The Truth About MLM Compensation Plans

This MLM compensation plans analysis article is based on a training done by Mike Akins.

The following is an expository on MLM compensation plans. We have found that the majority of networkers do not understand the dynamics of compensation programs.

This is not a reflection of the individual's intelligence level but is due to the lack of statistical information available in our industry. In order for you to understand the significance of each feature in MLM compensation plans, we have included in this analysis an overview of industrial statistics, marketing trends, historical precedents, the effect of present and past marketing philosophies, along with the fundamental principles by which our industry functions. Only when you understand the dynamics that control results in this industry, can you measure an MLM compensation pay plan effectively.

In order to understand the merits of MLM compensation plans, you will need to understand the dynamics of "true" network marketing. There are market forces and business principles that determine what works in this industry.

Sometimes these factors are not obvious but very subtle. For an example, surveys revealed that, in the past 2-3 years, more than 2 million networkers have been victims of failed network marketing programs. They were working against factors that they did not fully understand. During this period, another 2 million have switched programs.

A majority of these MLM compensation plans were flawed from their beginnings. A great number of these individuals have repetitively made the same mistake in their selection. They simply do not have a complete picture of what to look for in a viable program.

Research discovered that a number of these individuals left viable (good) programs with MLM companies because they didn't know how to recognize or how to work a viable program. Again this is not due to a lack of intelligence or skills on the behalf of the distributor, but the lack of statistical information and "trade specific" training.

Generally, when a networker analyzes an MLM company program and it's potential to produce compensation, they look to the MLM compensation plan. In reality, it requires more than a theoretically lucrative pay plan in order to produce adequate compensation. In network marketing, the equation for success contains several factors, one of which is MLM compensation plans. Each of these factors influences the effectiveness of the other factors.

For example, great MLM compensation plans may not produce great paychecks because of inferior products or ineffective marketing systems and strategies. A great product line may never produce great sales due to poor marketing strategies or lack of pay incentives. A program with both quality products and a lucrative pay plan may fail to "fly" because of the company's failure to keep up with the growth and provide quality service.

Some MLM compensation plans can have certain strengths but contain weaknesses that attract the wrong type of networker, causing stagnation and excessive attrition. Some MLM compensation plans may be imbalanced, awarding one segment of networkers at the expense of another.

The purpose of this expository is to share general information on the dynamics of MLM compensation plans and specific information on the potential of a program to produce compensation.

We believe that our type of pay plan is in the top 5% of MLM compensation plans in the industry and is potentially the number one compensation producing opportunity in the industry. In order to capture the full potential of this opportunity, there are certain dynamics you must be aware of that affect the ability of the program to produce compensation for a broad base of its members.

In order to determine the potential of a program to produce income you must understand the difference between MLM compensation plans and pay plans. A "paper" pay plan is primarily a schedule through which commissions and bonuses are theoretically paid. A compensation program includes all factors that produce actual compensation.

There are several factors that are important to a program's potential to produce income that are not included in an MLM compensation plan. For example, a "hot" product or a toll-free hotline may make it easier for distributors to enroll a greater number of prospects. These factors would be considered compensation factors but not pay plan factors.

You cannot determine the real potential of a program to generate income without understanding the concepts and principles upon which the industry is founded. Your understanding of these fundamental principles will affect the criteria by which you select a program and judge its potential. These factors determine which features will affect actual MLM compensation. Also, your marketing philosophy will affect your marketing strategy as well as influence your stamina, which is vital to long-term success.

A pillar to success in network marketing is the geometric growth factor. Understanding the principles that relate to geometric growth will assist you in selecting a viable company and structuring your organization for long-term success.

Because of the geometric growth factor, it is important to attract a combination of the right types of networkers into your organization and place them correctly. This principle is called tier structuring. We will expound on this principle later in this synopsis.

One of these tiers consists of the end product users. There must be individuals who are primarily interested in using the product, who are not interested in earning income through the product. Without tier structuring, your program or organization is destined to fail in spite of how brilliant you may be.

