MLM Compensation Plans
by
Scott Harris
This
article assumes that you have a basic idea of what a
multi-level marketing (network) marketing system is
all about. If you're new to this, you may want to
look for my previous article, MLM Q&A, which you
can probably find wherever you found this one (or you
may e-mail me for a copy, addresses below). This
second article in the series provides an overview of
how various kinds of compensation plans work.
- MATRIX
PLANS
Most MLM
companies use some kind of matrix-based
compensation plan. Broadly speaking, this refers
to a system where you sign up some people one
tier below yourself (this is your "frontline");
and those people sign up more people on the next
tier, and so forth. A rough diagram of the
resulting structure might look something like
this:
(Note:
If you are viewing this file using a program in
which you can select the typeface, pick something
that is monospaced - that is, where every
character has the same width. Courier is one such
common choice.)
(YOU)
___________________|______________________
| | |
First Level: (Albert) (Brian) (Cathy)
| ______|_______ |
| | | |
Second Level: (Frank) (Gil) (Hank) (Irving)
_____|____ | ______|_______ |
| | | | | | |
Third Level: (Jennifer)(Keith) (Larry)(Mitch)(Neal)(Otto) (Paula)
If
that comes out correctly on your screen, it
should indicate that You signed up Albert, Brain,
Cathy, David, and Elizabeth - that's your
frontline. Albert signed up Frank (who in turn
signed up Jennifer and Keith), Cathy signed up
Gil (who signed up Larry) and Hank (who signed up
Mitch, Neal, and Otto). Elizabeth signed up
Irving (who signed up Paula).
If
you sign up good workers and give them the proper
support, and train them so they can do the same,
in theory, each level will ultimately end up with
more people than on the previous level.
Typically,
you get a commission on the purchases made by
everyone who ends up within some fixed number of
levels from you. For example, you may get a
commission of 7% of all the sales generated by
everyone who ends up in your first 7 levels.
There are many variations on this. Many systems
pay different percentages on different levels,
For example, a company may pay 5% commission on
purchases made by people in your first and second
level, but 10% on the sales from the third level.
- THE
SIGNIFICANCE OF PERCENTAGES
The advantage of a
system that puts a greater share (bigger
percentage) of the commissions at more distant
levels is that, if a system is working well, the
deeper levels will have more people. For example,
if you signed up 3 people on your first level,
who each signed up 3, you'd have 9 on your second
level. If they each signed up 3, you'd have 27 on
your third level. In this case, using the unequal
scenario described above, you would receive 10%
commissions on the 27 people in level 3 and only
5% on the 12 people on levels one and two. That's
more lucrative than getting 7% on all 39 people.
The more levels away you go, the more people you
theoretically have on a level, and the more
advantageous it is to have a bigger commission on
those levels, even if it must be balanced by
smaller commissions on the closer (theoretically
smaller) levels.
There
is a downside as well, however. Let's say that a
company puts its biggest payback on the seventh
level. In order to have ANYONE seven levels away,
you must have one or more workers in each level
in-between, in the same line. That won't
necessarily happen, and a given line may never
reach a seventh level. On the other hand, if a
company stacks its biggest commissions in the
early levels, you won't have the chance to build
up the large high-paying base that can
theoretically result from geometric progression.
In short, either approach in extreme is probably
difficult to do well with.
Besides
comparing percentages, it is also useful to
compare what it is you're getting a percentage of.
Most MLMs have a minimum required purchase that a
participant must make to be eligible for
commission in a given month. A system that gives
you 5% of purchases which are usually $100 (i.e.
$5 per sale) is potentially more profitable than
one that pays you 10% commission if the purchase
there is usually $25 (since that yields $2.50 per
sale). Of course, you also have to weigh that
against how many people you think you can sign up
to a $100 system compared to the number you'd
likely be able to enroll in a $25 system.
Another
factor that determines profitability is how the
percentages are calculated. Some MLMs calculate
commissions based on actual purchases, but most
calculate on "commissionable volume" (CV)
or "business volume" (BV) or some other
number that refers to a less-than-100% portion of
actual sales. So, for example, a plan might call
for 10% commission on minimum purchases of 100
"BV" (yielding a $10 commission) but
you may have to spend $110 to achieve 100"BV".
So based on cash purchases, this "10%"
is really paying 9.1% ($10 on a $110 purchase).
And
of course, no system will pay very much,
regardless of the percentages, if you're not
dealing with a product that people will want to
pay this money for.
