What is network marketing? MLM defined and explained

Network marketing, a popular business model, offers individuals the opportunity to build their own businesses by promoting and selling products or services while leveraging the power of a network of independent distributors.

Closely related to multi-level marketing (MLM) and direct selling, network marketing thrives on the combination of personal sales and team-building efforts.

In this page, we will delve into the fundamentals of network marketing, exploring its structure, various compensation plans, key players in the industry, pros and cons, and tips for achieving success in this dynamic and potentially lucrative field.


  1. Network marketing is a business model that involves distributors, salespeople, and independent business owners (IBOs) working together to promote products and recruit new members.
  2. It offers the potential for financial and time freedom and passive and residual income through a strong sales team and effective marketing strategies.
  3. Legitimate MLM companies, such as Amway, Herbalife, Avon, and Tupperware, differentiate themselves from pyramid schemes by focusing on product sales and providing a sustainable business model.
  4. Compensation structures in network marketing include binary, matrix, unilevel, and stairstep breakaway plans, each offering unique benefits and challenges for sales teams and individuals.

What is Network Marketing, in a nutshell

Network marketing is a business model where independent distributors sell products to customers directly, often leveraging their own personal networks, without intermediaries such as retail stores.

This model aims to increase the associated distributors’ customer base and sales profits by offering bonuses for successful referrals.

Network marketing revolves around independent distributors becoming representatives or “distributors” of a product or service.

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These distributors are then incentivized with rewards for any individuals they are able to recruit into the system that generates sales.

This form of payment structure can potentially result in an officially created system with layers of personnel below upper-level representatives who are able to be financially rewarded in different ways than those received by higher-ups or multiple levels down the system.

What is Network Marketing? (Very Simple Explanation) – Tim Sales

Relation to Multi-level marketing (MLM) and Direct Selling

Often times these systems take the form of a type of scheme called Multi-Level Marketing (MLM).

It derives its name from its structure by having multiple levels – such as regional managers – overseeing different parts of a company’s business operations and the people beneath them on the organizational chart making up each level.

MLMs incentives range from one-time bonuses for referred customer sales all the way to compensation from multiple levels beneath you within that organization, depending on your elevated position within it .

Direct Selling, on the other hand, provides an option outside traditional brick-and-mortar retail stores where distributors are actually able to make their own schedules and have preferred terms when selling a product or service independently.

Moving away from more rigid structures employed by larger corporations, these independent business partners often get paid based on commission versus being fixed-rate employees on payrolls.

This gives them freedom and flexibility to create incomes beyond just being paid per hour worked like most general labor positions do when working at retailers or vendors with strong establishments.

The structure of Network Marketing

Here are the critical concepts to understand the basic structure:

A. Distributors, Salespeople, and Independent Business Owners (IBOs) -Network marketing businesses depend on associative individuals, regularly referred to as distributors, salespersons, or independent business owners (IBOs), to advertise and buy their goods or services. These persons control their own firms, generally laboring from home or in other alternative settings, and take charge of constructing and administering their sales teams, dubbed downlines. They make revenue through their personal trade and the sales yielded by their downline members.

B. Compensation Plan – A compensation plan is a framework for rewarding the efforts of distributors, salespeople, or Independent Business Owners (IBOs) in network marketing or other sales companies. It often encompasses several facets like commissions and bonuses with the aim to incentivize employees for their sales endeavors and team development efforts. Additionally, these plans also provide a variety of incentives structured to remunerate them for any achievements. These compensation plans create an economic motivation for members to reach peak performance levels, facilitating maximum value creation for both businesses and members.

C. Commission – In contrast, a commission is an established form of financial remuneration often employed in sales-driven organizations, including multilevel marketing. It is a payment determined by percentage and paid to salespersons or dealers depending on the number of sales they have created, either through personal actions or the efforts of those below them. Commissions stimulate people to expand their sales and recruitment initiatives since their income directly relates to their performance and team performance.

