What do we mean by network marketing?

It is a strategy that some direct selling companies use to encourage existing distributors to earn new distributors in exchange for a percentage of the sales of distributors that they have earned. Distributors form a (down) chain for the first distributor, and they in turn make profits by selling products to customers. One of the most well-known companies that use network marketing is Amway, which sells health, household and cosmetic products.

Network Marketing Concept

Network marketing is a legal business strategy, despite the controversy surrounding it. One of the problems surrounding this type of marketing is hierarchical patterns, in which profits are taken from new distributors to be paid to distributors up the distribution pyramid, rather than to those who actually do the work. This practice involves the use of individuals by claiming to be involved in legal network marketing. We can learn about this type of marketing by focusing on earning distributors more than on selling products.

The legal dimension of network marketing

The legitimacy of working with a network marketing strategy can be summarized by asking the following question: Do these companies sell their products to consumers directly, or sell them to members who are forced to earn new members to buy their products? If the answer is the second, we are facing an illegal hierarchical pattern.

The Federal Trade Commission has investigated network marketing companies for several decades, and has found that many have engaged in activities that are difficult to determine their legitimacy. According to the International Federation of Direct Selling Associations, the number of independent representatives of members of these companies has been at least 116 million around the world until 2017, and only a few earn reasonable income for their efforts. Some observers believe that these features apply to the hierarchical pattern.

A real-life example of a network marketing company

Herbalife Nutrition is a well-known network marketing company that manufactures and distributes food and weight-loss products, and has more than 500,000 distributors. Although the Federal Trade Commission conducted investigations into this company, it was the active investor William Akman who highlighted it, when he publicly sold $ 1 billion of the company’s shares in 2012, and accused the company of following a hierarchical marketing pattern, supporting his claim that the price of its shares would decrease Much.

But in 2018 Akman waived his bet, and the share price reached $ 40 on October 27, 2019.

Multiple lawsuits have been brought against the company, accusing it of abusive selling practices. The company reached a settlement with the Federal Trade Commission in which it was forced to restructure its business, and claimed that most of its revenue resulted from selling its products and not from gaining more members, and that it offered to its members many protections such as financially backed guarantees if they were unable to sell the products.