In Multi-Level Marketing (MLM) or Network Marketing Business, Consultants or Consultants, or independent contractors earn their income through a compensation plan based on their abilities and results. Compensation is how consultants are paid for their sales. There are generally two parts to the compensation, commission, and bonus.
The commission is the
amount earned when the Consultant, who has purchased the product at wholesale
from her/his company, sells the product at retail. Bonus is the amount(s) paid
on downline sales. There is normally more than one type of bonus.
A compensation plan should be developed after taking into consideration many factors. Do not copy a compensation plan ‘’a company that is really doing great’’ or by trying to write one from this article, which is for an explanation of the types of plans only. I advise, in the case of using someone else’s successful plan, you need to have been there from the beginning of that plan to see why it works. This is because many components go into making up a plan and circumstances change with time.
This article concentrates on the types of compensation plans used by most multi-Level companies. Except, of course, for those who use a hybrid or a mixture of several plans. Although both Direct Sales and Multi-Level use similar programs, they would emphasize different areas.
Commission: The Consultants is given a discount off the suggested retail price that becomes known as the wholesale cost or personal purchase volume (PPV) and is considered the commission.
Genealogy: Consultant (A) sponsors (B) who is placed on A’s first level (this can change in a matrix and in a Binary). When B sponsors (C) on their first level, this becomes A’s second level and when C sponsors his/her first level it becomes A’s third level and B’s second, etc. This group makes up a leg for A. When A sponsors a second person on their 1st level it begins the start of the second leg, third-person, 3rd leg, etc. All the people in all the legs are called A’s downline. All those same people are in A’s sponsor’s downline because A is the first level of his sponsor and begins one leg
Bonus Pool: This is the total sales of each person’s legs (downline). It is also called Group Bonus Value (GBV) or Group Purchase Volume (GPV). It is on this amount (which can also include personal sales) that the bonus or override is based.
- The amount of compensation paid on the sales of a consultant depends on the position of the sponsor and the sponsored person in the organization.
- All money is (must be) paid on the sales, never on recruiting.
- Although a consultant is paid on x number of levels in many compensation (comp) plans (e.g 5) when the Consultant makes a purchase his upline, x number of levels (e.g., 6 levels), makes a bonus on the amount of his purchase.
Bonus Value: When a
company has a various product line that does not have the same amount of mark
up, the company may establish a bonus value (BV) or product value (PV) for the
product. The Consultant is paid his bonus on either BV or PV. Take of note
this; because it can make a difference in what consultants will make and in
many cases is necessary for the company to introduce new products and compete
in the industry.
Discount: Most comp
plans offer a discount of 25/30% off retail and then pay out a total of 40% to
60% of wholesale.
- Most comp plans require a certain amount of personal purchase volume (the Consultant should have personally sold some of that or more) per month to collect the bonus.
- Most comp plans pay bonuses on the wholesale amount not retail.
- Taxes are paid on products according to the state in which the product is sold. No commission is paid on the taxes or handling charges, such as shipping.
Let us now look at the Four Compensation Plan in Most Use in MLM or Network Marketing Business
- Uni-Level
- Matrix
- Australian X-Up
- Binary
Uni-Level
This is an MLM compensation that has a fixed limited depth
of consultants but with unlimited width. The depth is decided according to the
compensation plan of the MLM company. There would also be no spillover in this
case, unlike other MLM plans. The main goal of the plan is to recruit as many
members as possible and line them evenly. Each consultant recruits new members
in the front line, introducing them at any width.
This is how it works: Everyone Consultant A sponsors goes on
his/her first level (see the figure below) and A can sponsor as many as he/she
wishes -unlimited width. The ellipsis shows unlimited width.
When B, C, D, E, F, etc. sponsor consultants on their first
levels, these become A’s second level, see the figure below.
As explained earlier consultants B, C, D, E, F, etc., form different legs of A. All the recruits of each of the legs of B, C, D, E, F, etc. will form the third level of A. The third level for A will be created when the people in the second level recruit other people. The genealogy continues in this manner but the number of levels (i.e., the depth) is set by the MLM company. The commission is normally paid up to the last depth that has been decided by the company. After that level, no commission will be paid to that person, whose level has reached the limit. In the example above, the company has decided that they will pay up to 5 levels; consultant A will not get a commission from the recruits of the consultants in level 5. Generally, companies have compensation plans that run 5 and 7 levels deep. Some other companies can run anywhere between 4 and 10 levels deep.
Companies who want to follow a simple compensation plan choose a uni-level compensation plan. There are no complications like spillover or other criteria, basically, the plan is simple to explain- in other words, the opportunity is easier to explain and sell to new recruits.
Matrix
The matrix (Sometimes called Forced Matrix or Fixed Matrix) MLM
plan is defined as a compensation plan with fixed width and depth. The distinct
feature of a matrix plan is its limited width. The matrix restricts the number
of consultants you can sponsor on your first level, usually to less than five.
The most used matrix MLM plans are 2×2, 3x3, 4×7, 5×7, 3×9, and 2×12.
This type of plan usually provides quick growth and some quick depth for Companies and Consultants. The Matrix plan includes many of the characteristics of Uni-Level except that it always has a fixed number of people on the 1st level and pays a bonus for a fixed number of levels in multiples of that fixed first level number. For example, in a 3×3 Matrix, each Consultant would have 3 people on the first level, 9 on the 2nd level, and 27 on the 3rd. Like Uni-Level, the Matrix can go down as many levels as there is money to payout. Again, for those who like the Matrix plan, there are lots of possibilities for variation.
Let’s explain the plan using an example.
Consider a 3x2 matrix plan, where 3 represents the width, and 2
represents depth or height. These two elements stay fixed (width and depth). A
3x2 matrix tree will look like,
Here the width (3) is the maximum number of consultants addable
on a level. Once the 3 members add up in a matrix tree, the first level is
literally completed. The next joining members are placed at the next level (2nd
level). So, on the first level, there are only three members.
The process of adding consultants to the next levels (level
2,3,4, etc.) after filling the first level is known as spillover. There are
certain spillover preferences and MLM companies follow them as per their
business strategy.
Consultants are forced to add them in the second or deeper
levels as there is a limit in width. That is why a matrix plan is also known as
a ‘forced matrix plan’. Unlike the Uni-level tree where the width is unlimited,
the matrix will have a width limit.
Australian
X-Up
This plan looks exactly like a Uni-level compensation plan,
but it comes with an extra ‘X’. The extra element X has a value, which could be
1,2,3 etc., hence you could have Australian One-up, Two-Up, or Three-Up, or
X-Up, or any distinction of ups.
For example, for the Australian
2-up plan. The sales volume of the first two direct downlines will be
transferred to the direct upline. It is called “pass up” sales, in other words,
you pass up sales to your upline.
In general, in the original Australian X-Up, the consultant
would pass up the first X sales to their upline. After passing up the first X
sales, the consultant would collect their commissions on the upcoming sales.
The Australian X-Up is always associated with a one-time sale, so there are no
residuals.
- The binary MLM compensation plan is the most popular network marketing plan with rapid growth opportunities. This plan is defined as a compensation plan that consists of two legs (left & right) subtrees under every distributor.
- When the subtrees are added, a binary tree is formed. New members joining after them are spilled over to the downlines or next business level.
- This process continues to unlimited levels or depths. The plan is easy to understand which helps consultants attract more people to the network. Thus, the recruitment or sales increase which also improves growth and business opportunities.
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