What Is The Best MLM Compensation Plan
Every multi-level marketing (MLM) company relies on its compensation plan to motivate, recognize, and reward its field sales representatives. But MLM compensation plans are not “plug and play.” Every MLM company needs to do its homework to build the best compensation plan to fit its products, genealogy, and strategic goals.
Determining the right compensation plan is one of the most important decisions an MLM leader makes. Design and build the right plan, and you’re able to incentivize and reward the hard-working field representatives who can make or break your business. Design and build a plan that pays too much or too little – or is too complex to explain – and you’ll see the impact almost immediately on your company’s bottom line.
Your MLM’s compensation plan best defines the terms and conditions for how representatives will earn income, as commission on direct sales or as an override bonus earned on downline product sales. An effective direct-selling compensation plan takes the pricing structure for the products and services being sold into account, as well as the selling behaviors your company wants to motivate and reward. The resulting plan is a delicate balance that works for both your sales representatives and your business.
Finding the MLM compensation balance
All MLM compensation plans are based on the company’s genealogy structure. Today, most MLMs craft a hybrid solution, with payouts based on both a placement genealogy and a sponsorship genealogy. The first step in building a balanced, effective plan is understanding the five most common types of payout options.
Types of Compensation Plans
1. Breakaway Plans
Stairstep Breakaway compensation plans – also known as Breakaway plans – were created by the earliest MLM companies. As direct-selling representatives achieve defined personal and group volumes, they “break away” from their downline and start their own lines. Today, along with being somewhat difficult to explain to newly recruited representatives, Breakaway plans can cause representatives to be self-focused until they reach the breakaway rank. At that point, they often find it hard to change their approach to focus on the downline’s success to achieve higher ranks and earn leadership rewards.
2. Unilevel Plans
In contrast, Unilevel compensation plans keep things simple by typically using just one genealogy to pay. Representatives can sponsor as many people on their frontline as they want, but Unilevel plans limit the downline’s depth. For example, a Unilevel compensation plan might pay a 5 percent commission per level, up to seven levels.
3. Binary Plans
Binary compensation plans are built around only two downlines. The frontline is limited to just two other representatives, with all other sales representatives placed in tiers below the frontline. The result is a “two-leg” downline made up of two-representative-per-level tiers, with no limits on the depth of the downlines. Representatives are paid based on the volume in each of the legs rather than a percentage of the sales for multiple levels. This means a representative will earn commissions only from the lesser earning leg, known as the “pay leg.” To optimize their earnings, representatives must work as a team across the two downline legs.
4. Hybrid Plans
Today, many MLM companies opt for a hybrid plan, combining elements of different plans to better align with their objectives and goals. One example is a combination of Binary and Unilevel plans, with Binary payouts for initial sales volumes and Unilevel payouts for ongoing sales volume.
5. Matrix Plans
Matrix plans offer MLM companies more control over payout volumes by ensuring a fixed width and depth. For example, in a 3-by-9 matrix, each level is made up of three representatives, up to nine levels. This limits the number of people representatives can earn on and encourages representatives to strategize on the placement of personally sponsored reps in order to achieve the maximum payout and downline growth. With Matrix plans, successful representatives have a broader view of the organization, which calls for greater involvement while offering the potential for much greater rewards.
MLM compensation essentials
Designing a compensation plan to fit your organization isn’t a once-and-done exercise. The implementation and execution of your payout structures take ongoing focus. Adapting and evolving your comp plan is vital. As your organization grows and changes, you’ll need to be diligent to ensure your compensation plan is keeping up.
The basic plan types described above each have strengths and weaknesses. As a result, many MLMs use one of the primary plans as a foundation and incorporate other commission types into the structure to help accelerate growth. And, while each direct-selling organization must tailor its compensation program to fit the company’s objectives, the best MLM compensation plans share a few essential attributes.
Focus on customer sales
For MLMs, retail sales to customers who do not participate in the business are critical for both growth and compliance. When most sales are to the company’s field representatives rather than retail customers, the company is subject to FTC scrutiny and action.
Achieving the right amount of retail sales begins when you develop your product and services. First, do research to ensure you’re creating products that fill a gap and meet a need in the marketplace. Then, make sure you will be able to charge prices that retail customers are willing to pay while also covering your operating costs – including representative compensation. A little market research upfront helps to understand the opportunity and ensure there’s enough demand to achieve your growth objectives and enable representatives to build successful businesses.
Finally, build incentives into your compensation plan’s qualifications for higher level bonuses and ranks that encourage and reward representatives who create and nurture a healthy retail customer base.
Provide opportunities for ranks and recognition
Commission dollars and cents consume much of the attention when designing a compensation plan. However, the best mlm compensation plans are not only about the money. Recognition for achievements within the organization is also highly motivating. Build in opportunities for representatives to attain defined ranks within the organization that come with a new title as well as compensation.
As you set the criteria for different ranks, make sure they align with your company’s long-term goals, such as recruiting more reps, selling certain products, or increasing retail sales. Ranks or bonuses can also be used to reward representatives who actively support their recruits and remain active in both their own business and their personally sponsored business.
Ranks or recognition must blend motivation with a realistic stretch goal for a significant portion of your field representatives. When the parameters to reach a rank are too difficult, it can have a demotivating effect. But, if you make titles or recognition too easy to accomplish, you wind up rewarding nearly everyone, which dilutes the power of the recognition and can make retaining high-performing representatives more difficult.
Incorporate compression wisely
Compression within an MLM compensation plan bypasses ineligible or inactive representatives when determining rank qualifications or compensation in order to reward active representatives. There are two primary types of compression in MLM compensation – standard and dynamic. When standard compression is applied, an upline representative is paid as if the inactive representatives were not present in the genealogy. Dynamic compression excludes both inactive and ineligible representatives from the payout.
MLMs must use compression strategically. Over-use of compression can end up discouraging representatives from working together or disincentivizing the recruitment of additional representatives. The advantage of compression is that it allows representatives to get paid deeper into their organizations. It is best used to avoid punishing a representative with a reduced payout when a few people in the downline fail to meet payout requirements or have gone inactive during the period.
Add activity requirements
The right actions done consistently drive sales results. That’s why building in activity requirements to reward desired behaviors that lead to increased retail sales, representative retention, and company profits are an essential element in the best MLM compensation plans. For example, define the minimum amount of personal sales volume over a rolling period of time that’s required for representatives to maintain active status. Personal sales volume is the total sales volume from the representative’s personal orders and the orders placed by customers sponsored by a representative. Make sure your requirements don’t mistake personal sales volume for personal.
Learn more at ByDesign.com or contact us to schedule a direct sales compensation plan demo.
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