M-L-M Compensation Plans

Compensation plans in network marketing / MLM vary from one company to the next; they are at best difficult to understand it is up to you to ask questions when evaluating any company's pay plan. Some are front end loaded or they maybe back end loaded. As a general rule of thumb anytime you see a payout of more then 60% be suspect.

Types of compensation plans within multi-level-marketing; an overview of how various kinds of compensation plans work:
MATRIX PLANS--most MLM companies use some kind of matrix-based compensation plan; a system where you sign up some people one level below yourself; and those people sign up more people on the next level, and so forth (7 levels seems to be the average depth of matrix based plans).

Typically, you will get a commission on the "purchases" made by everyone who ends up within some fixed number of levels from you. For example, you may get a commission of 5% on sales generated by everyone who ends up in your first 7 levels. (Many systems pay different percentages on different levels-- company may pay 3% commission on purchases made by people in your first and second level, but 7% on the sales from the third level.)

Your basic model of a matrix plan would be the classic "8-ball" model which contains a total of 15 members. The triangular setup in the billiard game of eight-ball corresponds to an arithmetic progression 1 + 2 + 3 + 4 + 5 = 15. The pyramid scheme, in contrast, is a geometric progression 1 + 2 + 4 + 8 = 15. In The 8-Ball Model, the person recruiting does not get paid at all until they have recruited 3 levels worth of new members. When the 8 are recruited, Person A receives the "participation fee" for all 8 people of level 4.

UNILEVEL PLANS--In a unilevel system, you can sign up as many people you want on your first level, and everyone under you is free to do the same. This type of plan is often considered the simplest of compensation plans. Commissions are paid primarily based on the number of levels a recipient is from the original representative who is purchasing the product. Commissions are not based on title or rank achieved. By qualifying with a minimum sales requirement, representatives earn unlimited commissions on a limited number of levels of downline recruited representatives.

FORCED MATRIX SCHEMES--The matrix is different amongst the pyramid schemes. A matrix is a pay plan that is fairly easy to explain to those you want to get involved with it. Why? Because it simply is a matter of getting a certain number of people on your first level downline, and duplicating that a certain number of levels beneath you and them.

If you're in a four by seven matrix, for example, what that means is you will have people placed under you as they are sponsored into your distributorship until you have four on your frontline directly beneath you. Once this line is filled the next level will be filled, again, four wide, until you eventually have all seven levels filled with a grand total of 28 people in your organization. Once you have your required number of people in your matrix it is considered 'filled' and you either start over on your eighth level with a new matrix or you just let your organization grow.

One Advantage of a Forced Matrix is Spillover. Spillover occurs when you sponsor more people then can fit on your first level.

BINARY PLANS--a multi-level marketing compensation plan which allows distributors to have only two, level one, downline distributors. If a distributor sponsors more than two distributors, the excess are placed at levels below the sponsoring distributor's level one downline.

What to watch for within a binary payment plan: Most of the companies that use this type of program, generally pay you on the weaker leg in the binary. Your legs may be unbalanced causing you to have to keep a close watch on both legs.

BREAKAWAYS--once someone achieves a certain level of success, they "break away" and form their own group. This type of plan is characterized as having distributors who are responsible for both personal and group sales volumes. Once a predefined personal and/or group volumes are achieved, a distributor moves up a commission level. This continues until the distributor's sales volume reaches the top commission level and "breaks away" from their upline.

Pro and Con: assuming you meet certain qualifications, you are generally eligible for an override, an additional bonus based on the volume of that breakaway group; that group may well contain people who would have fallen more than seven levels away from you, so you are now getting something from people who before would have not generated any income for you. The downside is that you no longer get full commissions on that person, or those in their group who had fallen within your first seven levels. It is very important not to get sucked into graphs and numbers brought out and displayed for you.

Enter the,,,

INFINITY BONUSES--a system where a distributor can benefit from sales made more than seven levels away. Instead of stopping after a certain number of levels, this bonus continues through "infinite" levels UNTIL the system finds someone else who has met that qualification.

AUSTRALIAN "TWO-UP" PLANS--are likened to RECRUITING GAMES; the '2up' part of the name is what is at the heart of Aussie 2up pay plan. This refers to a structure where the first two people you recruit are "given" to your sponsor, all the rest of the people you recruit are yours. Each person you recruit will in turn give you the first two people they recruit, keeping the rest for themselves.

