Does Network Marketing Compensation Plans Work and are they Legal?
Network Marketing (legitimate & legal business model)
The concept behind network marketing is a distribution model that allows a company to sell their products
directly to the consumer. Choosing to use a word of mouth approach (networking) instead of advertising
through traditional streams (eg media). Therefore instead of paying the media for advertising, network
marketing companies are structured to reward distributors through commission in return for selling their
products and finding new customers.
Therefore the main focus of a network marketing company is product distribution. In fact, in a legitimate
network marketing company, distributors are not required to recruit new distributors in order
to earn a commission, they can earn money purely by selling the company’s product.
Although distributors can choose to sell the company’s products to earn their commissions, not everybody
wants to be a sales person and therefore choose to recruit more distributors into their organsation as a
means to build their referral base. Not only does this create a group of loyal customers, it also allows
you to LEVERAGE
the efforts of others to create a
residual stream of income.
“I would rather earn 1% of 100 people’s efforts than 100% of my own efforts”
- John Paul Getty (American Billionaire)
Therefore the recruiting element of a network marketing business is merely a way of distributing
more products and helping to build a leveraged income.
Why do distributors in network marketing normally receive a commission when a new
recruit joins their organization?
To join a network marketing company you have to purchase an initial start up kit. This kit usually
includes training, some sales and management tools to assist you to build your business, and a certain
amount of product. Because there is a certain amount of product included in the start up kit, the sponsoring
distributor is now entitled to a commission. For example, when becoming associated with a network marketing
company there are normally a number of different business options available, what’s the main difference
between the cheap business options and the more expensive ones? The amount of product you receive in the
package, that is the more you spend up front, the more product you receive as part of your initial package
and the greater the commission the sponsoring distributor is now entitled to.
The opposite is also true, most network marketing companies now offer a very low start up option where
you do not have to purchase any product to get started, just the training and business tools. In this
scenario the sponsoring distributor does not receive any commission in return for you joining their
organisation, they do however now have a new distributor (and customer) who they introduced to the business
and therefore any future product that is bought or sold by this new recruit is eligible for commission.
In summary, when trying to understand network marketing, distributors are paid a commission - not for
recruiting new members, but for the amount of product that is sold through their organisation. Therefore
recruiting new members into a network marketing company is purely a way of expanding the distributor’s network
and customer base. Any commission made through recruiting new members is a result of the product sold in the
start up package and not for the recruiting itself.
Another big distinction between pyramid schemes and network marketing is the fairness of good maths. To
prevent network marketing companies from falling over like pyramid schemes (where people at the top make
all the money and people at the bottom lose everything), there are restrictions placed in the network
marketing company’s compensation plan that limit the number of people who can earn a commission off any
given sale. Basically there are only so many ways you can split a dollar, therefore, network marketing
commissions only travel so far. This not only makes the business model sustainable but also makes it fair
in the sense that it doesn’t matter if you got in first or last, you have the same opportunity as everyone
else.
Please bear in mind that every network marketing company’s compensation plan is structured differently.
To learn more about the basic structures please refer to the compensation plan chapter after finishing this
page.
So in summary, despite the fact that network marketing and pyramid schemes share a few similarities
(i.e. the pyramid shaped business model shown in figure 1, and that in both you can recruit new members)
network marketing is a legitimate business opportunity and one where you can earn a substantial legal
income. You don’t have to take our word for it, network marketing is now being endorsed by a number of
leading businessmen worldwide.
“If I lost everything and had to start again, I would find myself a great network marketing company
and get to work!”
- Donald Trump (David Letterman Show)
A word of advice when looking into a network marketing business opportunity - unfortunately some pyramid
schemes have tried to mimic the network marketing business model before being discovered as fraudulent,
therefore you have every right to be initially concerned. For your benefit we have put together a list of
questions that you can ask yourself prior to signing the dotted line to help you identify a legitimate
company from a fake one.
In particular, the following 2 questions:
- Is there a legitimate product involved?
What do you get in return for your start up investment, other then the potential to earn good money?
If you're not getting a product or service or if the training tools appear to be overpriced you could have
discovered a scam. For more information about recommend products please refer to the "choosing the right
product" chapter.
- Do you get commissions based on product distribution or on recruitment?
If they are paying commissions based purely on recruitment, walk away now.But if they are paying commission based on a product with a compensation plan. Stay with it!
Understanding the Forced Matrix Plan
Matrix Plan
The Matrix Plan, also known as a Forced Matrix Plan, is based around a
compensation structure that has a set width and depth for which
distributors are compensated. Although there are many variations to this
compensation plan, the basic concept remains the same.