In order to understand this principle explicitly, consider the following example: If you follow the geometric growth of a 500,000 member organization, you will find that approximately 390,000 of these total distributors will be on the bottom level.

In traditionally structured programs, it requires at least 10-15 individuals purchasing product (equal to the qualifying dollar amount) in order for one distributor to break even on their personal qualifying purchase and get into profit. With this extreme approach, there will always be from 75-90% of all distributors not breaking even on personal qualifying purchases or earning a profit. It is vital to your success to understand this principle.

Failure to address this issue has been a major reason that a number of leaders in the industry have not been able to maintain a consistent degree of success. They are always in a rebuilding mode. Our preferred MLM compensation plans only require 4-6 individuals purchasing product in order for you to break even.

The difference between the number of distributors earning a profit in the best paying program and the worst paying program is only about 15-20%. At best, only 25% of your distributors will be earning a profit or breaking even on their qualifying product purchases. What are the other 75% going to do? If they are networkers involved to make a profit, they will drop out. You cannot escape this ratio.

This dynamic is a foundational principle built into the very concept of network marketing and MLM compensation plans. There has to be end users who are not earning an income. The program that you are involved with has to be able to attract non-income earners.

In traditional MLM compensation plans, in order for the 390,000 distributors to break even or earn a profit, they will have to find from 1½ million to 4 million new purchasers. Can you imagine what the requirements for the next level will be?

A program will begin to unwind from the bottom up when they reach this theoretical threshold illustrated above. Actually, this principle affects the unwinding process very early in the building process. If you never understand anything else, it is vital to your success that you comprehend this principle.

In order for one person to break even or make a profit, there must be 4-6 people who do not! Write this down on paper. Work through the figure over and over again, until you capture a vision of what we are sharing with you. This factor must be considered when selecting a program.

The unwinding process can begin before an organization reaches this size. Small organizations of only a few hundred or a few thousand can experience the unwinding process as they build. There are many factors that affect the growth and stability of an organization. These forces are affecting the growth process from the beginning stages. Only when a majority of these factors work in unison, can an organization experience solid growth that will last.

Many times what creates explosive growth initially will be the very factor that creates excessive attrition later. Certain strategies attract certain types of individuals. The type of individuals your program attracts will, in part, determine the long-term attrition and retention rates. It is not a matter of "good" or "bad" people. It is a matter of certain "mindsets" that respond to certain factors in a program.

The features that stand out in a program or that you primarily promote will attract networkers who value those particular features. Each distributor's paradigm toward network marketing is shaped by their personal experiences, skill level, work habits, expectations, personality traits, and their perspectives that have been influenced by the information they have been exposed to.

This paradigm will affect their performance and determine their value to your success. In emphasizing the wrong features, or selecting a program that has misplaced priorities, you may attract an imbalance of a particular type of networker who will predispose your organization to failure or a high attrition rate.

It is important for a network marketing organization to contain a balance of tier participants as well as a balance of the different types of individuals. You can control this balance by selecting the right program, with the right features, and by promoting these features correctly.

A great number of networkers waste a tremendous amount of time promoting programs and features that will defeat them in the long run. You can overly promote a positive feature and create the wrong expectations in your distributors.

For example, you may overly promote a system that could have been a support to the efforts of the marketer. By over-emphasizing the system, the marketer fails to develop his skills because he depends on the system or support to create success for him. You can over promote MLM compensation plans to the point that the marketer has unrealistic financial expectations. The marketer may drop out because of these expectations, whereas, he may have stayed in the program and achieved success if the program was promoted correctly.

The right program promoted correctly will naturally build a strong organization. First, the program should have organizers, strategists, and foundational members. These individuals influence overall company direction and strategy. Secondly, there must be senior and junior leaders who are the "movers and shakers." These leaders provide "in the field" leadership and motivation.

Next come the moderately experienced networkers and part-timers that represent a broad range of income requirements from a few hundred dollars to a few thousand dollars per month. This tier of marketers will actually do the majority of the sponsoring. Each will only enroll a few new distributors, but as a group the numbers are significant.

