What are the disadvantages of network marketing

Multi level marketing

Multi level marketing is a rather new way of marketing. It differs from classic direct sales because customers are included in the marketing process. You run the MLM full-time or as a part-time job. Their job is to recommend the products they like to other interested parties. They are rewarded for their work with commissions and sales.

This lesson deals with Multi Level Marketing. You will learn why MLM is important and how it works. We introduce you to the advantages and disadvantages of network marketing. Finally, you know which companies benefit from this form of marketing and how the MLM is viewed by critics. To deepen your knowledge, you can answer a few practice questions after the text.

  • German:Network marketing
  • Synonym:Network Marketing
  • Abbreviation:MLM

Why is Multi Level Marketing important?

MLM can be seen as a new twist on referral marketing. If a customer is convinced of the benefits of a product, they recommend it to others. In this way, a company that uses MLM develops a pyramidal distribution system.

The salespeople are usually non-specialists. The companies rely on the satisfaction of their external employees. Those who are particularly convincing in recommendation marketing can be promoted to permanent sales staff. The sales organization is quickly enlarged through this type of marketing, without the company having to spend a lot of money on marketing costs.

Example: Application of Multi Level Marketing
A company brings a new baby food onto the market. In order to promote sales, mothers should be in their private environment for the product. You purchase the baby food at the purchase price and pass the product on to friends and acquaintances for an additional charge. Your profit consists in the spread between the sales and purchase price. In addition, a mother receives a commission for every sale made by a customer she has recruited.

How network marketing works

Network marketing works in that Advertise new customers for products of which they are convinced. These customers are known as network marketers. The external employee does the networking in his private environment. Here he introduces the product to friends and acquaintances. At the same time, new employees should be generated in this way, who would also recommend the product to others.

The corporate hierarchy in multi-level marketing is manageable. An employee is not granted authority to issue instructions to the lower sales level. However, he assumes the obligation to incorporate it.

The specific task of a customer who operates the MLM on behalf of the company is to advertise and sell a product. He acquired this from the company at the purchase price. The network marketer's profit is the difference between the surcharge and the purchase price. Depending on what kind of product it is, the range can be between 20% and 50%. In addition, he receives a previously agreed commission for the sales of the network marketers that he has recruited himself.

What are the advantages and disadvantages associated with MLM?

If a company introduces the MLM principle in order to generate better sales for the products, the network marketers can benefit from a number of advantages. On the other hand, they also have to accept some disadvantages.

The advantages of the MLM principle

  • The network marketer can organize his working hours freely. He does not have to adhere to any guidelines. Private appointments can be better coordinated with everyday work.
  • The Network Marketer does not receive any instructions from the company for the location where the sales pitches are held. The discussions can take place at home, on the go or directly at the customer's.
  • By drawing up a business plan, more time can be saved.
  • No previous knowledge is required for the job. All new employees are prepared for their new job as part of a training course.

The disadvantages of multi level marketing

  • The network marketer has to invest in the products he wants to sell. How high the effort is depends, among other things, on the number of products and the company's terms and conditions.
  • The network marketer is self-employed. This means that he alone bears the corporate risk. If he is not so active, this is reflected in his sales figures.
  • If the activity is carried out as main occupation, the network marketer has to pay for his health and pension insurance coverage alone.
  • Network marketing is often compared to a pyramid scheme. This gives potential customers the impression that this is a dubious form of distribution.

Which companies use MLM?

The MLM principle is used in particular by companies that are active in trade or production.

The following examples can be mentioned here:

  • Financial services
  • Cosmetics and body care
  • Housewares

Well-known providers are:

For industries that are active in the service sector - e.g. legal advice or tax advice - the MLM principle is not suitable.

The criticism of multi level marketing

The MLM is seen as a critical sales system because the salespeople do not need to have any requirements. You cannot provide advice to new customers. Their own experience is the only potential that network marketers can use to attract new customers. It is also often viewed as dubious that personal relationships of trust are abused by network marketing and that the salespeople have to make advance payments before selling the products.

Practice questions