Do you breathe? How often? What is your requirement for breathing?
Just as silly and obvious as these questions may sound yet how important the process is to the survival of humans, the relationship of MLM plans to network marketing business also holds a similar tone. MLM compensation plans breathe life into multilevel marketing businesses.
Breathing is a process that streamlines the pulse and beat of your body. Even a slight variation in the patterns will have its own implications on your overall health. Likewise, MLM compensation plans determine the health of an MLM business and that’s the major reason why MLM companies invest so much of their time, effort, and capital in devising a flawless compensation plan.
And with so much hullabaloo about MLM compensation plans, let’s dive deeper into understanding the basics of it.
MLM compensation plan - The definition
Simply put, an MLM compensation plan describes the process by which MLM companies pay their independent salesforce aka distributors for the sales they have personally made and the sales of distributors they have enrolled into the system.
In a broader outlook, MLM compensation plans are what keeps MLM businesses alive and kicking. They reflect an organization’s culture, values, and ethics. Effective compensation plans recognize, reward, and incentivize distributors perfectly.
It can be defined as a sturdy business structure with bonuses, commissions, revenue and profitability markings. Structured on pure mathematics, an MLM compensation plan with even a hairline flaw can break the business.
One big advantage of an MLM plan is that you get to know it better when your business progresses and you can make alterations to suit your business stability. However, this advantage is a must-do for maintaining the strength of your network marketing business.
How do MLM plans work?
Different compensations work differently. Their commission structure and bonuses vary. Major compensation plans pay distributors for the personal sales volume and for the sales made by their downlines. Some compensation plans also pay commissions up to certain downline levels.
Types of MLM Compensation Plans
Multilevel marketing is vibrant with a wide variety of compensation plans to its credit. There are 3 types of major compensation plans—Binary, Unilevel and Matrix. Rest are hybrid versions of these plans. Each has its own unique characteristics and MLM organizations choose to decide which plan to employ based on their business interests. This decision is also dependent on various factors such as product pricing, the cost to customer ratio, organizational goals, etc.
Binary MLM plan
Often called the ‘two-legged’ plan, Binary is one of the most popular compensation plans in MLM. It limits the number of downlines to two i.e. one can only add two people under them as distributors. These two downlines are placed on the left and right sides called the right and left leg consecutively.
The payment in Binary MLM plan is mostly based on the sales volume rather than sales levels. It is calculated based on the weaker leg sales, also called the ‘pay leg’. This improves teamwork and collaboration. The simple structure is also easy to understand making it the most suited plan in MLM businesses. The highlight of the plan, as cited by its proponents, is its weekly commission payouts as they don’t have to wait for a month to enjoy the benefits of their hard work.
Binary MLM plan takes into consideration the group volume rather than the percentage of sales of multiple distributor levels making it less susceptible to penalization charges on recruiting. Businesses looking for rapid expansion choose a Binary plan but for it to grow stronger requires distributors who are good at teamwork.
Unilevel MLM plan
Unilevel MLM plan goes by its name with only a single level of frontline distributors under each sponsor. There is no position advancement in the Unilevel plan regardless of their performance. All the distributors of a single sponsor stay right under them.
Unlike in the Binary compensation plan, commission payment rests on factors such as level and the hierarchy of each distributor. Compensation also depends on the profit percentage. MLM companies decide the number of levels in which the commissions are paid and the commission percentage varies for various levels. The plan boosts individual performance with higher commission payouts ensuring ways to effective distributor engagement.
Every compensation plan has a Unilevel structure, hence it is also called a ‘Universal plan’. Unilevel plan also supports businesses of all sizes.
Matrix MLM plan
Matrix MLM plan is identified as a sturdy structure with limited width and depth. This allows only a limited number of distributors at each level. For eg: A 3*3 matrix allows 3 distributors in width up to 3 downline levels as shown in the image above. This width limitation doesn’t let all downlines be directly under the sponsor. Sponsors are forced to place their downlines under other previously placed downlines earning the plan its name, ‘forced matrix plan’. Matrix MLM plan also allows distributors to join in a new position in the tree once they fulfill the set criteria. This increases their scope of earning more commissions.
Limited width is however good for novice distributors who sign in with influential leaders who help them fill their grid easily. This could also lead to inactive distributors. It turns out that Matrix MLM compensation plan is good for companies too. The limited plan structure gives companies more control over payout volumes.
However, Matrix MLM plan unveils unlimited earning opportunities in a limited income position.