Other tiers will include product users, hobby enthusiasts, and customers who are involved just for quality products or the social aspect. This group will be the product user base for the income earners and should be the largest segment.

The product user base, individuals who are either low or non-income earners, must constitute at least 75% of your organization or eventually excess attrition will occur. This is based on the principle explained above. Only when your organization contains all of these tiers do you have a secure residual income.

It doesn't matter how lucrative the pay plan is, there must be a majority of individuals in the marketing structure that are primarily product users. In examining the illustration above, you can understand the need for this. These product users can be customers or members who are primarily in the program to purchase the product at wholesale. Viable MLM compensation plans must be able to attract product users in order to create long-term compensation for the networker.

The dynamics of MLM compensation plans will not have a profound effect on attracting or retaining these product users because they are primarily product-minded and not focused on income. Actually, a program that is promoted primarily for the pay plan will have a difficult time attracting product users.

When the money is the main issue, earning expectations are higher. For the 80-90% who will be at the bottom of the organization, these expectations will result in discouragement and attrition. When a balance of features are promoted, "casual" part-time distributors that may not, for a number of reasons, earn much income will stay as product users. The product line and service will be the key factors in attracting and retaining product users. Also, the quality of service and a simple, "problem free" ordering system will accommodate the retention of these product users. Designing the appropriate product and service strategies is vital to a tier structured organization.

All of the top MLM companies in the industry have been built according to the "tier structured" philosophy. That is why they have survived in spite of poor MLM compensation plans. Amway has 3 million distributors worldwide. With one of the worst pay plans in the industry, they have maintained a distributor base of 2-3 million distributors for several years. How? There are many tiers of participants.

Shaklee, Forever Living, NuSkin, and HerbaLife are all top MLM companies with billion-dollar annual sales, and each has developed on a tier structure of participants. Until you understand this concept, you will not be able to develop strategy that will produce long-term results.

The companies that have primarily promoted MLM compensation plans as the main commodity do not understand the basic principles upon which network marketing is based. This is why they are not doing so well in the arena of competition. The pay plan is important, but it is only one of several factors involved in producing maximum compensation and retention.

The purpose of pyramiding laws is to protect innocent distributors from the consequences of the mathematical realities involved in geometric growth. Legislators realize that you cannot build a secure MLM business on only networker marketers who are each expecting to earn an income. Legislators call this structure a "house of cards," which will collapse under its own weight.

That is why there must be end users who are not involved for an income. Just as in a conventional business, where you have general managers, department managers, staff members, foremen, common laborers, and customers, in network marketing you must have various tiers of marketers and product users. Network marketing will not function effectively any other way. Eventually, individuals at the bottom of the organization will drop out initiating the unwinding process that will work its way up to the upper levels of the structure.

As we shared earlier, the equation for success contains several factors. The percentage of distributors who will achieve success in any particular program is determined by these factors. A few of these factors include the security of the company, the paradigm of the company leaders toward their distributors and the industry, effective marketing and MLM compensation plan strategies, the product philosophy, the potential of the products to retain product users, the support tools in place that accommodate the "grassroots" networker (who may have limited experience and time), the type of training available and, of course, the degree of personal effort invested by the networker (this can be influenced by what you promote). The strategic balance of these factors will determine the amount of compensation produced by a program.

Company leaders must proportion the proceeds between the various areas of operation in their MLM compensation plans. They must balance their investment between the following: the products, packaging and marketing materials, product research & development, management salaries, salaries of service and support personnel, investment returns, facility, equipment, commissions to distributors, and marketing support systems such as toll-free hotlines, and Internet tools.

A strategic balance of these investments is vital to long-term success. You must invest in quality corporate leadership that can create the right strategies and provide the visionary leadership that will be best for the overall opportunity. At the same time, a company must invest enough money into MLM compensation plans so marketers can earn incomes that are competitive at various levels with programs within the same marketing arena. The competitive issue here is not the theoretical pay plan but the actual incomes earned at various levels within the distributorship.