- BREAKAWAYS
AND INFINITY BONUSES
Many matrix
plans are of the "breakaway" type. This
means that once someone achieves a certain level
of success, they "break away" and form
their own group. The downside is that you no
longer get full commissions on that person, or
those in their group who had fallen within your
first seven levels (continuing our example, where
we assume a system pays through seven levels).
The upside is that, assuming you meet certain
qualifications, you are generally eligible for an
override, an additional bonus based on the volume
of that breakaway group. And that group may well
contain people who would have fallen more than
seven levels away from you, so you are now
getting something from people who before would
have not generated any income for you. In
general, only the most serious workers have the
potential to do well in this kind of plan. Since
the most successful people in the group break
away, you must expect to have to continue to
build on a regular basis, in many cases even just
to maintain a certain income level (with actual
growth requiring still more effort).
Systems
that don't have breakaways have the advantage of
avoiding that "running in place"
scenario. But it's still nice to have a system
where a hard worker can benefit from sales made
more than seven levels away. One solution to this
is the "infinity bonus." This allows a
person who meets certain qualifications to earn
income on sales any number of levels away.
Instead of stopping after a certain number of
levels (i.e. 7), this bonus continues through
"infinite" levels UNTIL the system
finds someone else who has met that qualification.
From that point on, that is the person who
qualifies for that bonus, until he, in turn,
"hits" someone else who qualifies.
Often
there are different amounts of infinity bonuses,
based on different qualifications. For example, a
system may pay a 2% bonus to people who have
signed up 5 other people, and a 5% bonus to
people who have signed up 10. In this case, if
you signed up 10, you'd get a 5% bonus on
everyone in a given line, down infinite levels,
until you came across someone else who had signed
either 5 or 10 people. If you hit someone who
signed 10, he'd be eligible for the full 5% bonus
from that point downward, and your infinity bonus
would stop at that point. If you instead hit
someone who had signed 5, he would be eligible
for a 2% bonus on subsequent levels; usually
you'd still get the difference - 3% - on
subsequent levels, until you hit someone else who
has signed 10.
- UNILEVEL
AND FORCED MATRIX
Matrix plans
are typically either "unilevel" or
"forced matrix." In a unilevel system,
you can sign up as many people you want on your
first level, and everyone under you is free to do
the same. In a forced matrix, you may be limited
to, say, 5 people on your front line (if we again
use our example where you receive commissions on
up to 7 levels, this would be called a 5x7
matrix, pronounced "5 by 7"). In this
case, if you sign a sixth, you must place that
person on your second level, under someone who is
already on your first level. The advantage of
this system is that it encourages "spillover"
- people more likely get recruits placed under
them by their sponsor, who must find places to
put his new enrollees. The disadvantage is that
as you place people farther away from you, you
will not be eligible for commissions from as many
generations of their recruits. For example, a
system may pay commissions through 7 levels. If
you must place someone on your second level
instead of your first, you have effectively
limited your income from that person to 6 levels
worth instead of seven. Of course, that may be
balanced by people placed under you by your
sponsor. These people (and their recruits) can
generate income for you that you would otherwise
not have received.
- BINARY
PLANS
Binary plans
are so named because they are built on a matrix
of two. You can sign only two people onto your
first level. Everyone else goes beneath those
people. In the previous section, I described how
forced matrices have the downside of moving
people further away from you more quickly. But
binary systems don't have that problem. That's
because they don't pay based on levels at all,
but instead, on a specified, maximum amount of
purchases (over some period or time, often weekly).
It pays on that amount regardless of how many
levels down you need to look to reach that total.
So the number of levels between you and a given
recruit is not especially relevant. The thing
that determines whether you get a commission from
that person is not what level he is on, but
rather how much purchase volume is generated in
the levels between you and that person.
Put
differently, a matrix plan pays off on all
purchases that occur through a specified maximum
number of levels (seven, in my examples above),
regardless of how small or large a cash amount
that might be. Binary plans turn that around.
They pay off on all purchases that occur through
a specified maximum dollar amount, regardless of
how many levels away you have to look to
accumulate that total.
The
advantage of this system over the standard matrix
is that you can easily benefit from sales that
occur many levels away from you, if that's where
the volume is. The disadvantage refers to the
other differentiating feature of a binary system,
the "balancing act."
