One of the most important yet least understood aspects of a network marketing opportunity is the compensation plan. In fact, most of those involved in network marketing provide an accurate description of how they are paid. This lack of knowledge results in too many distributors getting involved with opportunities that are not be right for them or realistic for their efforts.
Our purpose at MLM Times & Reviews is to provide you information that will allow you to understand and evaluate the compensation plans of opportunities presented to you in order for you to avoid the aforementioned mistake. We will examine the following:
- How each plan works
- The differences between various plans
- Their respective strengths and weaknesses
- Designed for either full or part-time basis
- Geared toward personal consumption, retail sales, or both
- Why many companies utilizing difficult plans are so successful
- Why many companies fail using plans that are easier to duplicate plans fail
- How to see the subtle nuances and red herrings in plans that can be so enticing, yet deceiving, but are so successful time and time again in attracting distributors.
However, what this guide will not do is tell which plan to choose. Only you can do that and it must be in conjunction with the other important elements of the opportunity such as Management, Products, and Support.
There are four basic plan designs:
- Stairstep Breakaway
Other than basic mathematics, careful consideration must be given to the products that fuel the compensation plan. There are basically three categories of product lines:
- Service Related
Many companies have failed having great products, but poor designed compensation plans, oftentimes because the marriage between the two was ill advised. Even more often the product lines are too thin to generate the required recurring cash flow necessary for the company to survive. For example, if a company has only a handful of products, but has high operational costs and short term liabilities, there is a disaster brewing. Unless the primary product is an absolute market disruptor with a patent in trail, success is questionable.
Ironically, compensation plans attract many people seeking an opportunity due to the hype of a compensation plan that is doomed from the start.
Unfortunately, the usual outcome for these unknowledgeable entrepreneurs is disillusionment after revenues from sales do not provide adequate compensation for the effort spent generating them. Prior to going into a detailed breakdown of plan types, it would be best to take note of the most overlooked facets of an MLM compensation plan.
- What are the thresholds and volume levels (total sales) that must be met in order to achieve maximum compensation?
- At what point and at what time are these commissions paid? Are commissions in the plan loaded (higher in the front) or weighted (middle or back end)? Knowing this provides clarity on when you will receive money and that is the name of the game, isn’t it?
- If you have been in the industry a while, you may have noticed that many distributors in their prospecting have the habit of saying that their company’s plan pays out a certain percentage, like 75% for example. Two things to keep in mind here. One is that you don’t earn 75%. You will earn what the commission is on a given level and assuming different percentage commissions and sales volume occurring on different levels, you must find the % average (commission check divided by total volume). Most plans will average out between 3-6% per level or generational group of distributors’ total sales volume.
Remember the word BREAKAGE. Again, the company may say on paper that it pays out 75% on its end, but in reality it may end up only paying half or 35%. There are a number of reasons for this happening, all resulting due to breakage. They are as follows:
- All companies receive the benefit of being on top of the compensation plan ladder. Therefore, even with the maximum number of pay levels from the company being achieved, there is usually no way it can ever pay 100% of the paper-stated pay-out. This is especially true of young companies where there hasn’t been any significant depth created. Occasionally, a company will pay out all possible commissions by taking its commissions and putting them into some bonus pool usually only accessible to the big distributors.
- The number of front line distributors to the company is also important to this equation. If all the front liners do not build to maximum commissionable depth, again some or a lot of the stated payout will flow to the company itself.
- Many compensation plans will pay different percentages of commissions depending on status. Therefore, if most of the distributor force is at the lower levels, the company will not come close to paying out what may be claimed on paper.
- Many companies pay additional bonuses for performance and these bonuses are figured into the overall paper-stated payout. Obviously, only a small percentage of distributors will achieve these bonuses, thus resulting in a lower overall payout for the company.
One confusing is the choice between involvement with “lower $ volume personal consumption plans” versus those that are more retail focused with higher $ volume requirement. While we do agree (assuming the other important criteria of selecting a company are there) that the low $ volume personal consumption-type plan companies are more suited to residual income and allow easier recruiting, it is important to recognize that most attracted to this model will focus on personal consumption and not on driving sales volume. Considering that you earn commission income based on $ sales volume, it only makes sense that with these programs, massive on-going recruitment will be necessary to create the kind of sales volume needed to make any kind of respectable income.
Having said that, higher retail $ sales volume plans often bring about slow recruitment and higher attrition, which means you cannot duplicate your efforts as quickly as you would like. Even so, plans of this type will result in higher volume, increasing the amount of your checks. The reality is you can be successful in any plan out there just as long as you have done your diligence, know it is right for you and are absolutely committed.
Unilevel plans are the most basic and simplest structure for MLM compensation. There’s no width limit and varying depth limits (usually ranging from three to nine), with varying bonus percentages on each level. The more sales volume you and/or your organization moves within the defined depth, the more you will earn.
The stairstep/breakaway compensation plan is the most commonly used and responsible for most of the really big money being made in the network marketing industry. The stairstep / breakaway plan also resembles the production of corporate America in that it is most closely related to the Pareto Principle. In other words, 20% of those involved produce about 80% of the results.