Stairstep Breakaway MLM plan
The Stairstep breakaway plan is primarily rank-based. The distributor on achieving a specific rank breaks away from his/her downline team and gets a new top position below the admin. This distributor then forms a new group of distributors under the admin.
Stairstep breakaway plan is driven by sales volume and performance making distributors adept in the business. One disadvantage that could be cited is that with an increase in focus on achieving specific ranks, focus on the downline is lost.
The Stairstep plan is also called “plan within a plan” because most popular MLM plans such as binary, matrix, unilevel, etc integrate the breakaway plan to accelerate the benefits.
Board MLM plan
Board MLM plan is basically a Matrix plan with a tight restriction on the number of downlines. Elaborating a bit further, in a Board plan a distributor after achieving specific set criteria, mostly a rank or number of downlines, is placed on top of a new board.
Board plan is also called ‘recycling matrix plan’ as the position of the distributor is recycled to a new position in a new board.
Generation MLM plan
Generation MLM plan comprises of different levels called generations. Both distributors and customers are added as downlines in the Generation genealogy tree. The Generation compensation plan looks similar to a Unilevel plan but with different generations of customers and distributors.
Generation MLM plan, being completely product-focused, is leveraged by ecommerce businesses to increase their sales performance.
Monoline MLM plan
Monoline MLM plan has the simplest structure among all other MLM plans. It has only one leg and the downlines are placed vertically based on a first-come-first-serve basis. This single-line structure helps distributors fill up their downlines, easy and fast, without the need for any mandatory spaces to fill up.
Monoline compensation plan pays you for the sales of your downlines up to unlimited levels or as set by the companies.
Hybrid MLM plan
Hybrid MLM plans just as the name suggests, blend in two conventional compensation plans combining the positives of both plans. Hybrid compensation plans are developed based on a company’s goals and values. They opt-in for a specific plan’s genealogy structure and another plan’s payout structure or combine the payout structures of two plans with a single plan’s genealogy structure.
For example, if an MLM business is erected on a Unilevel plan genealogy structure, in due course it might adopt Binary plan’s payout structure to suit the business course. Binary breakaway, Unilevel breakaway, Matrix board, Binary board, etc are examples of a Hybrid MLM plan.
Comparison of the most popular MLM plans
Diversity in MLM plans has its own advantages and disadvantages. Gaining an in-depth understanding will help you differentiate specific compensation plans from the others, making it easier for you to choose the right one that fits your business.
Comparison of Unilevel plan vs. Binary plan
Unilevel vs. Binary
|Single level with unlimited frontline distributors||Only two frontline distributors allowed|
|Monthly/weekly payout||Mostly Weekly payout|
|Pays till specific depth||Pays till unlimited depth|
|No downline matching||Downline matching creates a balance|
|Encourages individual efforts||Encourages teamwork|
Comparison of Matrix plan vs. Binary plan
Matrix vs. Binary
|Limited depth||Unlimited depth|
|No multiple business center option||Multiple business center is possible|
|Width is configurable||Width is always limited to two legs|
|Commission is limited upto a certain depth||Commission is paid up to unlimited depth|
|Rejoining in a new position is possible||Rejoining is not possible|
|Sales volume is not carried forward||Extra sales volume is carried forward to the next commission cycle saving the efforts of the distributors.|
Comparison of Binary plan vs. Generation plan
Binary vs Generation
|Allows only two frontline distributors as right and left leg||No restriction on width or depth|
|MLM compensation calculation is easier||Comparatively difficult compensation calculation process as the generations include both distributors and customers|
|Downlines of a single sponsor cannot be placed directly under him||Sponsor can place all his downlines directly under him|
How do I create an MLM compensation plan?
MLM compensation plan is a complex structure that needs to be thoroughly researched and understood before stepping out to set it up. It is not a one-time process, it requires consistent ongoing focus. The factors that compound an MLM plan are the same that determine the longevity of your MLM business.
Let’s analyze the most common factors that need to be considered while developing a flawless MLM compensation plan.
8 important factors to consider while creating an MLM plan
1. Product pricing
The pricing of your products is very much dependant on your MLM plan. Pricing it wisely can help you maintain your payout standard. Basically, a product has two prices—wholesale and retail. Distributors pay wholesale prices and sell the products to the customers at a retail price. The difference between the prices is taken as profit. This normally happens in a Party Plan MLM business model. Network marketing, however, considers one of these prices as the base price upon which their compensation criteria are built.
