Do you breathe? How often? What is your requirement for breathing?
As seemingly simple and fundamental as these questions may sound, the significance of breathing to human survival is undeniable. In a similar vein, the relationship of MLM plans to the network marketing business bears a parallel importance. MLM compensation plans breathe life into multi-level marketing businesses.
Just as breathing is a vital process that sustains the body’s pulse and rhythm, the choice of an MLM compensation plan is critical to the health and success of an MLM business. The efficacy of compensation plans determines the financial health of an MLM company and is the reason why businesses invest substantial time, effort, and capital into crafting a flawless compensation structure.
With so much attention focused on MLM compensation plans, let’s delve deeper into understanding their basics.
MLM Compensation Plan – The Definition:
In simple terms, an MLM compensation plan outlines the mechanism through which MLM companies reward their independent salesforce, or distributors, for both their personal sales and the sales made by the distributors they’ve enrolled into the system.
At its core, MLM compensation plans are the lifeblood of MLM businesses. They are a reflection of an organization’s culture, values, and ethics. Effective compensation plans serve as the means to recognize, reward, and incentivize distributors effectively.
These plans can be seen as robust business structures comprising bonuses, commissions, revenue-sharing, and profitability features. Built upon mathematical principles, even the slightest flaw in an MLM compensation plan can jeopardize the entire business.
One significant advantage of an MLM plan is its adaptability. As your business grows and evolves, you can make adjustments to ensure the plan aligns with your changing needs. This adaptability is essential to maintaining the resilience and longevity of your network marketing business.
How MLM Plans Work:
Different compensation plans operate in distinct ways, with varying commission structures and bonus systems. The majority of MLM compensation plans compensate distributors for both their personal sales volume and the sales generated by their downlines. Some plans extend commissions to multiple downline levels.
Types of MLM Compensation Plans:
Multi-level marketing offers a wide variety of compensation plans, with three major categories: Binary, Unilevel, and Matrix. Other plans are typically hybrid variations built upon these primary structures. The choice of plan depends on factors such as product pricing, cost-to-customer ratio, organisational objectives, and more.
Binary MLM Plan:
Often referred to as the ‘two-legged’ plan, Binary stands as one of the most favored compensation schemes in the realm of MLM. This plan restricts each distributor to have only two downlines, specifically, one on their left and the other on their right, forming what is known as the ‘right’ and ‘left’ legs consecutively.
In the Binary MLM plan, compensation is primarily determined by sales volume rather than the number of sales levels. It relies on the sales from the weaker leg, often termed as the ‘pay leg.’ This approach promotes teamwork and collaboration among distributors, making it a straightforward and comprehensible plan that aligns well with the MLM business model. One of the plan’s key attractions, as highlighted by its advocates, is the weekly commission payouts, providing immediate rewards for hard work, eliminating the need to wait for a month.
The Binary MLM plan considers group volume rather than the percentage of sales across multiple distributor levels, reducing susceptibility to penalization charges related to recruitment. While it is a preferred choice for businesses seeking rapid expansion, its long-term success is contingent on the ability of distributors to work effectively as a team.
Unilevel MLM Plan:
The Unilevel MLM plan, as the name suggests, features only a single level of frontline distributors under each sponsor. Unlike some other plans, such as Binary, there is no position advancement within the Unilevel plan, regardless of distributors’ performance. All of a sponsor’s distributors remain directly under them.
In contrast to the Binary compensation plan, where commissions are primarily based on sales volume, the Unilevel plan factors in distributor levels and hierarchy when calculating commissions. Compensation also varies based on the profit percentage. MLM companies determine the number of levels at which commissions are paid, and commission percentages differ for each level. This plan incentivizes individual performance with higher commission payouts, enhancing distributor engagement.
The Unilevel structure is a common feature in many compensation plans, earning it the nickname ‘Universal plan.’ Its flexibility and support make it suitable for businesses of all sizes.
Matrix MLM Plan:
The Matrix MLM plan is known for its robust structure characterized by limited width and depth. This restricts the number of distributors at each level. For example, a 3×3 matrix allows up to three distributors in width and extends up to three downline levels, as illustrated in the accompanying image. This width limitation means that not all downlines can be placed directly under the sponsor, leading to the plan’s nickname, the ‘forced matrix plan.’
