Many of us who make our living in direct marketing and / or direct sales still debate the differences between the two. Even so, the vast majority of experienced network marketers would define these terms in the following manner:
- Network marketing is a form of the direct selling concept wherein products or services are offered on a one-on-one basis and sold directly by the salesperson to the consumer. It is important to note that most network marketing products are consumable, having high re-order volume or are subscription based.
- Direct sales companies are known as “seller-based,” which means they give more income to the distributor when he or she makes a sale at retail. Direct sales companies usually market higher-ticket, one-time-sale, durable items such as air and water filters, cookware, art, home accessories, etc. With the direct sales business approach, the majority of the available profit designated for the salesperson’s commission goes to the person who makes the retail sale. That person usually earns a significantly higher percentage of the designated sale commission than does the sales management that may be supervising his or her work.
Unless they have been appointed as sales managers, successful direct sales people are paid based on their personal sales rather than on building an organization of other salespeople. And since most products marketed by direct selling companies tend to be durable goods rather than consumable goods, there usually is limited potential for residual income. Obviously, there are exceptions, such as the residual income experienced in insurance sales, but usually when the sale is consummated, the salesperson is moving on to the next person and potential sale. Immediate commission checks are usually higher than in network marketing, so if you want quick money, direct sales is your ticket.
On the other hand, network marketing, much like insurance, is focused on residual income. Network marketing distributors still sell, but the sales process usually begins with their “warm” market of friends and relatives. Network marketing companies typically offer retail commissions that are much lower, since more of the available commissions are directed toward bonuses paid to various upline management people in the sponsor tree.
In turn, you can also sponsor a downline of distributors that not only sell but also consume products, making them your customers as well. If the company has high-quality products that are fairly priced and offer obvious benefits, the distributor has the real opportunity of building a “lifetime customer”, resulting in highly desirable residual income.
What is Residual Income
Residual income is money you earn from your personal re-order business and the sales as well as sales and consumption (re-order) of those you personally recruit. Your personal recruits also recruit other people in their direct organizations and this is referred to as your “downline” (Figure A).
This process continues to generate earnings for you long after your day-to-day attention to the “sale” or your sponsoring efforts have ended. For example, the royalties a writer or performing artist earns on his or her creation is an example of residual income. So is the interest earned on stock investments. Consumable products such as vitamins, personal care, cosmetics, etc. are more compatible with the network marketing business model, since reorders create the residual income driving the program.
Many people find it easier to attract people to a network marketing opportunity for a number of reasons. Residual income is one; here are some others:
- It usually costs less to get involved. Other than samples of the products and an at-cost distributor kit, there is usually no investment. Customer orders can be drop-shipped by the company, and customers can usually reorder directly from the company because the line of sponsorship is documented within the ordering system. This allows commissions and residual income to be allocated to the correct independent owners (IBO’s). This system allows an IBO to achieve a “just in time” virtual inventory – the “holy grail of manufacturing and distribution.
- When a virtual inventory is available, there are less barriers to entry and therefore more people can become involved. This goes for the part-time salesperson along with the full-time career builder.
- There’s potential for exponential growth. The most important aspect of business to any CEO is consistent “top line” growth (sales). In traditional terms, top line growth is achieved through various sales channels such as VAR (Value Added Resellers), Dealers (Ford, Chevrolet, etc), Manufacturer’s Reps, Retail Chains and Piggy Backing (bundling with larger brands). Channels such as these also create barriers to entry because the hiring and training of a sales force is quite expensive.
In contrast, network marketing distributors can leverage their energy and efforts through a small number of people they train. These IBO’s subsequently train and manage their own people and so on. This model effectively eliminates labor and training expenses – another substantial barrier to business. If executed properly, the network marketing model creates commissions and bonuses for the sponsor and upline.
If you enjoy people, are a good communicator and a hard worker, either direct sales or network marketing can provide an accelerated income potential. Your success depends in great part on your passion for your product and helping you find the right company is the purpose of MLM Times & Reviews. With so many companies adopting this model, it is very likely you will find the one that is right for you. Then, you must do dilignence to ensure they will be around to support you. Find out more about due diligence here. And then sign up for a free or premium membership. It is the best way to ensure you have ongoing information that will ensure your success.