The pay plan is one of the factors involved in producing compensation. There are two fundamental aspects of a pay plan that determine its effectiveness. First, you have the structure of the MLM compensation plans. The breakaway, binary, matrix, Australian two-up, multiple phase, and the uni-level are examples of the different pay structures available in the industry.

Secondly, how the bonuses are appropriately placed throughout these structures is important. Each of these structures have features that favor the heavy hitter, the company, or the part-timer. Pay structures that balance the potential commissions between these three categories provide a more secure income for all three.

Traditionally, MLM compensation plans have favored the company and a few heavy hitters. Gradually, network marketing is maturing and a number of programs are providing a better balance between these segments. In our personal opinion, we believe the uni-level provides the greatest opportunity and balance for the majority of its participants. Our preferred comp plan is a uni-level.

When reviewing MLM compensation plans, look for balance. An effective pay plan should place a significant percentage of bonuses on the first two levels to support the less experienced part-timer. A significant percentage of the commissions should be placed on the next couple of levels and into the infinity bonuses to adequately compensate the moderate part-time to full-time marketer.

There must be deeply penetrating bonuses to sufficiently compensate the leaders. The bonuses at the beginners' levels should be easier to reach, while the bonuses at higher levels must be protected by qualifications that restrict the number of individuals that can obtain them.

If higher levels are too easily reached, the experienced networker will be blocked from deep penetration and will migrate to another program. Balance is the key to overall success. Imbalanced programs lead to attrition and failure. If too much money is placed at the beginning levels, the program will attract an imbalance of inexperienced networkers. Without a sizable number of experienced leaders who have previously achieved success, your organization will be weak. The MLM marketing strategies and training skills they bring to the program can be very important.

The largest segment of part-timers and the least experienced networkers will benefit more from the first two levels. Smaller percentages up front create an unfavorable break-even ratio. The most effective MLM compensation plans will balance the first two levels with deeper levels. A pay plan should allow the part-timer to get into profit with 4-6 purchasers. There must be enough income available to the experienced networker in order to attract quality leadership into the program and produce the type of checks that will hold them.

Once you carefully analyze MLM compensation plans and understand their theoretical potentials, you will need to analyze the potential of other compensation features to influence earnings and retain distributors.

As stated earlier, there are several factors other than the pay plan that influence actual income potential. In order to clearly understand the balance between the dynamics that affect success in network marketing, we must examine the history of our industry.

History teaches us that a great majority of networkers respond to products and other related factors before they consider the pay plan. This is a reality that must be addressed in order to select a program that will produce residual income. Since 75% of a healthy organization will primarily be product users, the fact that the majority of networkers are attracted to the product first is a healthy scenario.

One such reality is that products in network marketing have a tendency to cost more than products in the conventional market. In order to keep product users, the company will have to offer unique products that are not easily duplicated in the conventional industry. With the inevitable ratio of three out of every four networkers not breaking even on product purchases, a balanced product and marketing strategy becomes vital to attracting enough product users to maintain success.

In reviewing 40 years of network marketing history, we find that the majority of companies are focused on the products and service. Amway, Shaklee, NuSkin, and HerbaLife each have more than a million distributors and each have very poor MLM compensation plans, yet they maintain the greatest number of active distributors.

More recent "success stories," such as New Vision, Mannatech, Morinda, and Xango are product focused programs. Each of these three companies have exceeded all records for quick growth, enrolling more than one-half million distributors within three years from being founded.

Cell Tech and Life Plus, which were around awhile before they "exploded," grew from 30,000 to 500,000 distributors in three years after finding a popular flagship product and an effective marketing strategy.

Both of these MLM companies are product and service focused. All of these programs have MLM compensation plans that are considered to be in the low to moderate-paying category. As you can see, the dynamics of growth are complex. The more you understand about these dynamics the better you can develop strategy and select the program that will best fulfill your goals. We are not promoting a poor pay plan, but we are using these examples to bring a sense of relativity to our perspectives.

