To properly explain this, you need to understand our current system of distribution of products and services. About 65% of the price of goods/services are tied up in middlemen and advertising. In fact, it's been said that the actual food cost of a box of cereal is about $.50. But, due to wholesalers, warehouses, shipping, brokers, freight, etc., the end cost has to be as much as $2.50 to $3.00 with each of the middlemen receiving a "piece of the pie".
 

Network Marketing goes back to the 1920's when company's began to understand that "word of mouth" advertising was worth buying. Later, in the 1950's company's like Mary Kay, Tupperware, etc. began promoting their products SOLELY through the use of "independent distributors".

Think of it! All the money that had normally been spent out on middlemen and advertising could now be paid out in the form of commissions to those who advertise the product conversationally.

Here's an example of how network marketing works:

Let's say Joe goes to a restaurant and finds the food and service to be excellent. Let's say the average price he spent on dinner for he and his wife was $50. Would he tell others about it? It's likely.

Let's say that Joe tells five of his friends. Each of them spends $50 for dinner. If each of them did the same thing and they, in turn, did the same thing who did the same, Joes' recommendation would have created an additional income for the restaurant of over $31,250.

If the restaurant owner had agreed to pay Joe a 10% commission for each referral, Joe would have earned over $3,125 dollars in his "spare time" just for recommending something that he thought was good value. Not bad!

Network marketing uses the principle of geometric progression as it applies to economics. As in the example of Joe recommending the restaurant, that particular scenario would look like this:

5 tell 25 who tell 125 who tell 625.

625 people x $50 per person = $31,250 restaurant income

$31,250 restaurant income x 10% = $3,125 for Joe.

$0.01 doubling everyday would end up $21,474,836 on 31st day

It works the same way with any product or service, but the key is that the product must be consumable so that there is a need to buy the products on a monthly basis, leading to monthly income. Personal care, home care, nutritional products, are great examples of these. In fact, the average household spends as much as $150 and more on just these products each month. That explains why these items are favorite hunts of MLM companies.

If each of those people were purchasing a product or service from a company who offered a commission on these sales, the participant could theoretically receive several thousand dollars.

If the product were consumable and purchased monthly (like personal or home care products), then the participant would have created a monthly income instead of a single lump sum.