The basic structure of this compensation plan is normally identified by a
simple equation that distinguishes the width and depth of the plan
(i.e. width x depth). For example a 3 x 5 plan suggests you can only
sponsor a maximum of 3 frontline distributors and you have the potential
to earn commissions up to 5 levels deep.
Because there is a limited width to this compensation structure,
distributors are encouraged to assist their downline members to help
their organisation grow. Additionally any new recruits that are
sponsored after your frontline is full must be positioned under one of
your existing downline distributors. This process is commonly referred
to as “spill over” which is also used in the Binary Plan. The main
advantage of this concept is that it creates an element of team work
where some distributors within your organisation can work together and
mutually benefit.
The Forced Matrix structure allows distributors to sponsor new
recruits deeper into their downline once their frontline is full.
Traditionally these new distributors were automatically placed into the
next available position, however more recently, plans have been
developed to allow distributors to decide where they want to position
these new distributors. This recent modification has made this structure
more appealing, as it gives distributors more control over their
business and it increases the amount of teamwork.
One of the main advantages of the Matrix Plan over the
Unilevel Plan
and the
Stair Step Breakaway Plan
is once your frontline is full, your focus now changes towards
developing your frontline distributors and assisting them to find and
train their frontline distributors and so on.
A potential setback of the Matrix Plan is that generally the
amount of commissions paid on each level is variable. Therefore there is
more incentive for distributors to assist some levels of their downline
but not others. Additionally, some plans are quite wide and may require
you to fill 6 or more frontline positions before assisting your
frontline to develop their organisation. Another drawback to the
variable commission rate is while it does offer some incentives it can
be hard to explain to potential prospects. You could have the best
company in the world but if the compensation plan is too hard to explain
or understand it can make it very difficult to convert potential
prospects.
A study conducted in the network marketing industry in the late 80's
discovered the average network marketer sponsors less than 3
distributors. This makes it very difficult for the average distributor
to fill their frontline, especially some of the wider matrix plans.
Since this study, compensation plans have been developed to help even
the average networker to be successful. Such improved plans include the
Binary Plan,
which only requires you to sponsor 2 frontline distributors making it achievable for even the average network marketer.
When reviewing compensation plans, in particular the different
Forced Matrix structures, you should be aware that the narrower and
deeper the plan, the more supportive your upline distributors will be.
For example a 2 x 12 plan encourages more teamwork and support from
upline distributors than a 6 x 4 plan. Having said this, the variable
commission rate should also be considered as some wider plans have an
incentive for distributors to focus their efforts towards assisting
different levels of distributors.
To make Forced Matrix Plans more attractive, some companies have
added “infinity bonuses” and “rollup compressions” allowing hard working
distributors to earn commissions on levels specified outside the depth
of the plan. Because every compensation plan is different we won’t go
into these details as they are not necessarily applicable to all Forced
Matrix Plans. It should however be considered that whilst a number of
these bonuses are very attractive, only a small percentage of
distributors will be successful enough to earn them.
In summary the matrix compensation plans have the potential to be
very rewarding to both new comers and gun recruiters particularly once
you get to understand the compensation structure in its entirety. Like
most compensation structures this model does offer the potential to earn
a very high income if you are willing to put in the work. However as
discussed elsewhere in this chapter we strongly encourage that you don’t
join a network marketing company based purely the compensation plan. In
particular the products, the practicality of the business model and
whether the company has a proven track record should also be considered.
Understanding the Binary Plan
Binary Compensation Plan
Despite the fact the binary plan is relatively new (90’s) to the network
marketing industry it is already very popular among network marketing
companies and members within the industry. As well as the simplicity of
the design that the binary compensation structure offers there are a
number of advantages that make it attractive to all network marketers
including those new to the industry, part-timers, average networkers,
and your more experienced gun recruiters.
How Does the Binary Compensation Plan Work?
The Binary Plan as the name suggests is based around the number 2, which
represents the maximum number of frontline associates that any business
centre can have. Any additional distributors must then be placed under
one of your existing frontline members. This creates a very supportive
environment for new members as the easiest way for associates to achieve
success is by assisting their new members to build their organizations.
This team approach makes the binary plan very attractive as there is a
lot of support (both initial and ongoing) as all associates within your
organization work towards achieving a common goal.