For every person brought into Aussie2up, by your first level downline, that joins from any of these people they immediately go up to you and you make the "bonus" off of them. BUT this only applies to the first two people that any of these people bring into the deal. Only the first two people move up to you. That's how it got the name '2up'. Two move up... to you.

Let's say you bring in five people into 2up and each of them bring in five. You only get the first two of each of these people's five that they brought into the deal. Essentially, you'd get ten of these 25 people moving up to your first level. Not only do you not get "bonus" from you initial five recruits, you lose 15 recruits from you second level as well.

Graphically, this does not create a matrix, but only something that resembles a first level downline. The downline keeps growing, as you recruit new people, and as they people you recruit give you their first two recruits.

HYBRID PLANS--Are compensation plans that are constructed using elements of more than one type of compensation plan.

Other incentives found with MLM payment plans:
Fast Start Bonus--it is used as an extra incentive to sponsor more people. The Fast Start Bonus is Typically a Lump sum payment of up to 100% of the First Months Membership for anyone you sponsor.

Sponsor Bonus--often used with a Forced Matrix; it is usually a Monthly Recurring Bonus and is paid each month on everyone you personally Sponsor.

Hopefully this bit of information is helpful if/when it comes time to evaluate offers that come your way. I know in my case it has prevented me from jumping the gun, and allowed me to look at offers in a better light.

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Please note that a majority of the information posted came from the following articles MLM Compensation Plans by Scott Harris, www.mlm-thetruth.com --Various Types of Pyramid Schemes, 7 Different MLM Compensation Types Explained By Mike Makler.

Altho the idea behind this post is mine the the information belongs to others that have spent numerous months and years in researching the topic. I appologize for not doing a better job citing the works used.

Multi-Level-Marketing

Definition, what is, Multi-Level-Marketing:

Multi-level marketing (MLM/network marketing/matrix marketing) is a marketing structure used by businesses where a sales force is created by compensating promoter(s) [distributor(s) or any number of terms used] of company products not only for sales generated personally, but also for the sales of other promoters they introduced to the company, creating a down-line of distributors and a hierarchy of multiple levels of compensation.

Distributors represent the company that produces the products or provides the services they sell. They are awarded a commission based upon the volume of product sold through their own sales efforts as well as that of their down-line organization. One of the draws or hook to MLM, distributors can buy wholesale, sell retail, and recruit other distributors who can do the same.

This arrangement is similar to franchise arrangement--commissions are paid to distributors according to the company’s compensation plan; individuals can be at multiple levels of the structure receiving royalties from a single person's sales.

If a plan offers to pay commissions for recruiting new distributors, watch out! This is pyramiding, a multilevel marketing plan should only pay commissions for retail sales of goods or services, not for recruiting new distributors. Pyramid schemes are defined as plans which concentrate on commissions earned for recruiting new distributors and which generally ignore the marketing and selling of products and services.

MLM businesses are legal; also known as "affiliate marketing". However, many pyramid schemes try to present themselves as legitimate MLM businesses. [Pyramiding is illegal in most states, to remain legitimate a company that uses multi-level marketing has to make sure commissions are earned only on sales of the company's products or services if they cross state boundaries. With pyramiding money is received from new recruits, or they are required to buy more product than they are likely to sell.]

Another key to legality of MLMs is the 70% rule--prevents members from "inventory loading" in order to qualify for additional bonuses. The 70% rule requires participants to sell 70% of previously purchased inventory before placing new orders with the company. In most cases distributors may be asked to pay for their own training and marketing materials, or to buy a significant amount of inventory; hence, the 70% rule. As for the FTC, are the revenues generated from purchases incidental to the right to participate?

Criticism of MLMs:

When one looks at MLM, it has to be remembered where it all began. What started it all?

The most prominent case concerning MLMs, In re Amway Corp., 93 F.T.C. (1979), determined that multi-level-marketing was not an illegal activity. [Amway was found guilty of price fixing.] The roots of multi-level-marketing are intertwined with those of the Amway Corporation and its Nutrilite product line; the concept originated during the early 1930s. First ran afoul of the law in 1947: FDA accused Lee S. Mytinger and William S. Casselberry of misbranding. Potential customers were being given a booklet, "How to Get Well and Stay Well" which claimed the Nutrilite product line as a cure all for what ever ails you. (A 1951 Court case permanently forbid anyone who sold Nutrilite products from referring to any of the booklet.) Some time in the 1950's Rich DeVos and Jay Van Andel formed a new company, the American Way Association, later renamed Amway.

