Wednesday, August 1, 2012

Secrets of MLM Comp Plan they don't want you to know

Ever wonder how to decipher MLM comp plans? Here's some tips you may want to consider:

Go Simple

As an affiliate, it is to your advantage to pick a SIMPLE comp plan: do this, get that. You know exactly what to do to get paid. The more complicated the plan, the less you understand it, and the more likely the plan is tilted toward the company, not you.

What exactly do the ranks do? 

Some MLMers hate ranks, as they claim ranks are just a way for the company to discriminate against people not of a certain rank. There is SOME logic to that.

Ranks are basically a way for the company to KEEP the money instead of paying you your due in the name of "motivation", esp. if you need to make X number of sales just to get paid.

Think about it: if you made $1000 in sales, but the "rank" you need is $1500 to get paid a bonus, then you just made $1000 sales for NOTHING (except your own retail profit, if any).

And why can't the company just lower your wholesale price so you get more retail profit instead of this "sales bonus"? The profit margin is the same no matter if you sold 1 or sold 10 or sold 100.

What does the payout level actually affect?

Theoretically, you want a plan to pay down as far as possible, "infinity" is best. In reality, few if any companies actually pay down that far, or can someone that is NOT a master recruiter to recruit down that many levels.

Furthermore, it doesn't help if you add people who are NOT good sales people under you, who then recruit really good sales people under THEM. The order *does* matter if you do want to maximize your earnings and there are multiple level shares. One level removed means less money for you.

There is one exception. If you are just playing a recruiting game, where you don't care about the sales performance of your recruits, everybody just buy the bare minimum, and any warm body will do, then you don't care about the payout level at all. In that case, IMHO, you are playing MLM like it's a pyramid scheme. That is just wrong.

How much is bonus, vs. how much is regular pay out? 

Bonus you have to "qualify" every month (or whatever the evaluation period). The pay out is just payout. If a lot of your pay is actually in terms of bonus, instead of actual payout, the company is tilting the table in their favor instead of yours.

Be Wary of "compressed pay plans". 

Compressed pay plan is still same pay plan, but with an altered payout curve to emphasize the beginning instead of the middle and end where most MLMers "stagnate" when they ran out of people to sell to.

There are a ton of comp plans... unilevel, matrix (and the "binary" variant), and stair-step/breakaway. The topic is too complicated to cover in one paragraph, as each has their own pros and cons. I will just warn you to stay away from the X-up variant of the unilevel.  That *sounds* good, but in reality, not so good.

Beware of "X-up" plans

X-Up plans are deceptive. They are often advertised as 100% commission, but the truth is there are no such thing. The way X-up plans work is you "pass up" your sales commission every X sales to your upline. For example, you pass up 2nd, 4th, 6th, and every 5th from there on (real comp plan). That means if you sell 10 products, your "commission is not 100%, but 70%, as you've passed up at least 3 sales out of that 10 you did. The odds get a bit better as you play on as it goes back up approaching 80%, but that's still not 100%.

Be Wary of Profit Sharing

You should be wary of any "profit sharing" plans where you get a share of the company's "profit". Why?  Those are just a fancy way of saying "rebate", except you don't really know how much you will get, as you don't know how they calculated the numbers.

If you sell something, you know exactly how much it costs, and how much you will make from selling it. You also know how much effort you spent selling it, so you can immediately calculate how much you made per hour, and was it worth your time doing so. However, if you have to wait for the "profit share", then you don't really know if you're doing good or bad.

It is much like waiting for a rebate. Why can't the price just be lowered? You never know if the rebate is going to come, Profit share is even worse, since you don't really know how much you will get!

Point system vs. straight value

Point system exist because not all products have the same profit margin. Some products cost less to make but can sell for more, thus more profit, while other products cost more to make but prices are depressed, thus having less profit. This changes how much commission they pay out per product.

This creates additional difficulties for you to evaluate the viability of this business. Normally when you see a product list, you can see "hmmm... someone will buy 1 product A, 2 product B...  that will earn me this much" if this is a straight retail markup or commission system based on the price. However, with the point system, you have to check the point value of each item to calculate the actual commission.

If you consider yourself a SALESPERSON, then this is probably BAD for you, ASSUMING that all products have the same "sale-ability". In other words, if it takes the SAME amount of effort to sell either product A or B, then you would want the same pay for selling either product, even if they have different point values.

If you consider yourself a reseller / retailer, this gets more complicated. If it costs more for them to make the product, they should raise the wholesale price and charge you more for your inventory so you can revise your own profit figures. By changing the point value instead of the actual wholesale price, they essentially is playing a shell game: the "price" did not go up... just that you earn less selling one. Net effect is the same. If they count BOTH point value AND change the price, then they are double-dipping.

No matter your viewpoint, point system does NOT help you. It is strictly invented to improve the company's bottom line, not yours.

Be Weary of Exotic Bonuses

Don't get lulled by the exotic bonuses, like a car, or downpayment on a car, or lease payments on a car, or whatever. They are selling points, much like a car that can go 150 MPH or do 0-60 in 5 seconds. What are the chances you'll use that performance in a car? Same with the bonus... what are the chances you actually get to ENJOY the bonus?

It is used to sell the company, not really helping you.

Beware of ILLEGAL bonuses

In the US, it is ILLEGAL to pay for recruitment, and when it comes to MLM, it means recruiting downlines, not customers. If you are compensated for adding people to your downline, instead of their sales, you are participating in in an ILLEGAL comp plan.

Note: it's fine to recruit CUSTOMERS, who are NOT your downlines.

How much margin do you have? 

If it's a retailable product, look for LARGE margins between wholesale (your price) and retail (what you can sell it for) as well as a lucrative market, because you need to conduct your own marketing and training, so you need to budget for it. Without such margins, you will LOSE money on training the downlines and doing your own marketing.

Pros and Cons of spillover 

Spillover basically is a way for someone else in your branch, usually your upline, to "give" you a few downlines that doesn't fit in their "branch" of the tree. However, it also means that you will be feeding recruits into your downline's branch, not yours, if you are the top recruiter.

So again, depends on your viewpoint. If you are a great recruiter who find the the best sales people, you may not really want them to go into your downline's branch, thus become "one level removed", thus reducing your group sales bonus (usually, the further down the level, the less the bonus).

If you are someone who don't recruit much, you may welcome your upline's spillover (or even from someone in a different branch altogether, depending on how the rules are written).

In other words, spillover is fun early, when you don't have much success recruiting the right people, but becomes a drain later. So it depends on how far up the ladder you think you will go, and what sort of people are in your upline. If you are the kind (or perhaps, your upline is) that recruits every warm body that that you see, then spillover is not a problem, but you're likely doing the MLM completely wrong.

Was there extra expenditures not mentioned in the Comp Plan?

Amway was called a cult partly because the Amway Motivational Organizations are selling all these 'motiviational training' that was heavily pushed at the members, leading it to be called a 'second pyramid'. What may be originally a profitable business will quickly turned into a loss if you have to pay for training and marketing, and a lot of it.

Personally, I don't think you should be in MLM at all. However, if you insist, I hope these common sense questions help you pick the right comp plan.

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  1. I just want to know where you getting informations as far as illigal compensation for recruting your downline? Please where I can find some truth legal info? Thanks.

    1. I explained it here:

      The EMPHASIS of a MLMer should be to find customers for whatever s/he is selling, not recruit downlines.