2. Total payout
The sustenance of an MLM company is attributed to the payout standard. If the payout hits the higher side the company is not going to survive long and if the payout goes below average it will become difficult for the distributors to bring in more people. Generally, an acceptable percentage of payout in the MLM industry is 40-45%. Fixing your payout cappings is crucial to the stability of your compensation structure.
While setting personal volume as a criteria for commission payment, consider the personal sales volume of your distributors rather than the personal purchase volume to avoid getting penalized for ‘inventory loading’.
3. Payout distribution
Making sure the right person receives the right amount of commission. This not only increases trust but also helps in long-term retention of distributors. The compensation plan has to be structured in a way that it serves commission to all the members in the genealogy structure based on their efforts. Most of the conventional plans need to be hybridized to serve the effect.
4. Consider your business goals
All MLM compensation plans are influenced by organizational structure and goals. Make sure your compensation always pays out for sales not for recruiting. So, while devising a compensation plan and deciding on the payout structure, you must consider one or all of the below points.
- Types of products you offer
- Trends in the industry
- Your business’s mission, vision, and values
- How considerate are you for your distributors?—the incentives and training sessions you will offer
- Your cost-to-customer ratio
- How big are you planning?—national or international?
5. Plan on your capital
If not to a million distributors, have a sturdy plan at least for those few in hand. Analyze how well you utilize your capital right now. Take into account the cost of goods you would require, supply chain and inventory costs, customer acquisition costs, etc. to plan well ahead of the earning curve. This way you can see what is coming your way and can make necessary adjustments to the compensation plan.
6. Deliver value to your customers
Apparently, delivering value should be the prime focus of your business. Happy customers are the propagators of your success. How long you keep them happy decides how long your success will thrive. Train your distributors not to sell products but to address the demands of your customers. Also, distributors should be perfectly incentivized to motivate them to serve your customers better. An effective compensation plan can do that just right.
7. Optimize your compensation plan
Review your compensation plan every now and then to identify potential gaps that could damage your business. Optimizing your compensation through upgrading or integrating new plans or plan strategies can accelerate your business output.
Watching out on your compression strategies is also a good go in keeping your plan steady. Compressions skip inactive or ineligible representatives from the payout cycle benefitting the distributors above them. While compression acts as an advantage for active distributors, it might devoid inactive distributors of their upline support. So, while employing compression in your MLM plan, do it strategically.
8. Keep it simple; keep it active
Start with a simple plan and payout standard. And then, when your business progresses you can mold your plan to suit your business. Success is not in its complexity but in the understanding of it. So, do your research!
A compensation plan is what drives sales, distributor engagement and retention, and ultimately your profits. Keep your business process lively with a compensation plan that stirs activity among your distributors. Introduce simple yet effective achievement criteria for bonuses, ranks, and level commissions. Realistic goals not only motivates but accelerates your distributor productivity.
Which is the best MLM compensation plan?
Each plan has its own strengths and weaknesses yet each is unique in the way it drives success to your business. You cannot give ‘the best MLM compensation plan’ a name, it depends on your business idea and profitability interests. However, the most popular among the compensation plans are Unilevel, Binary and Matrix.
Molding it perfectly to suit your business makes it the best compensation plan for your MLM business.
How to analyze an MLM compensation plan?
Before you adopt or readapt a compensation plan, you need to look into a few things before you get off on the wrong foot.
- Make sure the compensation balances both customers and distributors equally.
- A good compensation structure provides growth opportunities and rewards in the right amounts for distributors thus engaging them in the long term.
- Understand the overall payout percentage; if calculations are not your cup of tea, consult with a professional consultant.
- A compensation plan that is overly generous can collapse early.
- Watch out for the compression strategy of the compensation plan.
- A plan with a lock-in feature wherein a distributor who reached a certain level cannot be demoted because of a sudden drop in performance keeps their achievements safe.
MLM Compensation Plans - Epixel’s take
Epixel MLM Platform has its own unique way of crafting compensations that would benefit the company as well as its customers. Before we build, we analyze the business idea in greater detail and then develop a compensation that meets our customers’ requirements. As the company grows, we watch over and remold the compensation to balance the requirements of our customers’ expanding businesses.
All things considered,
An MLM plan serves as the foundation on which successful MLM businesses are built. Care has to be taken in minute detail coupled with ample research of your market, sales target and customers, to develop a plan without flaws. Remember, your compensation plan is your business’s terms and conditions by which you pay your distributors. Paying too much can upset your business and paying too little can upset your salesforce. Setting the right balance is the best of both worlds.
Build your plan perfectly and watch it build your business.