There are four basic types of compensation plans in MLM – Stairstep, Matrix, Unilevel, and Binary. With advantages and disadvantages to both, the short of it is, many people have difficulties making a full time income given the way these plans are organized.

Some will pay only 8 to 10 levels deep (ones based on the Matrix), which cuts out the largest portion of the volume paid to the distributor. Others have unlimited depth (the Binary), but have limitations which are a little more difficult to realize until you may have done a lot of work and realize you are being underpaid.

The first question anyone should ask when considering an MLM compensation plan is how many people will you need in your downline to make your target income. You need to determine the number of distributors you will need to make $100, $500, or $10,000 per month (a six figure income). This is crucial if you intend to replace a full time income with network marketing.

Every network marketer knows that it will take work to succeed in this business, but the trick is finding the company that will pay the best. Most people have been convinced that theirs is the best, but keep in mind that there is always going to be a constant battle between the MLM company and it’s distributors, for the money of course.

Even when there is a CEO of a network marketing company who was previously a distributor, the company must survive, and so it has to come first in terms of the compensation plan payout. But what often happens is that you are talked into believing the pay plan will make you lots of money, while you overlook the reality, which is, how hard will you have to work for your money?

First of all, if you are being paid under 20% of your downline volume, you are being grossly underpaid. If you are making money only on the wholesale price of a product, then this percentage is rather much lower than that. So when a company drives the behavior of recruit – recruit – recruit, by having a retail price that no one would reasonably pay, then the majority of distributors are only making the wholesale margin.

Breakage

Each MLM company tries different methods to make the comp plan work both for the distributor and the company, but the company always gets the breakage. The breakage is any profit that is left unpaid to distributors.

Breakage occurs for example when there is a level beyond which, or a portion of your group product volume on which you do not get paid, bonuses or compensation that you do not qualify for, or product cost that is hidden between the supplier and the company.

The Binary Plan

Now, in a binary plan it is true, you have only two sides, a left and a right, to build, and after you put in 2, everyone else has to go under one of those two. This seems simple when explained, and creates an excitement when there is the possibility you will get help in building your downline.

You must also have sponsored a minimum of two people on autoship, one on each side, and often must reach a minimum group volume on each or on your lesser side which is usually much larger than your own personal volume in order to qualify for any commission. No big deal really, right?

As in any pay plan, putting people under your downline members generates excitement as it helps them out. Building by depth only, and not by width does give some the advantage that the person above is probably going to put people under them. These may be only people that are placed on outside or ‘power’ legs.

However, this also in part generates a welfare mentality. There are some that will take this opportunity not to work very hard because they know that their volume will come from work that you do.

But the real down side is that you will only ever be paid a percentage on your lesser side. That is, you will never be paid on any more than 50% of the total volume in your downline. So, if you are being paid on 10% of the lesser leg, realize that this means you are only getting paid 5% of the entire group volume in your downline.

That is to say, if the auto-ship requirements are $100 per month, you will be making only $5 for every person in your downline who is ‘active’ (on auto-ship for the minimum amount). Now you can get out your calculator, and determine exactly how many people you will need in this pay plan to reach your target income.

But keep in mind that this $5 per person is actually the optimistic view in this plan.When your sides are equal, you are making %5 per person on the minimum autoship. So calculating your numbers, realize that not every person will stay on autoship, and you won’t get paid on every person in your downline who IS on autoship.

It is only when this plan is working at it’s optimum, when your left and right legs are equal, that you make $5 per person on autoship, in the 100 point system,  5% of your downline volume.

Balance is Key!

The most difficult part is keeping these sides balanced so that you can be paid on the potential of the larger leg. This is where it fails the average distributor. There is almost always a larger part of the volume in the ’strong leg’ of the binary which is going unpaid to the distributor.

Even in rare cases, when the ‘bonus points’ are not flushed every pay period that you aren’t paid on them (in the binary I was in this was called a ‘non-flushing binary’ where you keep your points as long as you are on autoship), it is even more difficult to catch up.

Even with the ‘non-flushing’ binary models, where you can never lose your volume points in any leg as long as you remain on auto-ship, what are your odds of truly retaining that balance in the long run?

Let’s say that you have personally sponsored a power player on your left side. This person is your greatest dream team player, and starts enrolling people daily (maybe they even had a list from a previous company, a team who is following them now to yours!)

And let’s assume that at this point your sides are pretty well even, or maybe that your right side is even a bit ahead. Everyone is in the category of average distributors, some breaking even, some not, some on autoship and some enrolling 2 or 3 people.

Then as your star player takes off like gangbusters, signing up more people than you ever thought possible, your left side quickly pass your right side, but unless you are able to get your other side caught up (how likeley is that if you are not yourself one of those 2% of the heavy hitters?), you will never see a penny of that volume.

And you are the one responsible for sponsoring that person into this business! The only people enjoying the benefits of their volume are in your upline.

Fear of Loss

What the non-flushing binary system does is create the fear of loss, that if you take yourself off of auto-ship you are saying good bye to all of those potential points. In the binary plan I was involved in, I was so far out of balance that even when I did get paid, I was getting less than a 2% return on the volume in my group. If I had stayed, that percentage would have continued to decrease, as the one side continued to explode.

Now you could say why not stay and find another star player? Well, as I grew to working with professional network marketers who understood the various pay plans, they would never join a binary. They said ‘Friends Don’t Let Friends Join Binaries”.

The heavy hitters can do well with binaries simply because they typically start with large lists already (who often have large lists of their own), and are making money quickly from the start with initial momentum to help them build. The easily reach the bonus levels for these reasons.

Statistically Speaking…

The facts are clear and well known in the industry: the average distributor sponsors 2.7 people into a business for the life of their distributorship, and at least 90% of distributors become inactive after 90 days, usually because of the difficulty for the person most often starting out in this business (usually part time) to make any money (but this is directly due to the compensation plan).

So when you go to calculating the number of people you need to sponsor into your business to make $500, $1000, or $10,000 a month, these are things you can keep in mind. If you have a high rate of attrition you will need to keep up with sponsoring new people to make up for their dropping out.

If you are serous about a passive residual income, you will want to determine how much money you want to be making, and then determine tthe number of distributors in your organization will be needed to reach that figure. For example, to make $10,000 a month, will you need 4000, 3000, 2500, 1300, or 400 people on autoship in your downline? The average in the industry is about 1300. With the non-flushing binary I was in it would have been 4000. The company i am in now will require me to have 350.

I hope this helps, I know it is at least something which I wish I had been inclined to think about in my earlier endeavors into network marketing! Another critical thing to consider is How to Evaluate a Network Marketing Company.

If you would like to learn more about how to grow your business, regardless of your pay plan, then check out this duplicatable online training and marketing system, and you’ll learn from industry experts how to increase your bottom line while you grow your down line!

To Your Success!

This entry was posted on Monday, June 1st, 2009 at 9:57 PM and is filed under Core Training. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.