A benefit to programs with MLM compensation plans in this category, is that they attract individuals who seem to have a broader perspective of network marketing and will stay in a program long enough to give it a chance to succeed. They generally do not have exaggerated expectations and know they have to learn how to work a program to be successful.

This type of network marketer is more likely to include product users in their recruiting efforts and interact more with their downline, resulting in a more solid foundation. Even with poor MLM compensation plans, these nine programs have produced more incomes and higher incomes than the "sum total" of all the other hundreds of programs in the industry.

Amway alone has produced 2200 millionaires. We agree that if they would have had more lucrative pay plans there would have been even more successful "grassroots" distributors, but, from these examples we can learn principles that can effect our futures.

These principles must be taken into consideration when selecting a program. MLM compensation plans do not attract the masses but are important once the individual is involved. First, you must be able to attract the right type of prospects to your opportunity and then be able to retain the distributors once they have joined your program.

MLM compensation plans are not the only factor that is involved in retention. The majority of companies in the industry represent two extremes in compensation philosophies. The traditionally structured programs place the majority of commissions outside the reach of the part-time distributor. The company and the more aggressive networker benefit most from this imbalance. The other extreme is the "hyper compressed" MLM pay plans. Our preference represents a middle ground between these two extremes.

Let's take a closer look at these MLM compensation plan strategies and learn from them. The traditional 5-10% paid five or six levels deep created a situation where it required 10-20 distributors in each marketer's business to break even on qualifying purchases. Each new distributor that enrolled faced the same challenge. Therefore, as the organization grew, the problem intensified.

The result was more attrition at the "grassroots" level. In spite of the flaws in the MLM compensation plans, these companies have produced a great amount of compensation. Because of certain other compensation factors outside of the pay plan, these programs survived and are viable in today's markets.The company retained enough product users and passive part-timers to support a number of successful serious networkers. These traditional MLM companies have been able to survive and thrive because they were product and service focused and were built on a tier structure. The networkers with low skill levels, but with higher ambition, suffered in these programs. This is the segment that suffered more attrition. Programs with more balance are finding more distributors at the beginning levels earning more income.

Programs that focus on "easy money" instead of sound business principles attract a majority of individuals who are not realistic in their expectations and do not have a realistic perception of their skill level. They will not be satisfied with the success that their skill level will produce. Generally, these programs attract a greater number of disgruntled networkers who are skeptical and carry a low level of anger toward the industry. These types of networkers become discouraged easily and will drop out of whatever program they select.

These types of marketers will lean on "self-propelled" systems that require very little of the individual. This approach robs the marketer of the experience and training that is necessary for real lasting success. This segment of networkers has the highest rate of attrition in spite of what the pay plan offers. The best approach for these networkers would be to select a program that is designed on principles that have been proven to work over the past several decades, and learn how to market a viable program. Simply put, "money focused" programs do not create more money for the majority of networkers or, in other words, "easy money" doesn't come easy.

Product focused distributors will generally stay in a program longer as they learn the "ropes" to success. Building a successful business requires a process of personal growth, the maturing of strategy that is "program specific," cultivating the prospect market, developing and test marketing various marketing tools that have a long-term benefit to the specific program, and the development of a support structure that is tailored to the needs of your specific program.

All of these factors are important to "real success" (success that is going to last). There is a current trend to shop for a program that is going to "take off" for you. Sometimes the factors that create a short-term growth wave are the very factors that destroy the "wave" later. History proves this concept to be true. There must be enough time allowed for a "tier structure" to develop in your particular organization.

Aligning your strategy with the principles of being product and service focused is a key to lasting success. Finding a true product and service focused program can be difficult. There are three types of these MLM companies.

The first type of product focused company is one that directs the attention of the distributors to the product, because they realize it gives their program an image of legitimacy. The leaders believe that money is the real focus but realize that they may be perceived as being a "money game," so they superficially promote a quality line of products or service. There is a wide range of "money focused" programs in the industry, ranging from gifting plans, cycling plans, and one-time purchase programs to MLM opportunities that resemble a "true" product focused program. These types of programs do not have strong residual income potential and only produce short-term growth.

