Dating back to the 1940's, networking organizations were called MLM's, or multi-level marketing companies, to differentiate the multi-level compensation plan from traditional direct selling. Over the course of the next 40 years, the MLM industry faced significant regulatory challenges and criticism due to questionable industry practices. As a result, a body of case law was created to define business practices of a multi-level marketing company.

To distance itself from its tainted history, the industry nomenclature moved to "network marketing" as the "synonym of preference." While some still use the MLM terminology, more progressive industry writers and knowledgeable researchers have adopted the commonly accepted "network marketing" definition since the 1980's.

Today, the network marketing industry boasts a mature following and is recognized as an efficient and effective method of distribution of products, more measurable than generally accepted and more popular and expensive forms of advertising. Highlights include:

• On the regulatory front, Federal case law has continued to clarity acceptable industry practices, providing a barrier to entry for those attempting pyramid schemes or unsubstantiated business models.
• The Direct Selling Association, the industry trade group, has promoted and supported industry self-regulation to mitigate concerns and accusations of unscrupulous business practices. Network marketing companies have appointed internal Compliance Departments and Compliance Officers to supervise distributor practices and police distributor/corporate behavior in compliance with regulatory guidelines.
• More network marketing companies are now publicly-traded than ever before, adopting the standards of the financial exchanges and capital markets and, as a result, have opened their operations to transparent analysis by the investment community.
• Internal operations have become more technology driven and ROI focused related to accepted financial performance standards.
• Research and development has become focused on scientific discovery and innovation beyond the traditional "lotions and potions" categories.
• Distributor education has expanded dramatically toward increasing industry professionalism in recent years. Leading network marketing company's offer extensive distributor training. A broad cadre of independent coaches, trainers, sales aid merchants, internet programmers, self-replicating website designers, etc. has developed.
• Leading network marketing companies have expanded their altruistic commitments to charitable causes and philanthropic organizations.

While direct selling/network marketing are categorized together by the Direct Selling Association, the professional trade organization for the industry, the two marketing business models share similarities and some important differences.

Similarities: Both direct selling and network marketing share interpersonal communication as the vehicle for seller-buyer exchange. Both present products and services through personal explanation and demonstration, away from a fixed business location, i.e. retail store, primarily in the home or the office of the consumer/buyer.

Differences: The two channels share some dramatic and important differences focused on 1. The selling process; 2. The compensation structure; and, 3. The focus of the training systems.

1. The Selling Process; "Transaction Closing" Vs. "Relationship Building". The direct selling process use a multi-step selling process involving such steps as "getting in the door", "making the product/service presentation emphasizing the program's 'value Propositions', "answering questions and handling objections", "closing the sale/getting Payment(full or first installment) and "exiting". A whole culture of direct sales training has developed to teach these sophisticated selling techniques toward "closing the sales".
   
   By contrast, network marketing focuses on "relationship building"...getting acquainted with the potential customer and establishing a longer term relationship. This process may be extended over several visits or conversations, over days or weeks before a sales presentation is ever made. The goal is to build a relationship with the customer to better understand the customer's needs and maximize service to the customer long term vs. "closing the sale" short term.
2. Compensation Structure. "Single-Transaction Compensation" vs. "Multi-Level Commission". Compensation in direct selling is typically direct commission based, potentially with some bonus factor.
   
   Network marketing compensation is based on a commission on product/services sold by the network marketing sales person. For those networkers who choose to recruit, train, motivate and "manage" a team of independent sales representatives working with them, the sponsoring network marketer can earn a varying override commission on the sales of the team the leader has sponsored.
   
   Some leaders have organized international teams of over 250,000 sales people worldwide. Top leaders with these large organizations have documented, residual income totaling over a $100,000 per month.
3. Training Focus. Direct selling training, as noted earlier, is supported by a sophisticated training process focused on the techniques for persuading the potential customer to buy, for "closing the sale"...and moving on the next prospect.
   