The main earning objective of the binary compensation plan is to
balance the amount of leg volume flowing through either side of your
business centre. For example if you had 800 sales points flowing through
the left leg of your business but only 500 points flowing through the
right, you are paid out on the highest common denominator which in this
instance is 500 points. When the Binary Plan was first introduced any
additional volume (ie the extra 300 points on the left) would be lost
making it difficult for part timers however more recently most binary
plans now allow any additional volume to be carried over to the
following commission period. This “carry over” feature has proven to be
very popular for part-timers as it means that you don’t ever lose any of
the sales volume that you have acquired.
Because the goal is to balance the volume flowing through your
organization this encourages associates to help their weaker downline
members to build their organization (promoting teamwork) to achieve a
better volume balance and a more consistent (and higher) commission
cheque.
There are normally no depth restrictions to the binary structure
and each level of your organization is paid out on a consistent
commission percentage making it easy to understand. One of the main
distinctions of the of the Binary Plan is that it is volume driven as
opposed to level driven which means you do not have to have a large
organization to be successful. This also means there is an incentive to
help new associates in your organization no matter how deep they are.
In the fairness of good maths because there are no depth
restrictions to the Binary Plan, each business centre has a limited
earning potential which maxes out to ensure that both distributors and
the company earn a profit.
If each business centre has a limit to how much it can earn, how
is it possible to earn millions of dollars through a network marketing
business using the Binary Plan?
For your serious network marketers the profitable part of Binary
Plan is that although each business centre can only earn so much
(normally up to a few thousand dollars a week, which is still very
nice), there is generally no limit as to how many business centres each
distributor can operate. Think of a business centre like a shop, if you
currently own a shop that is doing really well but no longer has the
potential to grow, what do you do? Open a second shop, as this now
allows you to earn profits on both businesses. Well it is exactly the
same with the Binary Plan. Once you have achieve a certain level with
your network marketing business where your organisation has maxed out or
has limited potential to earn you more money, the company rewards the
distributor with a new business centre.
The company is happy because they have an experienced, successful
distributor opening another business center and the distributor is
happy because now they have a higher earning potential. The more
business centres the distributor has the greater the earning potential
of the distributor.
Binary Compensation Plan Helps Even The Average Network Marketer
Studies conducted into the network marketing industry have shown that
the average network marketing distributor sponsors between 2-3 new
distributors into their business. These findings meant that it would be
hard for the ‘average distributor’ to be successful using some of the
older compensation models that required distributors to recruit at least
6 or more frontline distributors to see a return. These older plans
started to give the industry a bad reputation as being "too hard",
however fortunately most of these plans have since been modified.
After these studies started to appear in the 1980’s the Binary Plan
was create to give everybody a fair chance of success. Because the
Binary Compensation Structure only allows the sponsoring of 2 frontline
distributors it meant that even your less than average network marketer
still has the potential to achieve financial freedom using this
compensation model. Additionally the binary compensation plan was
developed such that as a new recruit if you’re really struggling to
build your downline it is in the interest of your upline distributors to
give you as much help as they can.
The Best Compensation Plan as voted by you.
The MLM insider publication each year publishes the annual distributor’s
choice award as to what people working in the industry believe to be
the best company and best compensation plan. Obviously there is some
potential biasing that can occur as naturally the large companies with
the highest number of distributors are likely to feature the most.
In particular a large well known company (definitely not the biggest)
has won the distributors choice award for the last 10 years in a row.
One of the stand out features of this company is that it was one of the
first to implement the Binary Compensation Plan and whilst it is
definitely not the most lucrative compensation plan it is believed to be
one of the fairest.
Although the Binary Compensation Plan is not the most lucrative,
just like all other compensation structures this model does offer the
potential to earn a very high income if you are willing to put in the
work. When combined with the supportive teamwork that is generally found
within companies using this compensation model, there is a lot to like
about the Binary Plan.
Whilst we are generally supportive of this compensation structure, as discussed in each of the different
compensations models
throughout this chapter, before choosing a company we strongly recommend
that you also consider the products, the practicality of the business
model and whether the company has a proven track record.
Take note:
IDS only promotes businesses with a good track record. We promote 2 different ones:
www.mycashsecretathome.com
www.mycashsecret4u.com
and our own safelist
www.freedomsafelist.com
www.enterprisesafelist.com
Each one has a legitimate track record of successfully paying out huge residual income earnings. The problem with people not making any money with these systems is that they are lazy and don't work their business! It will not ever work unless you put some time and effort into it! If you don't make any money, it's because you have failed yourself! MLM companies don't fail; People fail because they don't put forth the effort!