D. Sponsor – In network marketing, a sponsor is a person who recruits or introduces a new member to the business opportunity. The sponsor serves as a mentor, providing guidance and support to help the new member succeed. Sponsors typically earn a commission or bonus from the sales generated by their direct recruits and the sales made by their recruits’ downline members.

E. Downline – A downline is a group of individuals recruited by a network marketer or their sponsored recruits who form a hierarchical sales team beneath the original distributor. Distributors earn a percentage of the sales generated by their downline members, incentivizing them to recruit and support a successful team.

F. Upline – The upline is the sequence of sponsors or recruiters that leads directly up from a distributor to the top of the organization. The upline provides support, guidance, and mentorship to their downline members, helping them grow and develop their businesses. In return, the upline earns a percentage of their downline’s sales, creating a mutually beneficial relationship.

G. Differentiation from Pyramid Schemes – While network marketing and pyramid schemes may appear similar due to their hierarchical structures, crucial differences set them apart. Legitimate network marketing businesses focus on selling actual products or services, with distributors earning income based on their sales and the sales of their downline members. In contrast, pyramid schemes rely primarily on recruitment for income generation, often lacking a viable product or service, and are ultimately unsustainable and illegal in many jurisdictions. Recognizing these differences is essential for identifying legitimate network marketing opportunities and avoiding fraudulent schemes.

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Key elements

What are the key elements of network marketing?

Let’s find out!

Product sales and recruitment

Product sales and recruitment involve recruiting new independent representatives into the network by encouraging them to purchase initial starter kits to sell products or services to potential customers.

This structure allows for a streamlined approach to sales, allowing individuals in the network to create teams that can more efficiently market products or services.

In order for a legitimate business model to take shape and sustain itself, there must be an effective way of motivating someone else to buy from you or join your downline; this is why product sales and recruitment are vital components within all types of network marketing.

Sales force

The sales force is an important part of successful network marketing as it incentivizes individuals within the team or “downline” in order to generate greater success when it comes to product/service sales.

This creates additional revenue on top of what was originally generated through retail sales since any representative who joins the downline will contribute profits that are then divided between upper-tier representatives.

On top of being a facilitator for financial return on investment (ROI), building up a large sale force also offers opportunities for promotion while creating stability in the sense that any sale contributed by them will result in ongoing income over time – even if they leave their position within the network.

Passive income generation

Passive income generation involves creating wealth without having one’s labor as its primary source – effectively multiplying earnings for those working within capital markets such as real estate, stocks, bonds, etc., adding another layer onto traditional liquidity streams from practical labor performed by ordinary workers throughout society.

In network marketing, this essentially means attaining profits from past efforts leveraged against one’s current endeavors – like generating residual incomes through reinvesting derived dividends into other investments further inside one’s distributed stream(s).

Residual income

Residual income, often associated with network marketing, refers to the ongoing earnings generated from the initial efforts of an individual.

In the context of the network marketing model, this income is derived from the sales made by one’s downline members, creating a passive revenue stream that can continue to grow as the team expands and sales increase.

This model encourages distributors to not only focus on their own sales but also support and encourage existing distributors develop their downline, fostering an environment of collaboration and mutual success.

Word-of-mouth marketing

Word-of-mouth marketing plays a significant role in the growth of network marketing businesses, as it leverages personal connections and recommendations to promote products and services.

Satisfied customers and distributors become advocates for the company, sharing their experiences and success stories with their network, leading to increased sales and recruitment opportunities.

This organic marketing strategy relies on trust and genuine endorsements, making it a powerful and cost-effective way to drive growth and expand the reach of a network marketing business.

Compensation structures

Let’s delve into the various compensation structures used in network marketing. Understanding these plans is crucial for evaluating potential opportunities and ensuring the best fit for your goals and preferences.

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Binary Plan

A binary plan is a compensation structure commonly used in network marketing, where each distributor or independent business owner (IBO) recruits and manages two direct downline members.

This creates a binary tree structure, with the IBO at the top and two legs branching out below, each representing a separate sales team.

