Defining Network Marketing Terms

There are several terms for doing business with an entrepreneurial flare, but some people confuse the terms and refer to them as schemes. It's important to know the difference so that you don't miss an opportunity that might be just right for you.

Here are the terms that you would hear associated with the different type of marketing businesses.

Network Marketing

Referral Marketing

Multi-level Marketing (MLM)

Affiliate Marketing

Virtual Markets

Ponzi Marketing

Pyramid Marketing (Schemes)

Binary Marketing systems

Multi-level Marketing, Referral Marketing, Network Marketing, Direct Selling

Multi-level marketing (MLM) is a marketing strategy in which sales of a product is compensated not only for sales that one persons generates, but that same person also receives compensation for the sales of others that they personally en-roll in the company. This creates a down-line effect, of distributors and the amount of compensation can vary depending on the level of sales or rank in the company. Other terms for MLM include network marketing, and referral marketing.

"Network Marketing" as well as Direct Marketing actually refers to the distribution; selling from one person to another. The term "multi-level marketing" actually describes the type of compensation plan. Other terms for Multi-Level Marketing may include "word-of-mouth marketing", "interactive distribution", and "relationship marketing". These words are sometimes used to try and distinguish Multi-Level Marketing from illegal Ponzi schemes, chain letters, and consumer fraud scams, which we will cover later in this article.

The Direct Selling Association, an American industry body, reported that in 1990 twenty-five percent of members used MLM, growing to 77.3 percent in 1999. Companies such as Avon, Electrolux, Tupperware, and Kirby all originally used single level marketing to sell their goods and later introduced multi-level compensation plans. By 2009, 94.2% of members were using MLM, accounting for 99.6% of sellers, and 97.1% of sales. The Direct Selling Association has approximately 200 members while it is estimated there are over 1000 firms using multi-level marketing in the US alone.

Affiliate Marketing, Virtual Markets

This is a one tier compensation plan. The company will compensate a seller for their sales. If any of that "sellers" customers wish to also sell the product(s) then they will sign up directly with the company as well, but the original seller will not likely receive any compensation.

You will discover more of this kind of marketing with online services and companies, known as “virtual markets”, however a virtual market may also include a multi-level marketing system as incentive for greater rewards and commissions.

Ponzi Marketing, Pyramid Marketing (Schemes)

This includes chain letters, consumer fraud scams and Ponzi schemes where money is involved. A chain letter that is simply sharing recipes is not illegal. It becomes illegal when the exchange of money is involved.

A Ponzi Scheme involves investing money that promises to pay returns by recruiting others who will also invest. There is never a product involved, which defines it as being illegal and the concept is based on getting a return on your monetary investment. In the beginning, returns can be unbelievably high and consistently the same on every level, but Ponzi Schemes fall out fast for one reason; because the investment terms keep rising to larger amounts of investment or when one person runs away with everyone's cash.

What Makes it Legal?

While Network Marketing and Multi-level Marketing companies have been rolled in under the term “Pyramid Marketing”, it doesn't necessarily mean that a Multi-level Marketing company is a fraudulent pyramid scheme.

While the compensation plan of a company may be multi-level, based on a binary or pyramid, it must offer a product with the recruitment package. If the company asks for an investment to start, without providing a product, it is considered an illegal transaction where no product is offered.

Binary and Pyramid Compensation Plans

The term “Pyramid” simply refers to the form of payment levels in the compensation plan and like-wise for a 'binary” levels and their payment system.

The one demonstrated to the left is a basic fuction of the pyramid and often considered illegal. One person at the top recruits two and so on. However, if you think of corporate America, everything starts with someone at the top and the little guy at the bottom.

A matrix is a good form of Pyramid marketing and some companies have chosen to use a “binary” marketing system for commissions.

The one to the left is exactly how the popular successful Marketing Companies operate with a Matrix Marketing plan, while proving to be legal and lucrative with an excellent an product line.

A “Binary” means that you have two legs that you help build as you recruit and your down-line recruits, each will build two “legs” of new members. This is also legal as long as it offers a product with the initial investment and encourages ongoing product sales, not just recruiting new members. The Binary does not prove to be as financially lucrative as the Matrix plan.

Good and legal MLM companies always encourage the use of their product once you have joined the company and the product always comes with the initial investment.  These companies can be a rewarding and financially lucrative method of "residual" or ongoing income for someone who has an entrepreneurial spirit or likes to promote specific products.

Bottom Line: If they are asking for an investment to get started with the company and there's no product included in the price then stay away.