   In the network marketing culture, for those people who want to recruit, train, motivate and "manage" a team of independent sales representatives working with them, the network marketing industry has a wide range educational training provided by the leading network marketing companies. Likewise, there is a broad cadre of coaches, trainers, sales aids merchants, Internet programs, self-replicating web-sites, and university programs dedicated to teaching the highly refined process of social marketing.

The Dominance of Network Marketing vs. Direct Selling: Comparing Statistics.

Based on key industry statistics published by the Direct Selling Association, network marketing, as a business model, overwhelms direct selling on critical dimensions of industry performance.

• 93.8% of all direct selling firms are network marketing organizations.
• 96.3% of all direct selling dollar sales flow through network marketing compensation plans.
• 99.4% of all direct selling persons are, in fact, network marketing sales persons.

Direct selling's history can be traced back to the "Yankee Peddler" of the colonial era who took goods and services to the rural colonial settlers by horseback and wagon. Network marketing, a variant of direct selling with its social marketing component and compensation plan, developed in the United States in the early 1940's. Today, the direct selling/network marketing industry accounts for over US$114 billion dollars in sales involving over 63 million distributors. The World Federation of Direct Selling Associations reports that direct selling/network marketing companies operate globally in over 57 countries.

The US is the world leader in direct selling/network marketing with sales of over $29.6 billion and involving 15.1 million distributors. Japan is the number two direct selling/network marketing country with retail sales of over $22.8 billion with 2.8 million distributors. The US represents 26% of the worldwide volume and Japan, 20%, collectively commanding 46% of total direct selling/network marketing sales. Globally, 16 countries report annual sales of over $1 billion.

There is significant international growth potential, particularly in the rapidly growing nations of the world who are working aggressively to build a middle-class infrastructure. Many of these countries recognize that direct selling/network marketing provides a low cost entre into entrepreneurism...a first step toward building an independent, self-employed middle class.

Focusing on three growing regions of the world, the basic statistics are dramatic!

Region	Population
India	1.0 Billion
China	1.3 Billion
South America	700 Million
Total Estimated	3.0 Billion

Admittedly, those regions lack education and/or financial resources, making the barriers to entry into a network marketing company somewhat prohibitive. The United Nations estimates, however, that 20-30% of these populations are, in fact, Middle to Upper-Middle Class, generating a market potential of 600-900 million prospects for direct selling/network marketing. The market potential is larger than the entire population of North America including Canada and challenges the entire population of Western and Eastern Europe. As such, there is enormous growth potential for direct selling/network marketing in the developing world to be led by the current direct selling/network marketing infrastructure.

Business failure is the reality of any small business, start-up culture, not just network marketing. Because of the relatively low "barriers of entry", the small business failure folklore suggests that over 80% of new start-up companies fail within the first 1-3 years of operation.

The network marketing industry is the epitome of the small business world. Research among network marketing company failures indicates the network marketing industry is plagued by the same challenges of other small businesses. Unsuccessful network marketing companies fail because of: 1) weak management skills among the founders; 2) inadequate capital financing to support initial organizational development, technological requirements, customer support and future growth; 3) failure to adapt strategies to competitive market changes; 4) undifferentiated and/or lower value product concepts and mis-directed research and development; 5) a weak compensation program; and, 6) a lack of strong field sales leadership.

An estimated 60-80% of new network marketing recruits drop out of network marketing during the first three to six months. Research by Dr. Charles W. King, University of Illinois at Chicago, indicated that two factors contributed to this attrition.

First, many of the new recruits were victims of the "get rich quick" promise so often used to seduce naive prospects. The new "sign-ups" never understood what network marketing was as an industry or what the networking process really involved. When they realized that network marketing was, in fact, a "work program" involving introducing ideas, products, services to potential buyers, the new recruits became disenchanted and withdrew.

Second, many new recruits were excited about social marketing and interaction with friends and associates but they did not know what to do...how to "do the business." When they looked for training among their colleagues, most of their associates were new and naive about network marketing themselves. When the neophytes turned "to their upline", many senior networkers "didn't have time" to spend with "newbie's" who required serious investment of training time. Due to the lack of training, these viable potential trainees dropped out.

