertising since their products are sold by word of mouth. They don't have to deal with the high costs of retail space since most independent distributors work from their homes, while products are delivered directly to the buying customers, avoiding distribution middlemen. The biggest savings, however, comes from the fact that network marketing companies don't pay their sales force (you, the independent distributor) a fixed base salary. The network marketing companies pass these savings on to their independent distributors for recruiting more people to sell their products.

Learn your ABC's
For example, after you become an independent distributor, you recruit person A to also be an independent distributor for the company. Person A in turn recruits person B and person C. Person C then recruits three more distributors: persons D, E and F. Every month you would not only receive commissions for all the products which you sold that month, but you would also receive a small commission (i.e. 5%) on all the products which person A sold, a slightly lower commission (i.e. 3%) on all the products which persons B and C sold, and an even lower commission (i.e. 2%) for any products which persons D, E and F sold, even though you may have no idea who persons B, C, D, E and F are. Since you can earn commissions on products sold which you don't actually sell, creating a large down-line beneath yourself can be quite financially rewarding.

How much can you really earn? Next week we take a closer look at quotas and how to avoid getting caught in the hype net.

Reproduced with permission of Kansai Time Out.