The whole principle works this way: A is a representative of company Q. B becomes a representative of company Q through A and C also becomes a representation through B. Hierarchy comes in here, though A, B and C are all representative of Q, A is seen as being at a higher level than B and C.
In network marketing, commissions to representatives are not solely based on sales, but also on the level of the representative on the hierarchy. The rep here receives his own commission due plus commission on that of other reps under him. Though some people criticize this marketing strategy, it is very effective in its own way.
Network marketing encourages existing reps to reach out to customers as well as focus on getting other reps on board. More reps means more customers will be reached and so sales will increase, ultimately leading to an increase in profits. Because there are a lot of reps of the same company out there, each rep will work harder to maintain his customers.
The other side of the coin however is that, reps will be focusing on getting other reps than customers. With this, even if they do not sell anything themselves, they are still sure of getting some commission. This discourages hard work and the company suffers in the long run.
The customer benefits from this competition, in that, each rep will try to give maximum satisfaction to his customers so they do not shift to the other reps. The other side is that reps at the higher levels will neglect their customers, especially if they know the customers are no longer buying their products for them to get commission. They will rather focus on pressuring the reps under them to make more profit. Neglected customers may shift to alternative products on the market.
Network marketing must therefore be practiced with a lot of caution to ensure that none of the above mentioned occur. Strict rules and measures should be put in place so as to encourage hard work and customer care. One thing that could be done would be to reduce the percentage of commission from reps under a rep and rather increase commissions on sales. This way, each rep would want to sell more rather than waiting for others to sell with them getting commission out of it.
Network marketing is gaining grounds now, especially in the financial sector, where each customer is seen as a rep and is expected to bring in new customers. The customers at the higher level receive part of the interest on the savings of the customers they brought in, in addition to what they earn on their savings. Though this is illegal in some countries, it is widely accepted by a large sector of the customer base.
With the improvement in internet services, online network marketing is gradually replacing the traditional network marketing.