With over $110 billion in annual revenues, Network Marketing is a thriving industry.

These companies save billions alone in marketing and advertising costs with direct sales and multi-level compensation methods.

But there always seems to be a tug of war between these companies and their distributors, without whom there would be no sales.

And the company, owners, and top 2% of the distributors most often get the lions share of the profits.

What is usually difficult to see are the facts beyond the hype, smoke and mirrors in a company’s pitch to draw new recruits into its business model.

So let’s take a look at the basic business model’s used in the last 30 years in most all network marketing companies.

Note that I am leaving the front end bonuses and matching bonus pools out of the income calculations for a reason.

The front end bonuses are what you get as you are actively sponsoring new people into your business. However, one of the most appealing ideas about a network marketing career is that you can build your organization so that you can leverage yourself, gaining more time in the long run (typically a 2 to 5 year plan) for yourself and your family. This is the dream of the 2 day work week. You want to retire some day!

And as for the bonus pools and matching bonuses, these are part of the smoke and mirrors, often extremely difficult for the average distributor to qualify!

Old-School Network Marketing Model
In this most common model, the company keeps 60% to 70% of the profits and the remaining 30% to 40% is retained for the distributors. The largest portion of this 30 to 40% is paid to the heavy hitters, which are among the top 2 to 5% of the company’s distributor base.

In this model, you will typically need 2,500 to 5,000 active team members (meaning on auto-ship) to have an income of $10,000 per month on the back end (residual) part of the pay plan, or 1200 to 2500 to reach $5000 per month.*

New-School Network Marketing Model
More recently founded companies have begun to split the profits more fairly with its distributor base, giving 50% of the profits to the distributors.  Still, most of this is reserved for the top heavy hitters of the company’s distributors.

You’d typically need 2,500 to 3,000 active team members to have an income of $10,000 per month on the back end, or 1200 to 1500 to reach $5000 per month. *

Next Generation Network Marketing Model
This is a much newer model, whereby a streamlined company affords its distributors 60% to 70% of the profits. This allows the average distributor to make more money, and a highly ethical company will not reserve 98% of that percentage to the top 2% of its distributors.

In this model, you’d typically need 400 to 1,500 active team members to have an income of $10,000 per month, or 250 to 725 to reach $5000 per month.*

* Earnings representations are examples. Individual earnings potential depends on a variety of factors including effort, marketing, abilities and time spent working.

Taking A Closer Look

Can a company really afford to pay the largest share of the profits to the distributors? The answer is most definitely Yes.

That is, provided the company consistently trims the “fat” in the budget. The more “fat” a company has, the less the company can put back into the distributors compensation plan. Some of the “fat” companies have (many of these may sound familiar) are:

• Private jets
• Lavish offices (maintenance alone is extremely costly!)
• Large number of salaried employees
• High-interest from outside funding sources
• Paid celebrity and national sports team endorsements
• Allegiance to stock holders vs the distributors
• Spending millions on convention props (including luxury buses for top distributors, etc)

Money spent on all of these things is what keeps most of it out of the hands of the distributors. Keep your eyes peeled for a company bragging about these things, or making income claims!

When sales increase in a non-streamlined company the overhead increases at the same rate.

As the sales increase in a streamlined company, the overhead should remain consistently low, allowing the extra profits to go directly in the distributor pay plan.

And the pay plan should reward the average distributor who is working part time, and be less heavily weighted for the top 2% of the distributor base who are heavy hitters.

Determine Your Driving Force

As a distributor in network marketing, your driving motivation requires you to want to make money.

The time you spend building this business is ultimately for a reason other than owning money, a reason that would ultimately allow you to use and enjoy that money.

It is for that reason, that need for freedom from financial debt and constraints that you need to get to your target income as soon as possible.

You do not want to have to work ten times harder to reach your desired goal if you don’t have to.

Most distributors take most of the first year getting educated, gaining confidence, and sponsoring their first few distributors.

It is usually after that first year that the momentum changes.

But if you find at that point that you are only 1/20 of the way there, and have to get another 1500 distributors into your team to reach your target income, this might be quite discouraging.

Many people give up at this point.

In order to avoid this pain, you want to be educated about a company before building a business with that company.

Even with great and wonderful products, these are things you can buy as a customer of those companies, the product should not be what determines your own business plan.

It is a given that any success in network marketing does depend on the highest quality products, but this should be in combination with the best possible compensation plan.

Once you reach your desired level of success you can buy any number of high quality products!

Smoke and Mirrors

You want to be able to see past the smoke and mirrors that make up the hype about a company’s compensation plan.

Let’s face it. Most of us never considered this before joining our first MLM company, or even the next few.

But if you are seriously considering building a long term residual income, one on which you really can retire, it behooves you to consider the company’s business model.

Although you have no control over the business model a given company uses, you do have control of deciding whether to work for that company or not.

And if you realize that there are people who can offer the next generation pay plan while you are offering one that would require a distributor to work ten times harder, wouldn’t you have difficulty competing for the sponsorship of that distributor?

So, if you want to build fast, and retire big, the first thing you want to do when considering a network marketing company is to find out which business model a network marketing company is using, and to what percentage of the distributors’ pay the heavy hitters are paid!

To Your Success!

Tags: choosing a network marketing company, how to determine network marketing company distributor payout, how to figure out true distributor compensation in MLM companies, MLM Business models

This entry was posted on Tuesday, April 20th, 2010 at 9:36 AM 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.