Additionally, the Matrix MLM plan permits distributors to occupy new positions in the matrix once they meet the specified criteria, expanding their potential for earning more commissions.
The limited width of the matrix can be advantageous for novice distributors who join with experienced leaders to quickly populate their matrix. However, it may also result in inactive distributors.
Interestingly, the Matrix MLM compensation plan benefits companies by offering greater control over payout volumes. Despite the limited income position, the plan unveils unlimited earning opportunities for those who effectively manage their matrix.
Stairstep Breakaway MLM plan:
The Stairstep breakaway plan primarily operates on a rank-based system. When a distributor achieves a specific rank, they ‘break away’ from their downline team and assume a new top position below the admin. In this new position, the distributor assembles a fresh group of distributors under the admin.
The Stairstep breakaway plan emphasizes sales volume and performance, cultivating distributor expertise in the business. However, one potential drawback is that an intense focus on achieving specific ranks might divert attention from supporting the downline.
Often referred to as a ‘plan within a plan,’ the Stairstep plan is frequently integrated into popular MLM plans like binary, matrix, and unilevel to enhance the benefits.
Enhance your sales growth and ensure active distributors with the Stairstep compensation plan.
Board MLM plan:
The Board MLM plan is essentially a Matrix plan with a stringent limitation on the number of downlines. To explain further, in a Board plan, a distributor is positioned atop a new board after meeting specific criteria, often related to rank or the number of downlines.
The Board plan is sometimes referred to as a ‘recycling matrix plan’ because a distributor’s position is recycled to a new position within a new board.
Generation MLM plan:
The Generation MLM plan consists of various levels referred to as generations. Both distributors and customers are included as downlines in the Generation genealogy tree. The Generation compensation plan resembles a Unilevel plan but incorporates multiple generations of customers and distributors.
The Generation MLM plan, with a strong focus on products, is utilised by e-commerce businesses to enhance their sales performance.
Monoline MLM plan:
The Monoline MLM plan boasts the simplest structure among all other MLM plans. It consists of a single leg, with downlines placed in a vertical fashion based on a first-come, first-served basis. This single-line structure enables distributors to quickly and easily fill their downlines, without the need for mandatory spaces to be filled.
The Monoline compensation plan rewards you for the sales of your downlines, extending up to unlimited levels or as determined by the companies.
Hybrid MLM plan:
Hybrid MLM plans, as the name suggests, blend two conventional compensation plans, combining the strengths of both. These plans are developed based on a company’s goals and values. They typically incorporate the genealogy structure of one plan and the payout structure of another, or they combine payout structures from two plans within a single genealogy structure.
For instance, if an MLM business initially adopts a Unilevel plan’s genealogy structure, it may later incorporate the payout structure of a Binary plan to align with the company’s evolving needs. Examples of Hybrid MLM plans include Binary breakaway, Unilevel breakaway, Matrix board, Binary board, and more.
Comparison of the Most Popular MLM Plans:
Diversity in MLM plans comes with its own advantages and disadvantages. Gaining a deep understanding will help you distinguish between specific compensation plans, making it easier to choose the one that best fits your business.
Comparison of Unilevel plan vs Binary plan: | |
|---|---|
| Unilevel | Binary |
| Single level with unlimited frontline distributors | Only two frontline distributors allowed |
| Monthly/weekly payout | Mostly Weekly payout |
| Pays till specific depth | Pays till unlimited depth |
| No downline matching | Downline matching creates a balance |
| Encourages individual efforts | Encourages teamwork |
Comparison of Matrix plan vs Binary plan: | |
|---|---|
| Matrix | Binary |
| Limited depth | Unlimited depth |
| No multiple business center option | Multiple business center is possible |
| Width is configurable | Width is always limited to two legs |
| Commission is limited upto a certain depth | Commission is paid up to unlimited depth |
| Rejoining in a new position is possible | Rejoining is not possible |
| Sales volume is not carried forward | Extra sales volume is carried forward to the next commission cycle saving the efforts of the distributors. |
Comparison of Binary plan vs Generation plan: | |
|---|---|
| Binary | Generation |
| Allows only two frontline distributors as right and left leg | No restriction on width or depth |
| MLM compensation calculation is easier | Comparatively difficult compensation calculation process as the generations include both distributors and customers |
| Downlines of a single sponsor cannot be placed directly under him | Sponsor can place all his downlines directly under him |
How to Create an MLM Compensation Plan:
Creating an MLM compensation plan is a complex task that requires thorough research and understanding before implementation. It’s not a one-time process but demands consistent, ongoing attention. The factors that make up an MLM plan are the same ones that determine the longevity of your MLM business.