Two points form from the FTC:

• multi-level marketing organizations with greater incentives for recruitment than product sales are to be viewed skeptically
• the practice of getting commissions from recruiting new members is outlawed in most states as "pyramiding"

Some argue that some MLMs engage in cult like behavior, or are rife with unethical behavior.

MLM's are also criticized for being unable to fulfill their promises for the majority of participants, the success rate for breaking even or even making money are far worse than other types of businesses.

From the US Postal Inspection Service:

Fraudulent pyramid schemes typically violate the Postal Lottery Statute (Title 18, United States Code, Section 1302). They contain all three elements of a lottery: prize (expectation of monetary or other gain from participation in the pyramid); chance (the monetary return you may receive from your participation is entirely up to chance, that is, dependent on the efforts of those below you in the pyramid), and consideration (the fee you pay to become a distributor).

Seven tips from the FTC when deciding on a MLM:

1. Avoid plans that includes commissions for recruiting additional distributors
2. Beware of plans that ask new distributors to purchase expensive inventory
3. Use caution if the plan(s) claim you will make money through continued growth of your "down-line"
4. Beware of plans that claim to sell miracle products or promise enormous earnings
5. Beware "decoy" references paid by a plan's promoter to describe their fictional success in earning money through the plan
6. Don't pay or sign any contracts insist on taking your time to think over a decision to join
7. Do your homework! Check with your local Better Business Bureau and state Attorney General about any plan you're considering

Some online resources, in other words use common sense:

12 Tests for Evaluating a Network Marketing (MLM) 'Opportunity'

• THE OPPORTUNITY TEST--Were you approached primarily on the basis of the actual value and need for the products or for the opportunity? Keywords to watch for "getting in on the ground floor," or "riding the wave" of opportunity.
• THE MARKET REALITY TEST--MLM recruiters point to the huge growth potential of their programs without considering the normal dynamics of supply and demand. Key point: Is an up-line of five or more levels of distributors allowed; market saturation.
• THE PRODUCT TEST--could the products be sold successfully on their own merits without going through a MLM distribution system? Is the focus on legitimate products of value to consumers? Are the products priced competitively? And other things.
• THE COMPENSATION TEST--Can you as a distributor make a good income for the time you spend selling the products without recruiting a single person? Or is the commission paid by the company for selling the products so low that you have to recruit a down-line in order to earn a significant income?
• THE INCOME DISCLOSURE TEST--If an MLM recruiter touts huge income figures of top distributors, request that the company disclose average payout to distributors by percentiles (highest 1%, second highest 1%, and so on to the lowest 1%), so that you can determine your chances of success. (Another acid test of the profitability of an MLM distributorship is to ask the person recruiting you to show you his/her last year’s tax return.)
• THE PAY TO PLAY TEST--Find out how high the expectation is for you to purchase products, services, training, etc., over a period of time, in order to be a serious participant. In other words, what will it cost you to play the game?
• THE PRICE TEST--Are the company’s wholesale prices low enough to allow a respectable profit? Or are retail prices so high that they must be sold at wholesale to achieve any volume?
• THE GOLDEN RULE TEST--How did you feel about the way you were recruited to do the business, and how do you feel about approaching your family and friends in the same way?
• THE TIME FREEDOM TEST--If a recruiter promises that by working hard for a brief time period you will never have to work again, ask what percent of their top distributors are no longer actively involved with the company and never attend opportunity meetings.
• THE HONESTY TEST--Has the recruiter been devious or up front in his or her inviting attempts? And can the products and opportunity be sold without making exaggerated product and income claims? Ask for validation of each of the claims made.
• THE CREDIBILITY TEST--MLM promoters who don’t command respect themselves may lean heavily on the credentials or character of others involved in the opportunity.
• THE SUPPORT TEST--Does the company offer an adequate support infrastructure to handle a temporary burst of volume? Will your up-line be there when you need them, or do they have a history of jumping ship when the next hot MLM deal comes along?

See also: 5 Red Flags for Identifying Exploitative Product-based Pyramid Schemes, or Recruiting MLMs and 30 Typical MLM Misrepresentations

As you can see there really are no get rich schemes out in the world. Always use caution and I can't say it enough--DO YOUR HOMEWORK!!!

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An interesting article to look over.