Tapping the Network Marketing Model

Some of the most well-known household names are those of network marketing companies, such as Mary Kay, Avon, Amway and The Pampered Chef. And there are hundreds of smaller companies emerging that do essentially the same thing. This overview of the network marketing model spells out the pros and cons and outlines some key strategies.

Imagine having a global sales force of 35,000. None of them require health insurance or other benefits. They work purely on 100-percent commission, and they spend just as much time recruiting new sales people as they do selling your products. All of this may sound like a pipe dream, but it is a reality. It is network marketing.

Network marketing has just begun to carve its niche in the marketplace. But it's hardly a new concept. Some of the most well-known household names are those of network marketing companies, such as Mary Kay, Avon, Amway and The Pampered Chef. And there are hundreds of smaller companies emerging that do essentially the same thing.

The daily growth of the network marketing industry is creating a major buzz within the business world. It is a business model that is getting attention from investors and businesses with more traditional business backgrounds.

In late 2002, Warren Buffett's Berkshire Hathaway bought The Pampered Chef, one of the network marketing industry's leaders. Southern Living at Home, whose distributors sell decorative items for the home, generated more than $100 million in 2002 for its parent company, AOL Time Warner.

For the last five years, I have been involved with a company called Natural Health Trends Corp. (NHTC), which is a network marketing company based in Dallas, Texas. In just two short years, revenues have grown from $8 million in 2000 to $40 million in 2002. Our revenue in the first quarter of 2003 was 57 percent higher than our revenue in the first quarter of 2002.

In the first five months of 2003, Natural Health Trends stock, trading under the symbol NHLC, has jumped nearly 500 percent. In fact, of the 10 publicly traded network marketing companies that have reported first quarter revenues, eight saw increases over the previous year. Three hit their 52-week highs during the month of May.

Direct Selling

It is no secret that direct selling is becoming an incredible economic force in the U.S. and abroad. Direct selling in the United States has doubled over the past 10 years to represent more than $25 billion of annual goods and services-and global direct sales were in excess of $79 billion in 2000. In fact, direct sales increased 4.4 percent in 2001, while retail sales increased by only 3.6 percent.

Direct selling continues to grow because word-of-mouth advertising works. It is no surprise that recent Direct Selling Association surveys show that an increasing percentage of Americans (an average of 55 percent) have purchased goods or services through direct sales--a higher percentage than Internet sales or through television shopping. And overall, network marketing has become an important part of the total direct selling picture.

How it Works

Network marketing is a proven business model, because it is relatively immune to business cycles and is an effective way to move a lot of product in a short period of time.

Network marketing companies distribute their products through independent distributors. These distributors usually pay some type of fee to join the program. This fee provides order access to the company's inventory and marketing materials and allows distributors to track their sales and the sales of their team (typically through an online virtual office).

The company generally makes money from both the signup fees and from the sales of the products. Distributors can generate earnings three different ways:

1. By buying inventory directly from the company at wholesale prices and re-selling it at retail;

2. By signing up other distributors who, in turn, develop their own product distribution and business organization; and

3. By enrolling preferred customers who buy directly from the company at wholesale prices.

Distributors are not only paid commission for their own direct sales, but also for the sales of those distributors they recruit, train and manage. Though there are those very successful distributors who have built a solid business and are able to sell and recruit on a full time basis, most distributors sell products part-time for extra income. (Natural Health Trends Corp. has top income earners making hundreds of thousands of dollars per year.)

Network Marketing's Dark Side

While there are many positive attributes of network marketing, there is one major challenge within the industry. Some companies become illegal pyramid schemes. These companies, and the image they project, are the single greatest challenge to legitimate network marketing companies.

What is the difference? Illegal pyramid schemes require exorbitant "registration" fees up front. Their distributors sell products that are either worthless or completely non-existent. These fraudulent companies usually invade a town for a short time, let a few people make money so they can spread the word, and then leave just as quickly with thousands of dollars in their pockets and a lot of angry investors left behind.

