Like many industries, network marketing has had to evolve and adapt to changes in tastes and technologies to stay relevant. Still, today's network marketing would probably still be recognizable to the people who started it. Learn more about the history of network marketing, from its earliest beginnings to the present day.
What is Network Marketing?
Before we launch into a history of network marketing, it's important to understand what it is. As the Balance describes it, network marketing depends on a group of distributors to help a business grow.
You can divide network marketing into two major categories: single tier or direct selling and multi-tier or multi-level marketing. The two categories evolved at different points in history and offer distinct benefits to the distributor.
What is the History of Direct Selling?
Direct selling dates back hundreds of years. Pretty much ever since there have been products to sell and money to buy those products, there has been some form of direct selling.
One very early example of direct selling is the traveling salesman or peddler. References to peddlers are made in ancient texts, including the Bible. There are also stories of salespeople, or peddlers, who would travel across the country in England, selling products to villagers.
In the US, salespeople who traveled across the country selling items were known as Yankee Peddlers, according to Direct Selling News. Yankee Peddlers are common throughout the 18th century.
Because Yankee Peddlers often came from outside of a village or town and because they carried everything they owned (and sold) in a cart or buggy, they were occasionally considered suspicious. There were instances of peddlers selling fake or imitation goods, according to Connecticut History.
Generally speaking though, peddlers helped connect villagers with goods they wouldn't be able to get otherwise. They also helped boost the local economy and helped several industries, including tin and brass, get off of the ground, as Connecticut History also points out.
At some point in the 19th century, the peddler evolved into the door-to-door salesman, and direct selling became a more formal process. One of the first direct selling companies was Southwestern.
The Rev. James Robinson Graves stated Southwestern Publishing in 1855. The company initially sold religious booklets and other printed material by mail. After the Civil War, the company switched to a direct sales, door to door model.
What Were Some of the First Direct Selling Companies?
Southwestern wasn't the only early company to adopt a direct selling model. David H. McConnell, the founder of what would become Avon, began his career as a traveling salesman, selling books door to door.
To make his sales pitch more appealing to his mostly female customers, he included samples of perfume. As it turned out, perfume was much more popular than books.
In 1886, McConnell started the California Perfume Co. At the time, he noticed that many of his customers were women who stayed at home, often while their husbands were away for long periods. McConnell had the idea to recruit those women to sell for his company.
P.F.E. Albee, who was 50-years-old at the time, was the first sales representative for the company. As Reuters reports, the company would end up with 10,000 representatives by 1902. It expanded into Canada in 1914 and ultimately changed its name to Avon in 1928.
Another early player in direct selling was Nutrilite, which would eventually be bought out by Amway. The seeds for Nutrilite were planted in the 1920s when Carl Rehnborg was in Shanghai during the revolution. While there, he made stews with vegetables, rusty nails and bones to enhance his diet.
Back in the US by the 1930s, Rehnborg went to work creating the first vitamin supplement sold in the country. He incorporated his company, Nutrilite, in 1939. At first, Mytinger & Casselberry were the only distributors of the company's vitamins.
By the end of the 1940s, Jay Van Andel and Rich DeVos were also distributing Nutrilite products.The pair would go on to found Amway in the 1950s. In the 1970s, Amway ended up buying out Nutrilite.
How Did MLM Evolve from Direct Selling?
In the early days of direct sales, vendors and sales representatives earned money based on how much they sold. If a sales rep sells $100 worth of product, they typically make X percent of the value.
Under a multi-level marketing program (MLM), compensation is based not only on actual sales you make. You can also earn money depending on the number of people you recruit to sell the company's products, as Forbes.com points out.
Nutrilite is responsible for the evolution and development of MLM from the direct sales model, according to Online MLM Community. Back in 1945, the company introduced a compensation arrangement that allows reps to recruit more reps to the company.
Once a Nutrilite sales representative or distributor had 25 customers buying from him, the rep was able to add more distributors to his team. The initial representative would continue to earn a commission on his own sales, plus 3 percent commission on the sales made by recruits.
How Have Compensation Plans Evolved?
Today, network marketing programs can use one of a variety of payment plans to pay distributors. Usually, a program will offer its representatives one type of plan, rather than a choice from several.
As the industry has changed over time, so have the type of payment plans available. One of the earliest compensation plans is the stairstep breakaway plan. According to Make Money Expert, the stairstep breakaway plan remains one of the most popular compensation arrangements.