Commissions are typically calculated based on the sales volume generated by the weaker leg, encouraging balanced development of both legs and fostering teamwork among the members.

Matrix Plan

A matrix plan is a compensation structure used in network marketing, characterized by a fixed-width and fixed-depth structure. In this plan, each distributor or independent business owner (IBO) can recruit a limited number of direct downline members (width), and the organization can grow to a specific number of levels deep (depth).

When the width is filled, additional recruits are placed into available positions further down the matrix, often following a left-to-right and top-to-bottom pattern.

Commissions are typically calculated based on the sales volume generated by the entire matrix, encouraging teamwork and collaboration among members to maximize their earnings.

Unilevel Plan

A unilevel plan is a compensation structure that allows each distributor or independent business owner (IBO) to recruit unlimited direct downline members, all placed on the same level or “tier” beneath the IBO.

In this plan, there is no limit to the width of the organization, as all recruits are placed directly under the sponsoring distributor.

Commissions are generally paid on a fixed percentage of sales volume generated by the downline members, typically for a certain number of deep levels, such as five or seven.

This encourages IBOs to focus on both recruiting new members and supporting their downline’s sales efforts, as their income depends on the success of their entire team.

Stairstep Breakaway Plan

A stairstep breakaway plan is a compensation structure used in network marketing that combines aspects of both unilevel and breakaway systems. In this plan, distributors or independent business owners (IBOs) advance through a series of ranks or “steps” based on their personal sales volume and the sales volume of their downline members.

As distributors achieve higher ranks, they become eligible for increased commission rates and bonuses.

When a distributor reaches a certain rank and meets specific qualifications, they may “break away” from their upline, forming a separate organization. This breakaway organization then operates independently, and the upline earns an override commission based on the sales volume generated by the breakaway group.

The stairstep breakaway plan encourages distributors to focus on personal sales and the development of their downline members, as their income depends on their team’s success and ability to advance through the ranks.

Pros and Cons of Network Marketing

Network marketing, like any business venture, comes with its own set of advantages and disadvantages.

Understanding these pros and cons is crucial for individuals considering entering the industry, as it enables them to make informed decisions about whether network marketing is the right path for them.


The primary benefit of joining a network marketing, is its potential for passive income generation. Independent contractors can generate residual income while away from their business pursuits by investing time in building a team and using various promotional tactics.

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This can lead to greater time and financial freedom, allowing individuals to pursue other goals or take an extended break from the workforce without sacrificing their earning potential.

Network marketing also has the capability to foster personal growth and skill development.

New distributors must hone their salesmanship, customer service, and leadership skills to grow their businesses. This can be especially beneficial for those transitioning into new industries or entering entrepreneurship for the first time. Those actively participating in network marketing programs can gain soft professional skills such as communication, negotiation, and problem-solving.


  1. Passive income
  2. Time and financial freedom
  3. Personal growth
  4. Skill development
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Unfortunately, there are several drawbacks associated with this form of commerce as well. Distributors who lack essential sales skills may struggle to retain customers or bring additional recruits into their networks.

Furthermore, ethical concerns have been raised regarding some companies’ business practices, and widespread misconceptions about the nature of compensation plans remain prevalent among consumers.

Lastly, it should be noted that due to high competition within certain industries and a lack of product differentiation between companies, many businesses fail despite substantial investments of time and capital from their owners.


  1. Poor customer retention
  2. Ethical concerns and misconceptions
  3. High failure rates

Definitions, in short

Finally, a quick summary of the most important definitions.

Definition of Network Marketing

Network Marketing is an industry where product manufacturers employ independent representatives to sell their products directly to customers.

It is typically accomplished through informal or personal connections, word-of-mouth, and social media networks to promote the products the manufacturer sells.

Definition of MLM

Multi-Level Marketing (MLM) is a type of business that utilizes independent contractors to sell products directly to consumers.

