Network Marketing vs Direct Sales – There Is a Big Difference!
Network marketing vs direct sales… Is there any difference at all?
The answer is yes. There is actually a big difference between the 2 terms.
LuLaRoe, Mary Kay, Amway, Herbalife, Young Living, Tupperware, etc... We are probably all familiar with at least some of these companies and you may be aware that they are all referred to as both network marketing as well as direct sales opportunities.
You probably have also heard of the term MLM, which is actually even more common to hear than network marketing. MLM is the same thing as network marketing for the most part, but direct sales is what differs greatly.
Comparing direct sales and network marketing is somewhat like comparing apples and oranges. Both are fruit but they are very different fruit.
Don't worry, this will all make sense in a minute after I explain what exactly these 2 terms mean and how they fit together.
Network Marketing [Explained]
Network marketing is, as the name suggests, a marketing business model in which a network of people is established.
In a nutshell, this refers to the business model when companies allow representatives (also called reps, distributors, affiliates, business builders, etc), to market their products as well as recruit in other representatives beneath them to do the same, thus building a network, or what you may have heard referred to as a downline.
In network marketing opportunities there is a good deal of emphasis placed on recruitment of other representatives. The incentive is that you can make money off of the efforts of other representatives in your downline. So if you recruit in Joe and he goes out and sells some products, you earn a commission. And if Joe recruits and Bob who earns money, both Joe and yourself will earn a commission.
The compensation plans with network marketing companies will vary greatly, but the common uni-level commission structure is something you see quite a bit. In this structure you recruit in people beneath you, they recruit in beneath them, and so on… Which creates different levels of your downline…
Money trickles up the pyramid-like structure from those at the bottom to those above.
As mentioned earlier, network marketing is the same thing as MLM (multilevel marketing). It just seems that MLM is a more recent term being used and has accompanied a lot of the newer opportunities becoming available that have deeper compensation plans, fancier bonuses and so on.
The reason network marketing has become so popular among companies is because it works out great, mostly for the company that is. Just think about it… Since there is incentive for representatives to recruit in other representatives and build a team, or downline, beneath them, these sorts of opportunities spread like wildfire.
Direct Sales [Explained]
Direct sales is the term used to describe the business model where companies use representatives (aka independent distributors, affiliates, business builders, etc.) to sell their products. With this business model there is no need for retailing in stores or anything like this.
Representatives go out and sell the products directly to the consumers, earning money in the process.
With some direct sales opportunities representatives may direct consumers to purchase products online, which would then earn them a commission. However, many such opportunities require reps to sell physical products in person, which they would purchase at wholesale price and then resell at a markup price. The difference would be that their earnings.
How They Fit Together
Network marketing refers to the business model where representatives go out and create a "network" of representatives beneath them that they earn commissions from. This business model can be great for rapid expansion of the business because of the high incentive there is to recruit in new members.
Direct sales refers to the business model where representatives go out and sell products directly to the consumers.
These Two Almost Always go Together
It's likely that every opportunity you have come across has been a combination of the both.
- Mary Kay
- Young Living
These are all network marketing (or MLM) as well as direct sales business opportunities.
The reason you always see these in combination is because they work so well together.
It it is possible that you could have a direct sales business that is not a network marketing opportunity. There is no reason that a business wouldn't be able to allow representatives to earn money from selling their products directly, and nothing more. However, why not add the network marketing layer into the mix and allow representatives to also make money by recruiting and other representatives and building a team (network marketing)?
If you put these 2 business models together it creates a much more powerful hybrid business model.
The Typical Network Marketing/Direct Sales Opportunity:
There are so many opportunities out there and they do vary a good bit, but generally speaking they all follow pretty much the same pattern.
If you are looking to join such an opportunity you will probably first have to buy some sort of "starter kit" in order to get going. This will include things like a sample of products, some business material (brochures, flyers, catalogs, etc.), access to a back office, and some training.
You may feel somewhat forced to purchase a bunch of products that you might not even really want, however I think that requiring representatives to purchase starter kits is actually a good thing. If reps were not required to purchase anything before joining, they would be running around trying to sell products they know nothing about and have they tried for themselves.
How You Earn:
After becoming a rep, of course there going to be 2 main ways to make money: by selling products and by recruiting in other reps. Selling products is a good way to get started but if you really want to make substantial income and grow your business then recruiting in reps beneath you and building a large downline is a must.
Most compensation plans also pay out a variety of different bonuses, but I'm not going to get into that because they vary greatly depending on the company.
There is almost always a rank system in place where you start off low and try to climb your way to the top. Moving yourself up the different ranks always requires the recruitment of other reps, either directly or indirectly.
As you move up the ranks you will typically be able to unlock new parts of the compensation plan and earn a lot more money by the growing size of your downline, which is required to move up the ranks in the first place.
