MLM Compensation Plans Explained

If you are looking to make a new stream of income, you probably looked at Network Marketing or MLM opportunities. You then probably realized that it is a wild jungle out there. Each and any MLM company has their own compensation plan that they claim to be the best out there, the most fair for the distributors. Some of them claim the best money and some of them claim to have the simplest…

You have to make sure that you understand every bit of a compensation plan. If you fail do to so you will struggle to make your business work and end up quitting too early!

Check out the main four compensation plans types you can find in the industry. Each company will have tweaked them to make it their own but it will give you a good base to understand what is out there.

Stairstep (breakaway) Compensation Plan 

Fixed Depth, Unlimited Width

This plan is the oldest and is the most common type of compensation plan. In this plan, if I become strong I can “break away” from my original sponsorship line. My original sponsor will still earn a part of my break away organization but it will be extremely reduced.

Advantages

One of the advantage of this plan is that I can go as wide as I like for my front line (my first level). I can have 50 people in my front line and build team with each of them. If I find some very strong and motivated people amongst those 50, then I can work with them and grow their team without being limited by any other person.

A second advantage (which is also a disadvantage, see below) is that this plan is now well known and it is well accepted by regulation agencies and will not create any doubt on the legitimacy of the plan.

Disadvantages

The fact that it is well known is also a disadvantage. It is difficult for a company to make it appealing to new distributors. It can also be so complicated to explain to new distributors that it can push some away. To add to that, the stairstep breakaway plan is an pretty unfair plan as it put strong incentives toward full time network marketers and brings the most money to the top people. This creates higher cost to run the business and higher attrition rate.

Another big disadvantage is that if some of my strong legs reach the necessary volume for them to break away, then I will loose their volume in my own group volume. This can be as much as 10% of my volume or in the worst cases it can be the complete volume.

Finally, the stairstep breakaway plan has a reputation for encouraging distributors to buy a large amount of product every month and create a stock of products called inventory loading.

Matrix Compensation Plan 

Fixed Depth, Fixed Width

A Matrix looks like a grid to fill. It can be 3×5, 5×7 or 3×9 for example. It means that for the 3×5, I can have 3 people in my front line and I can go 5 levels down. If I achieve the maximum width (3 people in the previous example), then the future people I sponsor will be placed under one of my front line distributor. This is called “spill-over”.

Advantages

One of the biggest advantage of this plan, especially for new comers in the Network Marketing industry is the “spill-over”. If I am sponsored by a very strong leader, I will benefit from his/her performance and it will start to create a downline for me immediately. In theory it is a great concept but it leads immediately to the biggest disadvantage of the plan.

Disadvantages

Because it shows that the “spill-over” will eventually happen, it creates a mentality of taking it easy and not working too hard. Professional network marketers know that this is not the case. There is no such thing as “sit back and relax”! This is a people to people business. You have to know who you have in your team and you have to support them and create bonding.

Binary Compensation Plan 

Unlimited Depth, Fixed Width

The Binary plan is the “newest” in the game. The binary plan appear to be very simple (find 2 people and then keep building each of these 2 people teams, etc.) but they actually are the hardest to master due to multiple special cases, spill-over, re-entry, leg balance, etc. So, this plan promotes two legs. It is fixed in width and claim to be unlimited in depth. Each leg will have its own group volume and a distributor will be paid on the lower volume of the two legs. The remaining volume of the strongest leg can be either transferred to the next pay period (in the best cases) or it will just be lost and will return to the company!

Advantages

The main advantage of a binary plan is that it is extremely easy to duplicate: I recruit 2 persons and then I help these 2 persons recruit 2 persons, etc. This creates a much stronger group effort and dynamic as I will have only two persons to manage and train and has to talk to my downline to work together.

Another advantage of a binary plan is that it usually pays weekly, compared to the monthly payment of other plans and it does a good job to pay the mid-range commission to distributors.

One more advantage of a binary plan is that the whole plan is focused on product volume and not on levels, recruiting or bonuses. Remember that any company and the distributors only make money when selling products (which is what differentiate them from an illegal scheme).

Disadvantages

The advantage of the infinite depth of binary plans can seem appealing, however, it is more of a marketing move from the company than an actual advantage. When you think about it, the amount of money earned per product sold is fixed and the percentage of this amount paid to the distributors is also fixed. So yes, you can go 100 levels deep but you will most likely get only pennies if not less from this sale.

Another major disadvantage is the fact that the distributors have to constantly balance the two legs to make sure that none of the group volume is lost even though this is starting to evolve to a 1/3-2/3 balance to be eligible. Also, each leg has to reach a certain amount of volume per month for the distributor to be eligible for commissions.

UniLevel Compensation Plan 

Fixed Depth, Unlimited Width

First, let me start by making clear of what “Unilevel” plan is. For some reason the name is very ambiguous. It is not a one level only plan. It usually allow 3 to 9 levels deep as well as allowing unlimited first level sponsored people. The unilevel plans usually have varying payment rate for different levels and also have one or several bonus pools for some “ranks”.

Advantages

The main advantage is that it is an extremely simple plan so it is easily understood by distributors who can profit from it immediately.

Newest companies use what is called unilevel compressed plans which means that if the company decides to pay $0.5 of every dollar to the distributors, it will not stop at a fixed amount of levels. If distributors in my downline do not qualify below the last level of the plan, then the remaining amount to be paid will be going upward toward the next qualifying person and the complete $0.5 will be distributed. This is good because I want to make sure that none of this money generated by my and my team efforts goes back to the company.

Disadvantages

The main disadvantage in traditional unilevel plans is the limited depth of the organization. If I place a very strong builder far down my organization I may not see all the commissions from him. However, the unlimited width allows you to put him directly under me.

Unilevel plans usually also have some group volumes and a fixed number of personally sponsored distributor limits for me to climb to the next “rank”. This looks like a leg balance of a binary plan but not as critical. For example I may be required to have a $5000 group volume and 2 of my personally sponsored people having a special rank for me to be able to get my new rank.

Choose what will work for YOU!

We saw that there are 4 general types of compensation plans. However, this only starts to scratch the surface of all the details of each plan and it is now up to you to do your due diligence and look in details at each of them and especially at the one of the companies you are interested in.

Remember that the best company has to have a very strong and fair compensation plan (you want to avoid the company saying “we pay the distributors UP TO 50%”, this is not a good sign) with no breakage but also and maybe even more importantly, you have to make sure that the company has a great product for which the plan will work.

What you have to do is to find the plan that works for YOU!

To Your Success,

 

PS: Want to see the best compensation plan out there? Check out Xango’s unilevel compensation plan.

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