Pyramid schemes promise a lot of income for very little work. In this case, the old adage is true: "If it sounds too good to be true, it probably is." It seems so simple to understand, but every year thousands of people lose millions of dollars because they have ignored this simple advice. Unfortunately, these are the headline stories that make it a challenge for legitimate network marketing companies to do business.

(Anyone who is thinking about becoming a distributor or investor can examine public filings to find out about the financial health of a company. Many companies, like NHTC, are publicly traded. Financial information can be found online at www.sec.gov or by contacting investor relations within the company.)

What Products Sell?

The best network marketing companies sell actual products with actual value. The products sold are as varied as the companies themselves. Products can range anywhere from travel packages to cosmetics to legal aid.

NHTC's distributors sell patented health and beauty products. The top selling products are SkindulgenceTM 30-Minute Non-Surgical Facelift System and AluraTM, an intimacy creme for women. These are products that people can and do use.

The Distribution Base

Network marketing companies understand that it is imperative to expand the distribution base for the health of the company. In fact, it is a crucial part of the network marketing model.

These companies make it clear to their distributors that generating income is going to require work. People who sell a few products to their family and friends a couple of hours a week are not going to make as much money as people who create, monitor and motivate their own distribution lines or businesses.

Network Marketing Abroad

While the network marketing model is an efficient way to move products throughout the U.S., the real growth and expansion of the industry is happening abroad. Seventy-percent of direct selling worldwide comes from outside of the United States. The network marketing model is extremely effective and popular in Asia and Eastern Europe. Most successful network marketing companies have some presence in these markets.

In a little more than one year, NHTC has recruited and trained more than 14,000 distributors in the former Soviet Union countries and 11,000 distributors in Asia. More than one-third of NHTC's 2002 revenue and earnings came from Asia alone. In June, NHTC opened a new office in Seoul, South Korea. This is in addition to existing offices in Canada, Australia, New Zealand, Taiwan, India, Hong Kong, Singapore, Russia and the Philippines.

And we are not alone. Amway, Nuskin and Mary Kay have made significant inroads into China and other countries. Why does network marketing work so well outside the U.S.? In Eastern Europe, where the capitalist model is in its early stages, a business opportunity with little startup cost and very little bureaucratic red tape is attractive. In Asia, the concept of door-to-door, direct contact selling is ingrained in the culture. In Taiwan, for example, it is estimated that one in ten people are involved in a direct selling business.

Network Marketing Essentials

In general, the network marketing model is an appealing avenue to distribute large quantities of products into the marketplace. However, before taking this approach, companies should consider the following tips:

1. The product line must be simple. Because you are relying on amateurs to sell your product-what they sell must be simple. It has to be something that can be easy to explain and easy to sell. All of the products that NHTC's distributors sell are "try it before you buy it" products. They are products that have an instant impact on customers when they try them.

2. The product line must be flexible. Even the best distributors run out of interest and customers if they have to keep selling the same product. When NHTC's female intimacy creme AluraTM was first introduced in 2001, distributors bought and sold more than $400,000 of product in the first week. Less than one year later, Natural Health Trends Corp. rolled out the SkindulgenceTM line of products. It has now surpassed AluraTM as the top selling NHTC product line. Again, the most important aspect of network marketing is creating and expanding the distribution channel, which is difficult to do if you have only one product to sell.

3. Be prepared for turnover. One of the biggest advantages of network marketing is also one of the biggest challenges. Because the model is designed so that the independent distributors are free to work as much or as little as they wish, the products and compensation package must be designed to drive those individuals to want to work harder. Also, when you have a large and diverse sales force worldwide, distributors will constantly come and go. You must rely on a core group of motivated leaders to keep the distributor base expanding.

Conclusion

Success in the network marketing industry comes from commitment to industry standards, from dedication to the distributors that drive your company, and from a delicate balance of traditional business practices in a very non-traditional form. Overall, the network marketing industry has proven to be a positive ecomonic model in its ability to create effective and efficient channels of distribution.

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Mark Woodburn is president of Natural Health Trends Corp. The company is based in Dallas, Texas. For more information on the company, visit www.naturalhealthtrendscorp.com or call (972) 819-2035.