How Good Is The Opportunity Really?
You have to be careful with network marketing/direct sales opportunities. They are often not nearly as great as they seem to be. What you have to remember is that representatives make money by recruiting in other representatives beneath them, so can't always trust 100% of what they say. Of course they are going to make the opportunity sound like the greatest thing out there.
The truth is that opportunities like this really aren't that great at all. Some stats show that as much as 99% of people who joined these types of businesses end up losing money, rather than making any, which means that the cost of the "starter kit" or their original purchase would be higher than the profits earned from selling products and recruiting.
Some required purchases cost in the thousands of dollars range (like LuLaRoe for example), although it is usually a lot less for most opportunities.
Real Income Stats [Not for The Faint Hearted]
Are you ready to have your mind blown?
If someone has recently attempted to recruit you into their downline, they probably painted a pretty picture in your head of the opportunity at hand. These income statistics will show you the real story.
Below are some of the official earnings disclosures from popular network marketing/direct sales companies including Young Living, It Works!, and PlanNet Marketing.
*Not every business provides a clear earnings disclosure and they are often years old, due to the time it takes to calculate statistics. However, they are all the same story and these examples tell this story.
If you look below you can see that 33.3% of reps for Young Living only made an average of $312 for the year. Above that, 41.02% of reps made an average of only $906 for the year. Above that, 15.66% of reps made only $2819 for the year. This right here already includes about 90% of all representatives and look at how low the income stats are.
The income disclosure for It Works! is definitely not looking very good. In fact, it is even worse than that shown above. As you can see below, 77.63% of reps earned a monthly average of only $51. About 94% of reps earned less than $500 a month.
The income disclosure for PlanNet Marketing might be the worst yet. 97.52% of reps earned an average of $165.92 for the entire year. Less than 1% of all reps earned enough to make a living off of.
I could go on and on and show you more income disclosures but I am not going to bore you. I have looked into many such opportunities and they all paint the same picture… That only a very small percentage of people actually make good money in these types of businesses.
There is a good article on Business Insider that I came across that discusses the perils of joining LuLaRoe, which is a company that requires quite a large up-front investment that leaves many people in the hole.
*The other reason I'm not going to show you more income disclosures is because they can be difficult to find the end rather confusing, since companies often don't want to show this horrific side of the business.
The Big Problem
The big problem, the reason that so few people actually make good money with these opportunities, is due to the very compensation structure that they set in place. I'm talking about the pyramid-like MLM or network marketing structure.
With this pyramid-like compensation structure commissions are passed up from people at the bottom to those at the top. This creates a lot of incentives to go out there and really try your best, recruiting in as much people as possible so that you can earn more and more commissions. However, the problem is that with a structure like this there will always be more people at the bottom than at the top. That is the way it has to work and the way it will always work.
Unfortunately the majority of people, who reside at the bottom, are going to be getting money sucked away from them and paid to those above them in the form of commissions. Remember, when you recruit others in you earn from their efforts. It sounds good and all, and it creates a lot of potential to earn a lot of money, but it just doesn't work out that good in reality because of course most people struggle at the bottom.
Pros v Cons
- Low startup cost - Most of these opportunities have low startup costs, usually ranging from $50 - $200 or so. Some require purchases of over $1k but that isn't all that common. Generally speaking, it is a very small cost to get started.
- Flexible - You work on your own time and can set your own schedule. But of course the more work you put in the more you are rewarded. So don't mistake this as being a way to earn good money doing little work.
- Already established brand - You are able to have your own home-based business selling a brand that is already established and trusted.
- Big income potential - If you are one of the few that make it to the top ranks, you can earn a heck of a lot of money.
- Most people fail - The statistics don't lie... Most people make little money with these opportunities. This is the reason they are so well known for having massively high turnover rates.
- Takes a lot of work - You will have to rip and claw your way to the top if you want to make good money. Recruitment is key and this is something you have to do continuously. If you only "kinda" want to start your own network marketing/direct sales business then it might not be for you.
- Need to be a people person - You will likely have to go out and be friendly with other people, trying to get them to join in or buy products. Sure, you can do some of this online, but the offline, real-life interaction is pretty much unavoidable.
Advice If You Are Thinking About Joining
Now I'm not saying that you can't make good money with network marketing/direct sales opportunities. There are people that make very good money, but you see the truth. The truth is that the people who make good money make up a very small percentage of the overall population.
One thing is for sure, if you want to be successful in a business like this you are going to have to be relentless. Recruitment is a must and this is something you will have to continuously do. You will also get turned down a lot, which is something you are going to have to deal with and keep moving forward.
If you are an introvert or don't like the thought of trying to sell people on some opportunity or product, this is probably not a good choice for you.