In recognition of the need for institutionalized education for new network marketing distributors, Professor King co-founded the University of Illinois Network Marketing Seminar Program for network marketing practitioners, which has spread globally over the past16 years. Education, "how-to-do-it" training and personal commitment are the keys to personal success in network marketing.

In recent years, financial analysts and market watchers have become intrigued with the network marketing industry.

• The network marketing business model generates healthy cash flow. Customers make up-front cash purchases in advance of order processing expense outlays.
• Well managed public network marketing companies report high return-on-investment performances.
• The DIRECT SELLING NEWS, an industry publication, maintains a data base that tracks approximately 28 United States based and foreign network marketing companies listed on the NYSE, AMEX, Nasdaq, and OTC BB.
• The industry has reflected long term international growth with good potential expansion in developing countries expanding their entrepreneurial cultures.
• Some companies have documented upturns in market valuations of over 100%+ in stock prices in recent years.
• More network marketing companies willing to operate in accordance with the SEC are exploring becoming publicly-traded companies.

Franchising

Franchising involves the leasing of a business brand and trade mark, an established/ proven method of operation including procedures and infrastructure...sometimes called a "Business-in-a-Box". Launched in the 1930's, the franchise model has grown to over $1 trillion in U.S. sales annually operating through an estimated 1 billion franchise establishments in more than 70 industries. Many franchisees have several "stores" or operations.

Franchisees typically pay a "front-end" fee for the geographic license for the specified territory and a commission on "gross revenue from sales". The franchisee also pays a "royalty fee for the trade mark" and a "fee for training and advisory services", management support provided by the franchisor.

The typical franchise agreement lasts from 5 to 30 years. Premature cancellations or terminations of most contracts bear serious consequences for the franchisee. A franchise is merely a temporary business investment, involving renting or leasing an opportunity, not buying a business for the purpose of ownership. It is classified as a "wasting asset" due to the finite term of the license.

Franchise costs range from less than $10,000 for small, developing franchises, for an H&R Block tax preparation service: $50,000 to $150,000; for a Subway sandwich and salad operation: $100,000 to $300,000; for a Supercuts hair salon "start-up": $120,000 to $300,000; for a 7-Eleven Inc. convenience store "start-up": $50,000 to $1,000,000+; , for s "start-up" McDonald's: $1 million to $3 million, and for a Hampton Inns & Suites "start-up": $4 million to $14 million.


Network Marketing

Network marketing also involves the use of a business brand and trade mark, an established/proven method of operations outlined in the company's "Policies and Procedures" Manual with training and performance monitoring provided by the upline sales organization.

Comparing franchise "stores" to network marketing downline operations produces these parallels:

• Single or multiple locations-Franchise: Franchisee dollar investment in each location; Network Marketing--Each network marketing representative is a "store" and some leaders have hundreds/thousands of independent representatives... some representatives operating across international markets.
• Proven business system-Same across Franchise (the Franchiser's Franchise Manual) and Network Marketing (the Company's Manual of Policies and Procedures).
• Fun and Friendly Work Atmosphere-Franchise: A fixed business location; Network Marketing: Working out of a home-based business location with friends and family.
• Customer service support-Franchise: Operational cost; Network Marketing: online customer service.
• Web site communications-Franchise: company website; Network Marketing: company web site and self-replicating distributor web sites.
• High repeat customer base-Franchise: "Walk-In" traffic; Network Marketing:
  Traffic driven by Word-of-Mouth(WOM).
• Training-Franchise cost; Network Marketing; Company Supplied, Upline Supplied, Conference Calls, Webinars, Company Sponsored Regional Training.
• Marketing and Advertising-Franchise: Expense for Franchisee; Network Marketing: Company support and distributor driven word-of-mouth (WOM).
• Business Investment-Franchise: $10,000+ to $ Millions; Network Marketing:
  $500-$1,000 Sign-Up/Training Materials/Sample Inventory Investment.
• Agreement Terms-Franchise: 5 to 30 years with early termination penalty; Network Marketing: Voluntary agreement renewal except upon violation of Company Policies and Procedures.