Since
you can only sign two people directly under
yourself, you end up with a structure that has
two "legs" - two spots that in turn
have all the other spots under them. In any given
pay period, the two legs will likely be unequal (one
will have generated more sales than the other). A
binary system pays based on the volume of the
weaker of the two legs. There is usually some
mechanism to carry the unused volume of the
stronger leg forward to the next pay period.
Even
though this structure encourages spillover (that
is, you will likely have people placed under you
by your upline), those people generally end up in
one leg, and you must balance that volume with
recruits of your own (in your other leg) in order
to benefit from that spillover.
Binary
plans typically pay off in "lumps." For
example, you may receive a commission every time
your weaker leg has accumulated $1000 in volume.
If you're doing well, that might be once a week.
If you're starting, it may be once every some-number-of
months.
Another
common feature of binary plans is that there is
usually some mechanism by which you can re-enter
your own downline. This allows you to create a
second position in the matrix that shares one leg
with your initial position. For that position to
receive commissions, you only need to build one
new leg, since it would have its first leg
essentially pre-built for it from the efforts of
maintaining your primary position.
If
you join a binary system in a group that you feel
is likely to produce spillover, it is a good idea
to start with two positions if possible. If you
place your own recruits mostly on the two legs of
your second position, you will probably maximize
the income from those people as they balance each
other; and their combined total will all end up
under one leg of your primary position which
will, in theory, largely be balanced by the
spillover from above that will end up in the
other leg of that first position.
- AUSTRALIAN
"TWO-UP" PLANS
This
refers to a structure where the first two people
you recruit are "given" to your
sponsor, all the rest of the people you recruit
are yours. Each person you recruit will in turn
give you the first two people they recruit,
keeping the rest for themselves.
Graphically,
this does not create a matrix, but only something
that resembles a front line. The front line keeps
growing, as you recruit new people, and as they
people you recruit give you their first two
recruits.
In
order to prevent people from strategically
picking weak prospects to give up (keeping
subsequent strong prospects for themselves),
there may also be an over-ride mechanism, where
you get some kind of bonus on whatever structure
is built by the people you give up.
- QUALIFYING
FOR COMMISSIONS
In all cases,
the income you qualify for may vary depending on
whether or not you've met certain qualifications.
In general, there is some amount of commission
you will receive just for maintaining whatever
minimum level of eligibility requirements the
company has for participation. Then there may be
additional commission available for meeting
certain goals (signing up some specified number
of people, generating a certain volume of sales,
etc.). In both cases, the matter of whether or
not you receive these payments is within your
control, based on your ability to fulfill the
higher requirements. And then there may be some
commissions where eligibility is not entirely
within your control, where it may be related to
the performance of other people in your
organization.
- CO-OPERATION
As discussed in the
previous article, some sponsors or groups are
likely to provide more support than others. In
some cases, the compensation plan can encourage -
or discourage - higher levels of cooperation
between sponsors and their recruits. While a
person's success is always tied to the success of
the people below him, the strength of that
relationship can vary with the plan's structure.
For example, plans that lend themselves to
spillover by their nature (i.e. binary and forced
matrix) often create an additional bond between
sponsor and recruit as the sponsor places new
people in the shared downline. This bond should
also be strong in systems where bonuses are tied
to the success of individuals in one's downline (for
example, in a unilevel plan where higher
commissions or bonuses are based not merely on
how many people you sign, but also on how many
people are signed by those people). On the other
hand, in some plans, your income may actually be
reduced if someone under you suddenly starts
doing exceptionally well. That kind of structure
is less likely to foster as much of a team spirit.
- OTHER
POINTS TO CONSIDER
This article
described only the broad outline of some of the
most common types of plans. There are many
variations. I am not endorsing any particular
kind of plan, just providing the background to
help you evaluate plans for yourself. Even people
who, for example, claim that a binary plan is
superior to a unilevel plan would likely admit
that a well-designed unilevel plan is better than
a poorly designed binary plan.
As
mentioned in the previous article, there are many
factors to consider in choosing whether or not to
participate in a given MLM opportunity. The
compensation plan is only one. Good products and
viable company are equally important If any one
of these three items are missing from the
equation, success is unlikely.
(c)
copyright 1995, 1996 The Media Group, 222 Main St., Mt.
Kisco, NY 10549
Written
by Scott Harris
The usual
disclaimer: The information contained here is presented
in good faith, but should not substitute for the advice
of an accountant, lawyer, or other professional.
Comments,
questions, and suggestions welcomed.
|
Back