Understanding network marketing compensation plans is essential for success in network marketing.
What are the most commonly used network marketing compensation plans?
How do they differ from each other?
Is there such a thing as the best compensation plan?
Many distributors in network marketing invest a lot of their time, money and lives in the business. These same distributors do not invest any of their time in studying their companies' compensation plans.
Four types of compensation plans have become the favourates for network marketing companies. Each plan consists of three basic elements, namely:
Commission type, that is, the amount of money that is paid out to distributors each month for their activities during the month
Rules that lay down the criteria distributors need to meet in order to qualify for commissions or rewards and benefits from the company, and
Structure. The rules in a compensation plan that determine where a distributor will be placed in an organisation form the structure of the compensation plan.
Any compensation plan that does not have all three elements will probably not be sustainable in the long run.
The four most commonly used types of network marketing compensation plans are...
Most major successful network marketing companies use one of these compensation plans to reward their distributors.
Each network marketing compensation plan uses a combination of different commission types.
For example a compensation plan may use differential commission to pay for product sales and level commission to pay for sales management.
Note also that each plan has its own advantages and disadvantages.
On this page I briefly discuss each of these network marketing compensation plans.
The primary feature of a unilevel compensation plan is the payment of a level commission to all qualifying distributors. All distributors are paid the same percentage of commission on their downline sales.
With the unilevel compensation plan, everyone is a distributor regardless of performance. There are no ranks.
A unilevel plan uses only one commission type, the level commission. Generally the percentage is 5% of downline sales volume.
With the unilevel plan, you can build as wide as you want.
The breakaway compensation plan is actually a hybrid of the unilevel plan.
With the breakaway plan, if in terms of the rules a distributor in your downline reaches a certain level on the structure of the compensation plan, that distributor and his/her entire downline breaks away from your direct downline.
From that point onwards they do not form part of your downline, subject to meeting the qualification rules. You will lose all the unilevel commissions from that downline. Should the distributor be disqualified compression normaly takes place.
To compensate for the breakaway network marketing companies pay a fixed percentage based on the break away group’s volume. The group volume does not count towards your own group volume.
The forced matrix plan is a unilevel plan with the first level restricted to a preset number of distributors. For example rules of the plan may provide that you can have only five distributors on your first level.
With this plan you are forced to place any new sign ups after your fifth sign up in your second level, or deeper if the second level is full. This is called spillover, which is considered to be a major advantage of the forced matrix plan.
A unique feature of the binary compensation plan is that the number of distributors on the first level is limited to two. Any personally sponsored distributor beyond two spills over to the second level. If the second level is full, the new distributor is placed on the next vacant slot at deeper levels.
As with the forced matrix compensation plan, it is this spill over that makes the binary plan attractive.
You are probably asking “which of these network marketing compensation plans is best for me?
There is no one size fits all answer to this question. It depends a lot on your personality and what you want to achieve from your network marketing business.
The thing to remember is that, apart from retail profit where applicable, a network marketing compensation plan pays you for a combination of product sales and sales management.
So if you are more of a traditional salesperson who can move tons of products, it may be advisable to go with the company that pays more for product sales than for managing sales teams.
If you really want to make it big in network marketing, study the compensation plan of any company before signing up.
Do remember that deciding to join a network marketing company solely on the basis of its compensation plan can be disastrous. There are other factors to consider.