With the breakaway plan, you earn commission from your own sales. If you recruit other distributors, you also receive a smaller commission from their sales, plus a commission on the sales of anyone they recruit.
You won't get to keep earning commissions on new recruits ad infinitum, though. Under the breakaway plan, a distributor is eventually able to break away from the initial line and become the top sponsor under a separate line.
The downside of the breakaway plan is that a recruiter could eventually lose the commission sales made by his or her recruits. To make that fact less financially painful for a recruiter, many MLM companies pay an override commission, or a flat fee, to the initial recruiter, according to Network Marketing Made Easy.
The override commission might not be as much as a recruiter would have earned if the recruit not broken away. For that reason, some people believe that the stairstep breakaway plan is ultimately not fair for sponsors at the top of the chain.
Two newer compensation plans offered by some network marketing programs are the binary plan and the matrix plan.
Under a binary plan, which is the newest compensation plan and the least well tested, the focus is on volume of sales rather than levels of recruits. As the distributor at the top of the plan, you form two "legs," with a recruit on either side.
If another distributor recruited you to the program, he or she earns commission from one leg, while you earn commission on the other leg.
The binary plan is not only more complex than the other compensation plans out there, but it also has the most questionable reputation. According to Money Making Expert, the binary plan is usually connected to companies that sell questionable or fraudulent products.
How Have Network Marketing Techniques Evolved?
It's not only company structure and payment plans that have changed over time. The way that network marketing companies sell their products has also changed as the industry has grown and evolved.
In the earliest days of network marketing and direct selling, door to door sales was the most common technique. Sales representatives would knock on doors or schedule appointments with people to pitch them the product.
While door to door sales are considerably less common today, they haven't vanished completely. Some representatives do continue to "cold knock" on people's doors, hoping to make a sale.
Another older selling technique that's still used today is the party plan. While the concept had been around since the 1920s, Tupperware made it popular in the 1940s.
During a home party, a hostess invites a group of friends over to her house. A representative from the company is there to demonstrate how the products work and take orders. In exchange for hosting, the hostess usually gets prizes or freebies based on how many orders the rep takes during the party.
Home parties are especially popular during the 1970s and 1980s. If you were a kid during those decades, you might remember your mom dragging you to at least one party for Tupperware, Pampered Chef or a similar brand.
Another technique that gained popularity with network marketers in the 1970s was the use of catalogs. Direct selling and MLM companies use catalogs differently from other companies.
Instead of calling the company directly to place an order, a customer places the order through his or her distributor. The distributor then contacts the company to place one bulk order or distributes the products based on his or her inventory
Although home parties still take place today and catalogs still exist, the rise of the internet has changed the way people sell with network marketing companies.
For one thing, customers can now order from their sales representatives online, through customized websites. Signing up with an MLM or network marketing company these days often includes access to a personal website for marketing and sales purposes.
Selling products online allows today's network marketers to reach a wider audience, whereas before they were usually restricted to their home regions. It also increases the competition in the industry, as more and more people can reach wider and wider audiences.
It's not just websites that have altered network marketing techniques. Social media has also played a role in changing the landscape of network marketing.
Instead of in-person, in-home parties, a number of companies now offer "parties" over social media. One technique is to create a Facebook event that is by invitation only. During the time of the event, the sales rep lists the items she or he has available.
If people are interested in an item, they can comment on the post to purchase it. The big benefit of social media parties is that people can log onto them from wherever and can leave whenever they want.
Have There Been Lawsuits or Regulations Regarding MLM?
As any industry grows and develops, growing pains can occur. That has been the case with the network marketing industry. Lawsuits and other legal troubles have taken place throughout the sector's history.
According to MLM Legal, the 1970s were a particularly challenging time for network marketing. The decade saw the rise of pyramid schemes as well as the accusation that some of the most well-known companies were little more than pyramids.
For example, in 1975, the Federal Trade Commission accused Amway of being a pyramid scheme. After four years of litigation and legal trouble, Amway won the case.
Although Amway won its case and was able to show that it wasn't a pyramid scheme, there were some genuine scams and pyramid schemes that popped up during the decade. Actual pyramid schemes aren't selling a product.
Instead, they are simply ways for the people at the top to make money off of the people at the bottom. One example of a pyramid scheme from the 1970s was "Dare to Be Great," which focused on recruiting people but didn't sell a genuine product.
Even with the bumps along the way, network marketing continues to grow and evolve. Today, more than 20 million people are involved in direct sales in the US. It will be interesting to see where the industry goes next and how it will change over the next 100 years.