A second type of product focused program places emphasis on the product and service, but does not provide effective features within the program that support the success of that type of program. Product focus does not only refer to emphasis on products. It also refers to marketing strategy that provides marketing features, along with the products and service that support tier structured growth. The majority of the time, this type of program is using "sizzle" product propaganda to cover up a poor pay plan. This type of program may experience initial growth only to level off as distributors experience the dynamics of the program.

The third type of product focused company is one that actually designs the features of the program to naturally attract product focused distributors. These programs will have higher quality products and generally have "flagship" products that are more cutting edge and exclusive. These companies will provide MLM marketing tools, state-of-the-art systems, effective literature, credible endorsements, comprehensive customer service, and other features that target tier structuring. The end result is progressive growth and lasting success at the distributor level.

There are a number of individuals who have tried traditional programs and failed to earn an acceptable income. These individuals have concluded that the programs didn't pay enough. To an extent, this is true. As mentioned, a number of traditional companies used the product focused philosophy to hide a MLM compensation plans. Traditional programs have a tendency to pay too little up front. This does make it more difficult for the start-up part-timer.

On the other hand, exaggerated compressed programs (some pay as much as 80% on the first level) have used the "up front" philosophy to hide inferior products or a poor marketing strategy. We still have the minimum of 75% of the distributors dealing with the profit issue. Paying more money up front is only part of the answer. Placing too much money up front only worsens the problem. The answer is a balanced marketing plan, more effective training, better support, and tier structuring, which means bringing more product users into the program.

Even the individual who has difficulty achieving success in network marketing can be successful under certain conditions. They should join a program during its infancy that has the type of products and strategy that will eventually attract and retain a great number of customers and product users.

These networkers must have the type of training available that will assist them in learning to become true networkers who progressively develop their marketing skills. Programs that are seriously flawed encourage networkers to reach for "gimmicks" to compensate for the flaws. Circumventing effective training through gimmicks will spell certain doom. Initially, these tactics will create growth. This growth will be short-lived. Systems can be helpful but cannot generate enough enrollments to create a large number of marketers successfully.

A few heavy hitters will be the only ones that benefit from a system alone. Without a viable program and the proper training, the cluster of "well wishers" will eventually perish. Achieving and maintaining success requires participation from a majority of its participants. Success in networking marketing is based on teamwork. Anyone who believes they can ride a system to success without working and learning how to effectively market it, will find that success short-lived. Downlines must be nourished and "cultivated" or they will not last. Everyone must learn to do his or her part. Systems are tools that do not stand alone but must be designed to compliment sound business building techniques.

Once you understand these principles, you will know what to look for in a program. Companies that have developed marketing strategies that address each of these factors will become giants in our industry. There has been a tendency for traditionally structured companies to neglect factors related to MLM compensation plans. This has led to unnecessary attrition of networkers who could have otherwise been successful.

Many of the large traditional top MLM companies have addressed the other factors well enough to attract these multiple tiers of participants. There has been a need for improved MLM compensation plans. Look for a company that is a leader in this arena without compromising the other vital components. MLM companies that have overreacted to this need and placed to much money into the pay plan have done their distributors a disservice and produced inferior overall programs. Distributors in these "hyper-compressed" programs are experiencing difficulty in building successful organizations. Think about it, if 80% or more of the money is in the first couple levels, where is the money for the long term business builder, the experienced leaders? And without them, everything unravels.

So, the key is to have a balance, a mix of seasoned veterans and grassroots distributors who all are focused on sharing a high quality product with others. A product that is truly wanted and needed by the public. Combine that with generous but fair MLM compensation plans that only reward those who work and you have the recipe for success.

If you're new to the MLM industry, here is a great resource that will help you getting the most out of your company's MLM compensation plans by teaching you how to attract new business partners like a magnet.

And here is a resource that teaches you how to generate 100 customers in 100 days!

These two resources will move your business building approach to the next level.

 

To your success,

 

10 Tips — Pick The Best Top MLM Companies Compensation Plans Bob Schmidt's Story

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