This process is facilitated by various levels of commissions, rewards, and bonuses paid from the income of the contractors, creating an interconnected network of sales.

MLM products meaning

MLM products are items and services primarily marketed through multi-level marketing systems where distributors earn sales commissions.

Sponsors earn residual income from recruiting new distributors, who receive commissions from the products their recruited downlines purchase.

MLM company meaning

An MLM (multi-level marketing) company is characterized by its hierarchical structure, where distributors earn commissions not only from their own sales but also from the sales made by their downline members.

The company emphasizes recruitment, team building, and product sales to generate income for its members.

MLM business meaning

An MLM business opportunity allows individuals to become independent distributors, working within a structured system that allows them to earn income through product sales and by building a team of downline distributors.

This opportunity emphasizes personal growth, sales skills development, and the potential for residual income as distributors benefit from the collective sales efforts of their entire team.

MLM scheme meaning

MLM stands for Multi-Level Marketing and refers to a marketing campaign that rewards recruiters for each new member they get.

Commissions are money earned from their own sales plus the sales made from further members recruited beneath them in the pyramid-style structure of the scheme.

Multi-level sales distribution definition

Multi-level sales distribution is a form of network marketing system in which merchandise is sold directly by independent distributors or retailers.

Independent distributors can earn commissions from their own sales as well as from the sales of their downline of recruits who sign up to become part of the distributorship.

Single tier network marketing

Single-tier network marketing is a type of direct selling business model where salespeople earn commissions solely based on their personal sales efforts.

Unlike multi-level marketing, there are no downline commissions or team-building aspects, as income is generated exclusively through individual sales without any hierarchical structure.

Two tier network marketing

Two-tier network marketing is a variation of the direct selling business model where salespeople earn commissions from their personal sales as well as from the sales generated by individuals they recruit.

This structure creates a single level of downline commissions, allowing participants to benefit from both their own sales efforts and the performance of their direct recruits.


What is a network marketing example?

Amway is a prime example of a network marketing company. It allows independent business owners (IBOs) to earn income through the direct sale of products and commissions generated by the sales of their downline members, creating a multi-tiered structure.

What is NWM business?

NWM, or a network marketing business model, is a business model that relies on a network of independent distributors to promote and sell products or services. Distributors earn income through their direct sales and the sales of their downline members, creating a multi-tiered structure that encourages both product promotion and team building.

What does MLM stand for?

MLM stands for ‘Multi-Level Marketing’. It is also known by various names or acronyms, including network marketing, referral marketing, and even direct marketing and selling. These terms often refer to the same core concept of a business model that relies on a network of independent distributors to promote and sell products or services while earning income through their sales and the sales of their downline members.

What is the MLM industry?

The MLM industry, or multi-level marketing industry, encompasses businesses that operate using a hierarchical structure, where independent distributors earn income through their sales and the sales of their downline members. This industry focuses on promoting and selling various products and services, ranging from health and wellness to cosmetics and household items, through a network of individual distributors.

Does Network Marketing work?

Network Marketing can be profitable when done correctly and strategically. However, it can also lead to losses if the strategy is not carefully planned and followed with dedication and perseverance.

Resources for fact-checking about Network Marketing

  1. Federal Trade Commission (FTC) – The FTC provides guidelines, regulations, and advice on network marketing and MLMs, helping consumers distinguish between legitimate opportunities and illegal pyramid schemes. (https://www.ftc.gov/)
  2. Direct Selling Association (DSA) – The DSA is a national trade association representing direct selling companies, including those utilizing network marketing. They offer resources, best practices, and industry insights. (https://www.dsa.org/)
  3. World Federation of Direct Selling Associations (WFDSA) – The WFDSA is a global organization representing over 60 national direct selling associations, providing industry resources, research, and advocacy. (https://www.wfdsa.org/)
  4. International Association of Better Business Bureaus (IABBB) – The IABBB offers a comprehensive database of business ratings and reviews, including network marketing companies, allowing consumers to make informed decisions. (https://www.bbb.org/)
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