What I Look For When Evaluating A Network Marketing Compensation Plan

One of the most confusing subjects in MLM and network marketing is evaluating the compensation plan. It's a shame really. How in the world do you expect to make significant money as a distributor in your network marketing company if you don't even understand how you get paid and how you are compensated?

While you don't need to know every single detail of the compensation plan, you do need to know enough to figure out what you have to do in order to reach your income goals. Today, I'm going to go over the five different types of compensation plans available in network marketing as well as how to evaluate the compensation plan for any network marketing company you are considering participating in.

While no compensation plan is the same, I have found that most network marketing companies based their compensation plan on the following five systems:

1. The Stairstep breakaway compensation plan
2. The Unilevel compensation plan
3. The Binary compensation plan
4. The Forced Matrix compensation plan
5. The 1-Up or 2-Up compensation plan

In the stairstep breakaway compensation plan, there are different levels and positions in the company that you qualify for by meeting certain sales and/or recruiting requirements. Your income is based on the level you qualify for and the level your distributors qualify for. The higher your level the more money you make on your personal volume. The higher your level and the lower the level of all the distributors between you and the point of sale, the more money you make on your team's volume. Also, once you reach the higher levels and help distributors reach the higher levels, they "break away" from you, but you can still receive commission based on what are called "breakaway" bonuses up to a certain number of levels deep.

This plan, in my opinion is the best compensation plan for several reasons. It encourages you to keep selling and recruiting so that you can "stay ahead of your money." It encourages leaders to continue to work with the team regardless of depth because they can still make money off the team's efforts as long as they are higher than any other distributor at the point of sale.

There's only two downsides that I don't like about this compensation plan. If you recruit a very good distributor right away, that person is going to typically rise through the compensation plan at the same time and level as you are. As a result, they will continue to cut off your income at least until the both of you get to those breakaway levels. The second downside is that if you are in a company that is based on a product, this compensation plan encourages the practice of front-loading, where a distributor buys more product then he or she needs just to qualify for a certain level. This is one of the reasons why network marketing has a bad name. People buy more products than they need and the products sit on their shelves collecting dust.

In a unilevel compensation plan, you get paid a certain percentage based on where the sale takes place. So, for instance if a distributor is 3 levels below you, you get paid a certain percentage, which is different then what you would get paid if a distributor is let's say 5 levels below you. There is a limit on how many levels you get paid on.

One good thing about this plan is that if you get a superstar in one of the levels you are compensated on, you can earn a great income and they can never cut you off. The downside is that there is a limit on how many levels you get paid on. Therefore if your uni-level is 5 levels and you get a superstar on level 7, you make nothing. Also, if you have a lot of people who have stopped building the business, but they keep their minimum product requirement, but there are people several levels below them working the business, they now have nobody to work with them because the people getting paid aren't doing anything and the people that should be working with them aren't because they aren't getting paid.

In a binary compensation plan, you have two lines of sponsorship. Any additional distributors that you sponsor must be placed in either the left or the right line of sponsorship. Your income is based on BOTH lines of sponsorship reaching a certain amount of sales. So for example, if you get paid $100 for $1000 in sales volume, BOTH lines of sponsorship must reach the $1000 in order for you to get paid.

I personally hate binary plans. In my opinion, they are designed for one reason and one reason only. They are designed to attract a "heavy hitter" in the network marketing industry to come over to the company and bring their entire down line over to the new company. A heavy hitter can structure the move as such so that there is balance with the two legs and as such make a lot of money from a binary plan.

For the rest of us, understand that you are going to almost ALWAYS have one leg that far out producers the second leg. Regardless of what the strong leg is doing, you will only get paid up to the volume that the weak leg is producing. As a result, the weak leg is always going to hold back your income.

In a forced matrix compensation plan, like the unilevel you get paid a certain percentage based on where the sale takes place. However, unlike the unilevel, there are a certain limit of positions available in the matrix. You are forced to place the distributors that you recruit in one of the available spots opened in the matrix. So for example, if you have a 4 by 10 matrix, that means that there are a maximum of 4 lines of sponsorship and they go up to 10 levels deep. If you have already filled your 4 spots, the person you recruit goes to the next available spot. This allows you to potentially receive recruits from your upline.

The benefit with this plan is that if you get the right spillover and end up with a superstar from the efforts of your up-line, you can make a significant income from something that you didn't even do. This is one of the drawing points of this plan and also one of its weaknesses. Because of the potential of spillover, this also encourages people to "do nothing" hoping that they will receive some spillover from their up-line. Also, like the uni-level you only get paid up to a certain number of levels deep, so if you get a superstar that is too deep, you won't earn any income.

In a 1-up or 2-up compensation plan, you basically pass your first 1 or 2 sales up to the person that sponsored you into the business. Any additional sales made are yours to keep. When you recruit new distributors, they also must past their first 1 or 2 sales up to you before they qualify to keep the commissions generated from future sales.

I'm also not a big fan of this compensation plan either. You only get paid 1 or 2 levels depending on whether you are in a 1 up or a 2 up and you only receive this compensation until they meet their minimum requirements in order to start getting paid. So, unless you are recruiting a ton of people on a regular and consistent basis, you aren't going to really make a lot of passive income with this compensation plan, which kind of defeats the point of doing network marketing, in my opinion.

In addition to the five basic compensation plan types, network marketing companies typically pay their distributors for two activities. The first is product sales and the second is recruiting and training bonuses. Product sales are what you make when you or someone in your organization makes a sale of the product. Recruiting and training bonuses are what you make when you meet some type of recruiting or training requirement set by your parent company. For example, if you recruit 3 new distributors who each purchase a certain amount of product in your first 30 days, the company may pay you a recruiting bonus. If you help someone on your team perform the task, the company may pay you a training bonus.

So now that you understand how compensation plans typically work, how do you evaluate whether the compensation plan that you are involved in is a good compensation plan or not? Here are some things you want to consider...

1. How easy is it for you to make $500 to $1000 a month? This is actually what most people join network marketing to earn so the faster and easier your compensation plan allows this to happen, the more money you are going to make. This is because you will make this type of income and stick around and your distributors will make this type of income and stick around.

2. How much does the product cost and how much does it cost to get started as a distributor. The higher the cost, typically the more prospects you are going to have to talk to before you find someone interested in becoming a customer or distributor. Also, the less options you have available to market. This is because your marketing is going to have to be more targeted so that you don't waste time with people who don't have the budget for your product and/or for your business opportunity.

3. Is there competition for your product/service? Don't believe the hype when you are told there is no competition. There's ALWAYS competition. You need to find out who those competitors are, what they offer, what their price point is and how they can affect your business. The last thing you want is to sign up a bunch of competitors only to lose them because a competitor comes around with a similar product that cost less than your product.

Finally, I'll point out that this is what I look for and these are my personal preferences when evaluating a compensation plan.  That doesn't mean that everything I say here is absolute fact and should be reverenced like you would a holy book.  I know people who are not heavy hitters that do very well in binary plans, despite the fact that I don't like them.  I know people who do very well in 1ups or 2ups despite the fact that I don't like them.  So use this information to help you form your own philosophy on how to evaluate a network marketing compensation plan.

Roosevelt Cooper 631-615-4541

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