The biggest difference between this and other compensation plans is it’s the most suited for full-time involvement. Because of this, attrition tends to be higher as well as the financial requirements to startup. There is some negative talk about these plans, but this is usually due to misinformation regarding the effort and commitment necessary to make a business successful using this compensation plan. .
Stairstep/Breakaways have two sides to them. The (front) stairstep and the (back) breakaway. The front side of the plan generally has 3 or 4 increasing rank positions that can be achieved by meeting progressively higher $ sales volume requirements over a specified period of time. All the distributors under you are considered part of your personal group and their and your personal $ sales volume combined helps you to stairstep to these progressively higher rank positions at which point you will breakaway.
You will generally earn higher commissions on the lower rank distributors under you (in your personal group) and this commission will decrease as they too move up the stairsteps to the breakaway side. When you do breakaway, your group comes with you as well as their $ sales volume which combined is called group volume. With most breakaways there is a set/defined personal group volume that has to be met each month in order to qualify for commissions on other breakaways There is also a personal $ sales volume requirement that you as an individual have to do each month. This personal $ sales volume generally applies to both the front and back side.
Binary plans are designed to generate revenue through “Income Centers”. These centers use a numbering scheme of some kind, but here we will label them as 001, 002 and 003. In a binary plan, a business owner may purchase (initially) up to the 3 business centers for a set cost that is backed up by product. The 001 is the top center with the building centers 002 extending down on the left side and 003 extending down on the right side. From each 001, 002 and 003 center you have two legs. 001 left and 001 right. 002 left and 002 right. 003 left and 003 right.
If you only purchase 1 center, two legs will be extending from it (001 right and 001 left) which represent your two recruits. If you start with all three centers, the 002 and 003 will actually represent two additional personal legs off your 001 center and from the 002 and 003 you will have two legs each coming off of each of them which will be filled by 4 possible new recruits. So in effect, you have two “sides” and two “legs” per side to start building your organization from your 002 and 003.
Each side generates retail and wholesale volume resulting in your total sales in each leg income center. Each week, the volume in each leg is compared and you will be paid based upon the center that produces the least volume. This is paid to your 001 center. So initially, the weakest leg in the system is the key to being paid and for good reason – it forces you to focus on growth within the weakest point in your business.
For instance, if one leg has reached its maximum compensation of $4,000 and your other leg is only producing $1000, you will be paid on only the lesser of the two until both have been maximized. You then are paid equally from both legs. You may then purchase another center and begin to systematically build it until both legs are maxed. This process can be repeated endlessly.
The Matrix plan is like Rodney Dangerfield – it gets no respect. And although many companies use a variation of this plan and it has many advantages with the matrix over other compensation models, it only makes up about 9% overall usage. Moreover, it is considered the “black sheep” of MLM compensation plans.
What makes the matrix plan unique is the limitation to building width in your organization. To be more specific, width is the total number of business owners you can directly sponsor. The most common variation is the 2×12 model. In the 2×12 you may have 2 people in width and a total of 12 people in depth. In other words, you will have two people on your second level, 4 on the second, 8 on the third, 16 on the fourth and so on. The problem with a model of this type is that while it looks great on paper, it is difficult to achieve in the real world.
The most obvious, and most hyped, benefit to the Matrix plan is the potential for “spill-over.” Spill-over occurs when you have maximized your first level and all sponsoreed directly by you afterward “spill” to subsequent levels. The point of this is to provide support to your downline, allowing you to build an organization faster.
One benefit of this effect is that a new business owner could actually end up with two sponsors; the one who sponsored them and the one under whom they fall in the matrix.
One study conducted to examine the effect of such a narrow focus revealed that once a business owner achieved three downline, either through their own efforts or through spill-over, they would not or could not quit. Based upon feedback from participants, this effect was attributed to fear of loss.
Compensation in a matrix plan tends to be maximized further down than on than other types of plans, at least on paper. Since the width is limited, and organizations tend to go deeper in matrix plans, so do the levels bonuses are paid on. It is also much easier to predict how much you will earn on each level, since you will know exactly how many people will fill each one. Generally, matrix plans are simple and easy to explain and understand.
According to another study, MLM participants will sponsor 2.6 new business owners on average. In other words, if your matrix width is greater than two, you will not likely see any spill-over. But it is important to recognize that this is not the median, but the average.
You should carefully consider the following points when evaluating a matrix compensation plan.
- Width versus depth relative to payout.
Geometric progression always looks better on paper. Rarely is a matrix maxed out by any distributor. The structure of a matrix is the most important consideration. For example, you will probably make more money with a 5 x 6 matrix with a 40% payout.
- Check to see if you get paid on every level.
Matrix plans sometimes are encumbered with hidden thresholds, skipping some levels of commissions until you have achieved specific numbers on a specific level or multiple levels.
- What kind of products lend themselves to matrix plans?
In a word – all. And they have been very popular with and succeeded with service related products like buying & service companies or subscription sales incorporating a carefully defined cost basis achieved on a monthly basis.