Network marketing is a sales distribution model that relies on a large network of distributors to sell proprietary products to their friends, family, and personal contacts. A network marketing company grows its distribution by having its distributors recruit new distributors to create a downline. The existing distributors receive a percentage of their downline distributors’ sales. Distributors also earn a commission through the direct sales of products to customers. To join the networking team, new distributors are required to purchase a dollar volume of products from their recruiter.
Also referred to as multi-level marketing, network marketing has been scrutinized for its practice of compensating distributors for recruiting new distributors. If a distributor’s compensation is generated primarily from recruitment and not product sales, the practice may be deemed illegal as a pyramid scheme. If compensation is derived primarily from product sales, it is considered legal.