8 Important Factors to Consider When Creating an MLM Plan:
When developing a flawless MLM compensation plan, several key factors must be considered to drive your business to new heights. From setting realistic goals and aligning strategies with your capital to cultivating closer relationships with your customers, numerous aspects determine the path forward for your business. Let’s dive in to understand the intricacies of developing an MLM plan.
1. Product pricing:
The pricing of your products significantly depends on your MLM plan. Pricing them wisely can help you maintain your payout standards. Typically, a product has two prices: wholesale and retail. Distributors purchase products at wholesale prices and sell them to customers at retail prices, with the difference serving as their profit. This model is common in Party Plan MLM businesses. In network marketing, one of these prices serves as the base price upon which their compensation criteria are built.
2. Total payout:
The sustainability of an MLM company is closely tied to its payout standards. If the payout is too high, the company may struggle to survive long-term, and if it’s below average, it can be challenging for distributors to attract new recruits. Typically, an acceptable percentage of payout in the MLM industry falls between 40-45%. Establishing reasonable payout caps is essential for the stability of your MLM compensation structures.
When using personal volume as a criterion for commission payment, it’s advisable to consider the personal sales volume of your distributors rather than their personal purchase volume to avoid penalties related to ‘inventory loading’.
3. Payout distribution
Ensuring that the correct individuals receive the appropriate commissions not only fosters trust but also contributes to the long-term retention of distributors. The compensation plan must be structured to distribute commissions to all members within the MLM tree structure based on their efforts. In many cases, conventional plans require hybridisation to achieve this effect.
4. Consider your business goals:
All MLM compensation plans are influenced by organizational structure and goals. Ensure that your compensation primarily rewards sales rather than recruitment. Therefore, when crafting a compensation plan and determining the payout structure, consider one or all of the following factors:
- The types of products you offer.
- Industry trends.
- Your business’s mission, vision, and values.
- Your consideration for distributors, including the incentives and training sessions you’ll provide.
- Your cost-to-customer ratio.
- The scale of your plans, whether national or international.
5. Plan on your capital:
Even if you don’t have a million distributors, it’s crucial to have a robust plan for the few you do have. Analyse your current capital utilisation carefully, considering factors such as the cost of goods, supply chain and inventory expenses, customer acquisition costs, and more. By planning well ahead of the earning curve, you can anticipate what’s coming and make the necessary adjustments to your compensation plan.
6. Deliver value to your customers:
Clearly, delivering value should be the primary focus of your business. Satisfied customers play a pivotal role in your success. The duration for which you keep them content determines the longevity of your success. It’s important to educate your distributors to not just sell products but also address your customers’ needs. Additionally, distributors should be appropriately incentivised to encourage them to serve your customers better. An effective compensation plan can accomplish this effectively.
7. Optimise your compensation plan:
Regularly review your compensation plan to identify potential gaps that could harm your business. Optimizing your compensation plan by upgrading or integrating new strategies can boost your business’s performance.
An effective compensation plan can enhance your sales and overall business performance. Keep a close eye on your compression strategies to maintain plan stability. Compressions exclude inactive or ineligible representatives from the payout cycle, benefiting the distributors above them. While compression benefits active distributors, it may result in inactive distributors losing their upline support. Therefore, when implementing compression in your MLM plan, do so strategically.
8. Keep it simple; keep it active:
Begin with a simple plan and payout standard. As your business progresses, you can tailor your plan to fit your needs. Success isn’t found in complexity but in understanding. So, do your research!
A compensation plan is the driving force behind sales, distributor engagement, retention, and ultimately your profits. Keep your business dynamic with a compensation plan that ignites activity among your distributors. Introduce straightforward yet effective criteria for bonuses, ranks, and level commissions. Realistic goals not only motivate but also enhance distributor productivity.
